Housing and Land Use Implications of Split-Roll Property Tax Reform in California

Research Report

Housing and Land Use Implications of Split-Roll Property Tax Reform in California

Abstract

An initiative on the California state ballot this November would change the way local governments assess the value of commercial and industrial properties, aiming to create a fairer property tax system and raise badly needed revenue. But if passed, will the proposed tax system exacerbate California’s extreme housing shortage, as some of the initiative’s opponents argue?

The property classification system proposed in Proposition 15, called “split roll,” would require local jurisdictions to reassess many commercial and industrial properties at their current market value, rather than their original purchase price, which would generate more tax revenue for schools, counties, and municipalities.

Proponents say the initiative would have little impact on or could increase housing supply. In contrast, opponents say it would worsen the housing crisis by incentivizing cities to rezone residential properties to commercial or industrial use. But what do the data say about how Proposition 15 would affect new residential development in California?

In this report, we examine whether converting to a split-roll assessment regime will increase incentives for cities to rezone residential properties for commercial and industrial uses and whether it will increase incentives for owners to redevelop vacant or underused land for housing.

On balance, we find that split-roll tax reforms are more likely to increase the housing supply in California than constrain it. But we also find that split roll won’t solve California’s housing shortage or affordability challenges without additional policies and reforms.

We used property records, land-use and zoning data, and tax property assessment rolls for four California cities to estimate municipalities’ financial incentives to rezone from residential to commercial or industrial uses. We also looked at the incentives for private owners of vacant or underutilized commercial and industrial properties to convert those properties to residential to reduce tax liability. We then compared the relative strengths of these incentives and how they might influence future land use and residential development if Proposition 15 proposal passes.

In all four California cities, we found more properties eligible to be converted to residential uses than to be rezoned away from them. We also found that financial incentives for owners and developers to build residential housing increase significantly under split roll. And because, unlike cities, property owners would capture the full amount of savings, we concluded that this was a powerful incentive. Split-roll tax reforms are unlikely to substantially alter California’s municipal zoning incentives or suppress housing supply.

Summary of Findings

Centers

Cross-Center Initiative

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