Vacant House Taxes: One Tool to Ease Housing PressuresOctober 26, 2022
Housing affordability – whether buying or renting – remains a critical challenge for California cities and their residents. An April 2022 report from UC Berkeley’s Terner Center for Housing Innovation found that a record number of Californians are housing cost burdened. State housing cost burdens have surged over the last two decades, with home value increases meaningfully outpacing median household income growth over the same period.
Affordability issues are particularly pronounced in regions like the Los Angeles metro area, the Bay Area, and the Inland Empire. Meanwhile, Californian rents – already among the highest in the US – have climbed as COVID-19-related eviction moratoriums are phased out and price pressures increase.
Against this backdrop, municipalities are searching for creative ways to incentivize homeowners to rent vacant units and/or to generate revenue for affordable housing. Some cities, particularly in the Bay Area, have looked to vacant homes taxes, a new revenue source modeled after similar efforts in Vancouver, Canada, for inspiration.
Early Efforts: Vancouver’s Vacant Homes Tax and Oakland’s Vacant Property Tax
Vancouver consistently ranks as one of the world’s least affordable cities. In 2017, city officials introduced a tax on homes vacant for more than six months a year. The tax was designed to encourage property owners to rent vacant units, or to sell homes if they did not want to live in them, rather than hold them as a speculative investment. Tax revenues generated through this effort have been used to support affordable housing in Vancouver.
In 2018, 70% of Oakland voters approved Measure W, a special tax that levied a per-parcel tax on residential properties that are not in use for at least 50 days in a calendar year and where one of ten exemptions do not apply. Oakland’s Measure W levies a tax of $6,000/year on single family units; condos, duplexes, townhomes, and parcels zoned for ground floor commercial activity are taxed at $3,000/year. Revenues are used to support programs to reduce homelessness and to combat illegal dumping.
Three Cities to Consider Vacancy Taxes This Fall
Voters in three northern California cities will decide in November whether to adopt their own residential vacancy taxes.
Berkeley voters will consider Measure M, which was placed on the ballot by the City Council and would impose a tax between $3,000 and $6,000 for each single-family home or apartment unit left vacant for more than half the year – unless an exemption applies. The tax will double in the second year and expire in 2035 without further voter authorization. Berkeley expects to generate millions of dollars in revenue annually, which could be used to fund affordable housing projects. Measure M is proposed as a general tax, requiring approval from a simple majority of voters.
San Francisco voters will consider their own Measure M, a proposal to tax owners of vacant units in multi-unit developments. The tax would apply to owners of vacant residential units in buildings with three or more units where the units are vacant for more than half the year and an exemption does not apply. Owners would be taxed between $2,500 and $5,000, depending on the size of the vacant unit, in the first tax year. The per-unit tax would increase annually until reaching $20,000. Revenues would be used to subsidize rents for elderly and low-income San Franciscans and to develop affordable housing projects. San Francisco’s Measure M was placed on the ballot via voter initiative petition. While the measure proposes a special tax, it only requires a simple majority to pass.
Santa Cruz voters will decide whether to levy taxes up to $6,000/year on residential property owners if a home has been occupied for fewer than 120 days in a calendar year and if one of several exemptions does not apply. Revenues would be used to bolster the city’s affordable housing supply. Like San Francisco’s Measure M, the Santa Cruz measure was placed on the ballot via voter initiative petition and requires a simple majority to pass.
Several other California cities are considering or have recently considered implementing vacancy taxes. The Los Angeles City Council considered whether to include a vacancy tax on the November ballot but did not approve an ordinance in time to do so. Richmond and Capitola mulled placing vacancy taxes on their respective November ballots but decided instead to revisit the issue next year. An expert panel commissioned by San Diego City Council to address local housing affordability has proposed a vacancy tax. Half Moon Bay and Simi Valley considered, but subsequently shelved, their own vacancy tax initiatives.
Do Residential Vacancy Taxes Work?
Measuring the effect of vacancy taxes on local housing availability is difficult given the number of confounding variables: for example, the Covid-19 pandemic and changing interest rates. Nonetheless, available data on North American vacancy taxes suggests the levies can have a muted, positive impact on housing availability and local revenues.
Vancouver’s vacant homes tax, which is assessed as a percentage of a vacant home’s declared value, has generated more than $100 million CAD since its inception. City officials also claim that vacant units subject to the tax have declined 26% between 2017 and 2020, reflecting an influx of previously vacant condos into the rental market. However, vacant units subject to the tax account for less than 1% of the city’s housing stock and the city’s rent and housing prices remain stubbornly high.
The Oakland vacant parcel tax has fared similarly. The tax has generated a few million dollars a year in revenue and has contributed to a negligible uptick in housing availability. City officials note that the number of taxed, vacant parcels is trending downward, suggesting the levy is having its intended effect. Nonetheless, rents and home prices in Oakland have increased since the city introduced the tax.
Even vacancy tax proponents admit the measure has a minor at best impact on local housing availability and revenue generation. Housing experts, like Shane Phillips from UCLA’s Lewis Center for Regional Policy Studies, say vacancy taxes marginally increase local housing availability, but are no substitute for new construction.
The vacancy tax experiences of Washington, D.C. and Melbourne, Australia demonstrate that proper enforcement is crucial to increasing housing availability and generating revenue. Both cities have struggled to reliably enforce their vacancy taxes due to a lack of political will or funding for enforcement measures like vacancy audits. The result has been little-to-no change in the vacant housing stock and below-forecast revenue collection. By contrast, Vancouver has devoted a meaningful portion of its vacancy tax proceeds to funding vacancy audits. Vancouver’s routine and random audit programs have spurred high, voluntary compliance from property owners and have limited administrative appeals.
First, cities should manage expectations for vacancy taxes. Larger municipalities are likely to generate more revenue from vacancy taxes than smaller ones due to the number of tax-eligible units. Larger municipalities may also benefit from economies of scale when administering the program compared to smaller municipalities, as administrative costs can be shared over a larger pool of parcels by the former than by the latter.
Second, program design is crucial to the effectiveness of any vacancy tax. At a minimum, practitioners should consider the appropriate tax rate, and which owners will be exempt. Expanding exemptions may make the measure more politically palatable but can substantially limit the amount of revenue collected. Similarly, how a city defines “vacant” will impact how many properties are tax-eligible, and thus how much revenue can be collected. Cities should also determine how revenues generated by any vacancy tax will be used, and how the tax will be enforced.
Third, proponents interested in passing special tax measures may wish to consider proposing measures via voter initiative (like Santa Cruz and San Francisco), which may be passed by simple majority.
Fourth, cities must understand their voters’ preferences – and educate them on the benefits of a vacancy tax. Voters may be hesitant to back property tax increases, even if the tax would not apply to them. Educating voters about exemptions and how any new funds could be used are both important steps to building the electoral support necessary to implement a vacancy tax.
Fifth, practitioners should consider the interplay between any municipal short-term rental and vacant home ordinances. For example, implementing a vacancy tax in a municipality with a permissive short-term rental ordinance could prompt vacant property owners to push their units into the short-term rental market, rather than the desired long-term rental market. Practitioners should therefore look at city housing resources holistically, even when considering a tax on specific types of properties like vacant homes.
Contact Catherine Engberg for more information on how your municipality can design, approve, and implement residential vacancy taxes. Catherine thanks summer law clerk Andy McCoy for his research assistance.