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Economy

Two Birds of a Fiscal Feather

Multifamily housing for rent.

For decades, controversies about property taxes and rent control have been near the top of the list of state and local government disputes.

Proposition 13 and the other efforts to limit property taxes that it inspired are a prime example. So are the ongoing efforts ever since by those whose nests are feathered with those dollars. That tug of war is currently highlighted by California’s Tax Protection and Government Accountability Act, which the Howard Jarvis Taxpayers Association and others have qualified for the November 2024 ballot to limit the political erosion and evasion of Proposition 13’s protections, subsequently targeted by Democrats’ end-of-session Assembly Constitutional Amendment 13, which would dramatically raise the votes necessary to make the proposition pass, and Governor Newsom’s legal efforts to remove it from the ballot altogether.

Rent control is similarly controversial. Some local governments, particularly those that have majority renter populations, seem to always be proposing rent control or tightening of rent controls. On the other hand, about half of America’s states ban or restrict local governments’ ability to impose rent control. This was illustrated by California’s Costa-Hawkins Rental Housing Act, and subsequent efforts at overturning it, culminating in another November 2024 ballot initiative, as well as the current controversy over New York’s rent control rules.

People typically discuss these two subjects as if they were distinct. They are, in that one is a tax and the other is a regulation, and one applies to all properties while the other applies only to rental housing. But the source of both controversies is the same. They are, in an important sense, two birds of a fiscal feather.

The “common core” is that current property owners have a very limited ability to protect themselves from government abuse by “voting with their feet,” making them convenient patsies to be forced to bear the burden of ineffective and discriminatory policies.

Consider taxes first.

It is generally less costly to escape the policies in an unattractive local jurisdiction than in a state, and less costly to leave a state than the country. Consequently, a smaller government can generally impose less inefficiency and fewer unsupported policies. That would be the case if a local government imposed overly burdensome sales or income taxes, which a citizen could “dodge” by leaving the jurisdiction, the costs of which put an upper bound on how abusive such policies can be.

Unlike other state and local government burdens, however, voting with one’s feet cannot avoid the burdens of jurisdictions imposing “abusive” property taxation. The current owner of a property bears those burdens (and whatever benefits they finance). If they move away, but do not sell the property, they continue to bear the burden. If they sell the asset, whether they move away or not, the present value of the difference between expected future taxes and benefits will be capitalized into their property’s sale price, and they still bear the burden, just in a different form.

That can explain why in California, property taxes accelerated in the 1970s. It was attractive to politicians who wanted to sharply increase the role and reach of government, even though it carried no guarantee that the resources would provide more benefits than costs to citizens. That is why virtually every major government “leader” and powerful interest group opposed Proposition 13. It can also explain why Proposition 13 became so popular with those who felt victimized by rapidly rising property taxes without corresponding increases in value provided, and why opponents have continued to attack it in the more than four decades since, to resurrect their preferred funding source for profligate and unequal policies. One recent “study” critical of Proposition 13 let the cat out of the bag when it concluded that what was needed was to “overcome political and taxpayer resistance to changing Proposition 13 and other policies that constrain taxation and budgetary decision-making in California,” which in more straightforward words means, “we want still more tax money to spend, whether California’s citizens believe that spending is worth it or not.”

Rent control follows the same basic script when it comes to burdens imposed on property owners.

Rent controls coercively reduce what rental housing owners can earn by forcing rents below what others would be willing to pay for their units (that is, it takes away property rights owners had before). As with property tax increases, the current owner of a property bears those burdens. If they move away, but do not sell the property, they continue to bear the burden. If they sell the asset, whether they move away or not, the far lower present value of potential earnings from the property will be capitalized into their property’s sales price, and they still bear the burden, just in a different form.

The only major difference between the two cases is that taxes can fund whatever the government wants to spend it on, but imposing rent control essentially taxes landlords and gives the proceeds to existing tenants. In fact, in majority-renter cities, such as Santa Monica, existing renters can vote very large sums of money into their own pockets under the cover of “democracy” rather than robbery (voting to make your landlord charge you $1000 less than otherwise has the same effect as taking back $1000 of the rent you paid from your landlord at gunpoint, but the latter would land you in jail). That is why former Los Angeles Mayor Eric Garcetti referred to getting a rent-controlled apartment as like winning the lottery. Those lottery winners then reward the politicians who arrange such transfers, keeping them in office to advance their causes.

In sum, both property tax increases and rent control continue to be controversial, after decades, in that they both represent forms of grand theft against housing owners and rental housing providers. As long as such policies persist, enabled because the affected property owners cannot effectively “vote with their feet” the escape the burdens, we will see ongoing battles between those who benefit from and facilitate such theft and those whose resources are exploited to bear the costs. Such unequal treatment flies in the face of protecting what were to be our common unalienable rights to ourselves and our resources. There would be more peace and justice (at least in the traditional sense of giving each person their due) if we looked to shrink, rather than expand, such grand theft, housing, as we do with grand theft, auto.

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