On June 9, after seven grueling days of vote counting and $215 million spent on his own campaign, Tom Steyer officially withdrew from the race for governor of California. Whatever your feelings about Mr. Steyer’s campaign, it reminded Californians of one important fact: the Golden State needs to adopt split roll.
To the average Californian, the idea that our state needs new taxes and fees may seem absurd. You will find no disagreement here: for my money—literally—the average Californian shoulders far too heavy of a tax burden.
But the truth is even worse. Not only does our state nickel and dime Californians too much: it taxes the wrong things. We have among the highest income and capital gains taxes in the country, meaning that working hard work and investing what you earn is punished. We also have among the highest sales and gas taxes, which fall hardest on working families.
Of course, the single biggest cost of living issue in California is our absurdly high cost of housing. And here again, it is a story of taxes and fees: By one estimate, it can cost as much as $157,000 in so-called “impact fees” alone to build a single-family home. Is it any wonder that our housing is so much more unaffordable than in other states?
While the legal fiction justifying these fees is that they internalize the cost of development, in reality they are simply used to generate revenue. In a recent viral post on Instagram, a developer shared that he was charged $30,803 in fees to build a modest 747 square-foot two-bedroom home valued at $132,538. Does anyone really think such a development requires $19,000 in street upgrades?
These taxes and fees aren’t high just because California misuses the funds. (Though that is surely a factor.) They are high because of our unusual approach to property taxes: Since Proposition 13 passed in 1978, annual property tax bills have been limited to one percent of assessed value, and they can only increase by two percent each year, regardless of how much the property increases in value—unless it is sold or redeveloped.
The bizarre unintended consequences are manifold and well documented: Identical homes on the same street can, and often do, pay orders of magnitude different tax bills purely based on when they were last sold or redeveloped. Besides the basic issue of equity, Proposition 13 thus provides a huge disincentive to sell or redevelop your property.
Of course, advocates had a strong argument for the cap: no one wants to see grandma taxed out of her home, purely because it has—on paper—gone up in value. For this reason, many states provide relief to vulnerable households, even if they don’t go quite so far as California.
But the argument for this system breaks down with commercial properties: Across California, unsightly strip malls and office parks sit aging and undeveloped, purely because of the perverse incentives created by this fluke in state tax law. By one estimate, our refusal to assess commercial properties at market rate amounts to an effective annual subsidy of $6.5 billion to $11.5 billion.
The real impact runs even deeper: In recent years, the state has taken welcome measures to remove various regulatory barriers, including zoning restrictions and environmental review delays. Yet because tax law provides commercial property owners little incentive to redevelop, and high fees further punish anyone trying to build housing, the effect of these reforms has been muted.
In 2020, a narrow majority of Californians rejected Proposition 15, which would have instituted a split roll and spread the money across local governments and school districts. It’s easy to sympathize with the skepticism of new taxes, especially amid the chaos of COVID-19.
Yet the wisdom of moving to a split roll system stands: Instead of creating a new slush fund, instituting split roll should be broadly revenue neutral, and the funds should be earmarked for the infrastructure upgrades that allegedly necessitate our state’s infamously high fees on new development.
Estimates vary, but the consensus view is that California needs to build around 1,800,000 new homes to end our housing crisis. If the state collected the bare minimum of the amount of revenue expected from split roll, or $6.5 billion, and agreed to pay cities, counties, and special districts a fair $25,000 per unit built—in exchange for zeroing out or substantially reducing fees—the state could facilitate the construction of at least 260,000 homes per year.
At the upper bound of revenue, such a system would stimulate the production of 460,000 homes each year, and end the crisis in only four years.
By kicking off a building boom, this would lower the cost of living far in excess of any increases associated with taxing commercial property fairly. It would raise commercial property values, and generate new property and sales tax revenue for local governments. And for current residents, it would mean newly paved streets and sidewalks, refurbished parks, and newly built schools.
Californians are rightly fed up with the state’s high taxes and unbearable cost of living. They are frustrated with our lack of homeownership options, high and rising rents, and mounting homelessness crisis. They understandably balk at how much they must pay in taxes, and middling quality of the public services that all of these taxes buy for them. As a result, many are leaving the state.
Counterintuitively, we can fix these issues—not necessarily by taxing more or less, but by taxing smarter. It is time for California to adopt split roll.
Nolan Gray is senior director of legislation and research at California YIMBY. Follow him on X @mnolangray
