California should resurrect an old strategy to jumpstart new housing production

Everybody knows California has a crisis of housing supply and affordability. The median price of a home is about nine times the median household income, and there’s no question we need to increase housing production to tackle the problem.

The Legislature has passed about 500 new laws in the past decade primarily to override local zoning authority, to overcome local resistance to new housing projects. Recently it passed Senate Bill 79, which requires localities to permit midrise housing near major transit stations. 

Despite these aggressive zoning reforms, housing production remains stuck at around 100,000 homes built per year— less than half of what is needed. 

Even when housing is approved through expedited processes, the projects don’t always get built. Clearly, additional steps besides zoning reform are needed. 

The truth is a lot of projects simply won’t “pencil” under any circumstances, especially in the infill locations targeted by state policy, where land is expensive and the cost of infrastructure improvements is high. For instance, transit-oriented development isn’t economically feasible except in locations where market rents are extremely high, the Urban Institute recently reported.

The time may be right to think about bringing back a narrowly tailored version of tax-increment financing — known historically in California as “redevelopment” — to help ensure more housing gets built at the right price, in the right places, with the right amenities. 

Tax-increment financing sequesters growing property tax revenue in targeted districts, in order to pay for infrastructure and affordable housing in those districts.

It has been out of favor in California for 15 years, ever since Gov. Jerry Brown killed the system because the state was forced to backfill the property taxes school districts were losing because of it.  

But tax-increment financing is used in almost every state, and around the world, as a way to stimulate real estate and community development in desired locations. 

Given that California has a strong policy preference to increase housing production and to target that new housing in specific locations — as SB 79 suggests — tax-increment financing may be the right tool to provide gap financing for new housing projects.

In recent years, California has moved tentatively toward using tax-increment financing for specific purposes. Enhanced Infrastructure Financing Districts, for instance, allow tax-increment financing for public infrastructure, but such districts lack the capacity for wide-scale adoption.

A broader tax-increment financing system could go a long way toward ensuring that those housing projects that cities must now approve actually get built. 

In order for a new tax-increment system to succeed, it would have to be carefully targeted to achieve state goals. And it must provide cities with sufficient incentives to use it.

A new system would almost certainly have to permit cities to use incremental increases in property tax revenue from both the city and the surrounding county in order to generate enough funds to be worthwhile.

Then the resulting funds could be targeted to gap financing for housing and mixed-use projects that have an affordable component and for supporting infrastructure located in infill locations. For example, a certain percentage of tax-increment financing funds could be targeted to SB 79 projects. 

To be sure, a lot of specifics would have to be considered. If county funds are used, there might be a cap in each county on the use of those funds. If school funds were also used, the state would likely have to approve those projects. 

But these are details to be worked out. The broader point is that targeted use of tax-increment financing would give cities the tool they need to make sure all those housing projects being approved under state law now actually get built — and help make a dent in California’s housing crisis.