. . . But Likely Increased for Others. As discussed in the prior two sections, local governments in California appear to have responded to Proposition 13 by increasing fees on home builders and assessments on owners of newer homes. These higher charges increase costs for homebuyers. Faced with these higher costs, fewer young households are able to afford to buy a home. Figure 26 shows that homeownership among Californians 45 and younger has fallen by around since 1980, despite little change in the state’s overall homeownership rate. Many factors contribute to this trend, making it difficult to accurately pinpoint its cause. Nonetheless, the rising cost of development fees and assessments on new homebuyers likely have some role.
Impact Fees Are Higher in Cities Without Parcel Taxes. Figure 23 shows the median impact fee per residential building permit for cities in 2014. As seen in the figure, the median impact fees were roughly $5,000 per permit in cities that passed a parcel tax between 2000 and 2014. In comparison, those cities that did not propose a parcel tax or failed to pass a parcel tax had median impact fees of over $12,000. Looking at the difference in the fees, cities that could not pass a parcel tax likely relied on higher impact fees to pay for the costs associated with new development.
Overall, California Local Revenue Increased . . . In addition to property, hotel, sales, and utility taxes, local governments receive revenue from various fees and assessments levied for particular activities and services. (Later in this report, we discuss how these fees and assessments for land development have increased since Proposition 13.) Across these “” revenues for all local governments, revenue rose from roughly $2,600 per person in 1977 to roughly $3,440 per person in 2013 (adjusted for inflation). This reflects an increase of over across all revenues for local governments.
Cities and Counties Weigh Fiscal Effects of Development. California’s cities and counties make most decisions about when, where, and to what extent development will occur. Different types of developments yield different amounts of tax revenues and service demands. In response, local governments commonly examine these fiscal effects when considering new development or planning for future development.
Under Proposition 13, Commercial Development Often Yields Greater Fiscal Benefits. Proposition 13 altered the fiscal effects of development for local governments in two key ways. First, the property tax allocation system created to implement Proposition 13 provides many cities and counties only a small portion of local property tax revenues. Second, as discussed previously, since Proposition 13’s passage local governments have become increasingly reliant on other taxes, such as sales and hotel taxes. Because of these changes, many cities and counties find that developments that generate sales or hotel taxes in addition to property taxes yield the highest net fiscal benefits. In contrast, housing developments, which do not produce sales or hotel tax revenues directly, often lead to more local costs than offsetting tax revenues.
California’s Impact Fees Higher Than Many States. Over half of states have impact fees, which pay for the costs associated with new development like new infrastructure. A recent survey of over half of these states (including most of the western states) found California to have the highest average impact fees for construction of a home. Moreover, according to this study, California’s fees were almost three times as high as the average across all the states in the survey.
Impact Fees Are an Alternative to Property Taxes. Prior to Proposition 13, local governments could increase property taxes to pay for the costs associated with new development. After Proposition capped local governments’ property tax governments had to use other sources of revenue to pay for the costs associated with development. Three options for raising additional revenue for new development include parcel taxes, impact fees, and assessments (discussed in the next section). Typically, parcel taxes are set at a fixed amount per parcel and are paid by property owners. Impact fees are paid by the builders of new construction.
Comparing development patterns of neighboring lots offers one way to attempt to separate the effect of Proposition 13 from some of these other factors. This is because development on neighboring lots likely is influenced by many of the same local factors, making it more likely that differences in development arise from differences in property tax costs. For properties in three large counties (Los Angeles, San Mateo, and Sacramento), Figure 21 compares the frequency of development on vacant lots to frequency of development on neighboring vacant lots that have been owned for fewer years. As the figure shows, over the last decade vacant lots were less likely to be developed than neighboring vacant lots if they had been owned for longer. This effect is larger when the difference in ownership tenure is greater: properties owned one to five years longer than their neighbors were 25 percent less likely to be developed, compared to 69 percent for properties owned for 20 to 25 years longer. This lends some support to the role of Proposition 13 in explaining why properties owned for longer are less likely to be developed.
Impact Fees Do Not Require Voter Approval. Propositions 13 and 218 require local governments to obtain voter approval to levy parcels taxes and assessments. Gaining voter approval can be challenging, especially for parcel taxes. Parcel taxes require the approval of of voters. Of the roughly 200 parcel taxes put to city voters for approval between 2000 and 2014, only about half were approved. In comparison, local governments can adopt impact fees through ordinances or resolutions. To levy these fees, local governments must explain the connection between the development project and the fees imposed. The fee amount is based on the cost of paying for the services or improvements related to the development project. Impact fees typically are easier for cities to impose because they do not require voter approval.
Other Factors Probably Matter Too. While Proposition 13 may have some part in explaining why properties that have been owned longer are less likely to be developed, it is almost certain that other factors also matter. For example, many properties that have sold more recently likely were purchased by buyers whose intent was to develop in the near future. This probably accounts for the much higher likelihood of development for properties owned for three years or less. It is also possible that properties that have been owned longer may be less likely to turn over or develop because they are in less desirable areas.
Proposition 13 May Play a Part in Explaining This Pattern. It is possible that Proposition 13 contributes to this pattern of development. Land owners typically seek to time the development of their land to maximize their financial gains. In many cases, greater gains can be achieved by delaying development until real estate markets are strong or holding out for the optimal development opportunity. Land owners also incur costs, including property taxes, to hold on to land for future development. If these costs exceed the potential gains of delaying development, then land owners may decide to develop sooner. On the other hand, if these costs are lower, land owners may be more inclined to hold off on development. In particular, land owners whose property tax costs are low because they have owned their property for many years may be more likely to delay development in hopes of greater future profits.