Crony Capitalism on Steroids
Steven Greenhut
by
Housing shortage in Mountain View, CA (Phyllis Peterson/Shutterstock.com)

Sacramento

California’s housing crisis has such an obvious cause that even many of the state’s Democratic lawmakers now acknowledge it. Local and county governments have for decades discouraged the construction of housing tracts through slow-growth ordinances, global-warming policies, environmental laws that encourage lawsuits against new developments, and a fee structure that can add as much as 40 percent to the price of a new single-family home.

The nonpartisan Legislative Analyst’s Office in 2015 reported that “the state probably would have to build as many as 100,000 additional units annually — almost exclusively in its coastal communities — to seriously mitigate its problems with housing affordability.” Instead of mitigating the problem, state policy has made it even worse in the ensuing years, thus pushing the median price in the entire San Francisco Bay Area to $860,000.

The Legislature recently killed one modest attempt to boost supply. Senate Bill 50 would have allowed construction on a by-right basis — but only for multi-family buildings around job centers and transit stations. The locals had a cow, and the final version was filled with so many new regulations and work requirements that it was hardly a deregulation at all. But now the Sacramento brain trusts have a new approach that’s more in keeping with their outlook.

As the legislative session nears its end, lawmakers are pushing Senate Bill 5, which would create a $2 billion a year property-tax-funded spigot to spend on locally devised development projects, with 50 percent of the cash earmarked toward subsidized housing. The measure is essentially a resurrection of the state’s redevelopment agencies, which were shuttered in 2011 after then-Gov. Jerry Brown desperately needed money to close a gaping deficit.

Redevelopment was a relic of 1940s-era urban-renewal fervor. Most states have something similar, often referred to as tax-increment-financing districts. But California’s 400-plus locally controlled redevelopment agencies were particularly awful. Cities would use the redevelopment process to essentially grab control of all development decisions within a targeted project area — and to divert property taxes from other agencies.

They would float debt without public approval to fund infrastructure and subsidies that would boost private development projects. The resulting increases in property tax revenues paid off the 30-year bonds. It was crony capitalism run amok. Instead of upgrading blighted areas, cities mainly funded auto malls, shopping centers, hotels, and movie theaters, which provided discretionary sales-tax dollars that localities could use to boost public pay and pensions.

Because the state backfilled tax dollars that these agencies diverted from public schools and other traditional public services, they had a large target on their back when California faced enormous budget deficits several years ago. The state shut them down and clawed back the money, but corporate-welfare supporters have been hard at work ever since. The state now has general-fund budget surpluses (even though it’s awash in pension debt), so legislators are considering new ways to essentially re-create these dismantled agencies.

As the League of California Cities argued, “S.B. 5 would create a local-state partnership to … fund state approved affordable housing, infrastructure, and economic development projects that also support state policies to reduce greenhouse gas emissions expand transit oriented development (TOD), address poverty and revitalize neighborhoods.” Because of the surplus, the League said “the time is right for the state to restore more robust financing mechanisms.”

What does this have to do with the housing crisis? Redevelopment diverted a portion of its property-tax proceeds to low-income housing developments. These subsidies obviously didn’t make a dent in the state’s housing-supply problem, especially given the absurdly expensive prices on these projects. But the problem goes deeper than that.

State officials still ignore the degree to which redevelopment policies helped create the current housing shortage by encouraging cities to base permit decisions on the amount of tax revenues that projects provided. Local officials came to view housing as a net loss to the budget, whereas retail projects were usually viewed as winners. Across the state, agencies subsidized retail developers and penalized those who proposed housing developments. This “fiscalization of land use” created a pattern that depressed home building for decades.

It’s bad enough that the agencies subsidized developers, wasted tax dollars, amassed debt without a vote, and replaced market decisions with the edicts of planning czars, who often concocted absurd projects that would never pencil out in a freer market. But they also abused their powers of eminent domain. Garden Grove tried to demolish an entire neighborhood of middle-class single-family homes so it could market the parcel to a theme-park developer in an attempt to create a competitor to Disneyland in neighboring Anaheim. That’s only one of many absurd examples across the state.

Redevelopment agencies were emboldened by the U.S. Supreme Court’s 2005 Kelo decision, which affirmed local government’s “right” to take property from one private owner and give it to another private owner. In the past, the courts had required that such projects have a true “public use,” such as a road, school, or courthouse. But this court found that such takings were permissible for any “public benefit.” The difference is enormous.

“Today the court abandons this long-held, basic limitation on government power,” wrote Justice Sandra Day O’Connor in her memorable dissent. “Under the banner of economic development, all private property is now vulnerable to being taken and transferred to another private owner, so long as it might be upgraded — i.e., given to an owner who will use it in a way the legislature deems more beneficial to the public — in the process.”

Even though Brown and the Legislature ended redevelopment agencies for short-term fiscal rather than philosophical reasons, it was still a happy day when they shut them down. But now they may be back. We’ll see what happens in the final weeks of the legislative session, but leave it to California to believe that a housing shortage caused by government regulation, subsidy, and control can be fixed by more government regulation, subsidy, and control.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

Steven Greenhut
Steven Greenhut
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Steven Greenhut is a senior fellow and Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.
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