Maybe more taxes can solve the housing crisis

Anup Malani is a professor at the University of Chicago Law School and offers an intriguing, if counter-intuitive approach to the nation's big cities housing crisis. He notes the root of the crisis is "that local voters have an interest in restricting the housing supply. Existing homeowners worry that new housing will lower the prices of their homes. Existing tenants want price controls to limit rents. While prospective residents want new housing in cities, they don't get to vote in local elections."

It's an impasse, to be sure, and one South Bay politicians are familiar with. But why live with an impasse that unfairly favors existing homeowners and renters and turns our cities into class-segregated, atomized communities?

Here's Malani's approach: Tax residents (not builders) of new development and use the proceeds to compensate existing property owners for the reduction in prices caused by the new construction. This is like an impact fee, but one paid by the user, not the developer. The tax would only apply until the point at which new construction reduces the value of existing homeowners' property by an amount greater than the value it affords new residents.

"Allowing incoming residents to compensate homeowners would help cities grow to their ideal size, at which the cost of adding one more resident is equal to the resident's benefit to the city's economy."

How might it work? "Developers can't pay existing homeowners directly for the right to build new homes--which homeowners would they pay and how much? But cities could use property taxes to facilitate a side payment. They could charge new residential developments a higher property tax than existing residents and earmark the additional revenue toward payment of existing residents' property taxes."

Would this arrangement increase rents for the poor? On the contrary: the current arrangement penalizes low-income people hugely as the government-distorted market prices them out of cities like San Jose altogether. This proposal might redistribute wealth more effectively, as it would spread out the huge and unfair concentration of property values in American coastal cities to other parts of those cities and the country at large.

"A straightforward reform like this could unleash development and expand opportunity in America's cities."

--Malani's Op-ed appeared in the 6.23 edition of the Wall Street Journal