Sins of Omission: the Vacant Land Fee

The fun of blogging is that I can post half-baked, incomplete ideas.  Unlike an editorial or proposed legislation, it's fun to put out an idea that doesn't seem quite fully formed, but is still intriguing to think about.  This is one of those.  

A little bit ago, I wrote a similarly tenuous post about an initiative to build social housing in San Diego.  Please, read the post, but the general idea was to pass an initiative that would raise money to be used to build mixed-income social housing in San Diego, and then use the rental income from that housing to fund parks, sidewalks, libraries, and other community improvements.

As I admitted, I didn't get to the point of identifying the source of funds. The point of this post is to introduce that source of funds, or at least one source.  The ultimate goal is not only to raise money, but to do so in a way that incentivizes even more market-rate development.  If we can attack the problem from both sides, we'll arrive at the solution even faster.

When it comes to policy problems, it's helpful to think of the distinction between "sins of commission" and "sins of omission." The use of "sin" can be misleading, but this common distinction is important.  Government is pretty good at dealing with "sins" of commission, by creating a governmental reaction to a citizen's action: murder someone, go to jail.  Buy some cigarettes, pay a tax.  In the case of development, this takes the form of Development Impact Fees: if you build new housing that is going to make traffic worse and crowd our parks, then the city will charge a fee to address those issues. The collected fees are paid when new housing units are permitted and then pooled together to build new infrastructure. While this makes sense on a basic level, it also increases the cost of the thing (housing) we desperately need.  At least to some degree, the fee makes it more difficult to build new homes.

What government is not as good at is dealing with "sins" of omission: when the problem is not that you did something, but you failed to do something. Like not buying health insurance.  Or deciding not to be a Good Samaritan and save someone's life.  Or, in the case of housing, sitting on underdeveloped land and not building the housing we need.  There are many causes of this: sky high construction costs, Prop 13, overly burdensome regulation, NIMBY opposition, etc.  

To be sure, we don't like government forcing us to do something and overpunishing inaction can be alarming.  I don't want to lose sight of that.  But nevertheless, it's worth exploring how to get citizens to take actions that benefit the community as a whole.  Don't force someone, but nudge them to do the right thing.

So back to the focus on housing.  Impact fees are premised on the recognition that new housing leads to increased public costs. But this goes both ways: committing to build new housing costs us, but so does omitting to build new housing.  Regardless of the cause, the lack of new construction hurts us, as a community, in an opposite yet symmetrical way to actual development.  When landowners fail to build housing, it requires governments to spend money to provide homeless services, affordable housing vouchers, increases in salaries to help employees pay for expensive housing, greater infrastructure costs caused by increased sprawl. . . the list goes on and on. 

So what if we tried to do something about that?  If we could make people pay when they fail to develop land to its potential, we may be able to encourage people to build.

So here's the idea:  as a counterpoint to Development Impact Fees, we could charge a Vacant Land Fee.  It could use a better name because it wouldn't apply only to vacant land, but also underdeveloped land.  Although not expressly stated, every lot in the City is zoned for a theoretical maximum number of units that could be built on each lot.  For each unit that is not built, we could charge a fee (not a tax) to compensate the city for the harm caused by the failure to build.  The fee would be due upon transfer of the property.

Importantly, the fee would apply only to underdeveloped land: if you live in a single family home on a lot zoned for single family, you won't be charged the fee.  Likewise, if your lot is fully developed, the fee is not assessed. The hardest hit would be owners of parking lots downtown, where there are zero housing units on a lot that is zoned for hundreds. 

So how would this work?  Let's say there is a parcel of land with a single family house on it sitting in the heart of Hillcrest.  The current zoning, however, would allow ten units.  If the parcel is put on the market and sold in January 2017, the City would impose a Vacant Land Fee for the "missing" nine units.  As a placeholder, let's say the fee is $10,000 per missing unit.

I hear the grumbling, you are already worried about this idea.  Buyers shouldn't be penalized for the units not built by the seller, and how would this lead to new units?  But what if we (1) set a five-year deadline for payment of the fee; (2) allowed for a 20-year interest-free payment plan; and (3) permitted post-transfer reduction of the fee if new units are built?

Applying these rules to the same example, the new owner would be required to pay $90,000 in January 2022, but at the rate of $4,500 per year ($90,000 divided by 20 years).  If the new owner builds those nine new units within that five-year window, the fee disappears.  If she builds the units after ten years, the payment drops at that point.  The effect would be a financial incentive to build the units allowed by current zoning.  Also, because of the fee, it would discourage people from buying the parcel unless they intend to build it out.

The actual amount of the fee would be calculated based on the cost to the City of those missing units.  If we are willing to say that housing is a right within the City, the fee would be roughly proportionate to the cost of building a new affordable housing unit.  If that's the case, the fee may be much higher than $10,000 per missing unit.  

The end result would be (1) a new source of funding for affordable housing (for the social housing works mentioned in the linked post), (2) an incentive for homeowners to build the maximum number of units on their land, and (3) a shifting of the externalized costs of single family homes to those who choose to live that way.  The fee would not make it illegal to own a single family home on University Avenue in Hillcrest and would not mandate development, but it would make that homeowner bear the brunt of the societal costs of that decision.  Moreover, if the result is a new source of funding to handle these huge costs to our City, it could theoretically lead to lower taxes in another area, like sales tax or property tax bonds.  Because the fee would be paid only by landowners, it would be more progressive than sales taxes.

So that's the idea.  Like I said, half-baked and who knows how it would pencil out.  But fun to think about.  Let me know what you think and how you would make it better.  Or why it's the worst idea you read this year.