The linkage fee trap
Seattle is a compassionate city faced, like all growing cities, with an affordable housing challenge. Most Seattleites hope to see their city successfully tackle that challenge with effective programs that help those most in need. But unfortunately, translating such good intentions into action is all too often distorted by politics. And the latest case in point is City Council's rush to enact a "linkage fee."
The proposed linkage fee would generate revenue for subsidized affordable housing by taxing all new development $5 to $22 per square foot of floor space in the project, or about 3 to 10 percent of typical multifamily development costs. The City of Seattle estimates that the tax would raise five to ten times more revenue than the Incentive Zoning program currently in place. Proponents claim the tax would neither raise the rents of new housing, nor slow its production — in other words, an economic free lunch for affordable housing.
If that sounds too good to be true, it's because it is. Here are seven reasons why:
1. The "nexus" rationale for the housing tax is that creating jobs is a negative impact. The legal justification goes like this: People who live in new housing create demand for service jobs; the low-paid workers in these jobs can't afford market-rate housing; therefore the builder of the housing is responsible to pay for subsidized housing.
By that logic, any activity that creates any economic output whatsoever externalizes the need for affordable housing and therefore should be taxed to pay for housing subsidies. Singling out housing development to pay the tax may appease the anti-developer sentiment common in many constituencies, but it is bad policy, especially given the fact that building new housing helps meet demand, thus keeping prices under control.
2. The housing tax is unfair because it only applies to new development and not to existing property. If you are willing suspend disbelief and accept the above nexus argument, then it follows that all housing, whether existing or new, creates the same need for affordable housing.
Why shouldn't existing property owners contribute their fair share, especially when they have been benefiting from large increases in their property values as a result of Seattle's success?
3. The housing tax is unfair because it doesn't apply to single-family properties. Again, if you accept the nexus argument, then single-family houses create a need for affordable housing just like any other type of housing. Why shouldn't single-family home owners pitch in too? Not only are they enjoying windfall gains in their home values, but the fact that nearly 2/3 of Seattle's zoned land is reserved for single family severely limits housing supply, which, in a high-demand market like Seattle, is the primary reason for rising prices.
4. The housing tax will exacerbate the very problem it is intended to address. The proposed tax will either raise the costs of development, or lower the prices paid by developers for land — both of which would lead to escalated rents.
When development costs rise, housing projects are not feasible if the market cannot support high enough rents to offset those costs. The inevitable result will be higher rent — if not now, then later, once the rental market inflates sufficiently to make development feasible again.
Alternatively, if the tax causes land values to drop, then keeping property in an existing money-generating use — e.g. a surface parking lot — becomes more financially favorable than selling the land for redevelopment. And that means less housing created, and more rapidly rising rents throughout the city due to suppressed supply. Ongoing demand would eventually push rents high enough to motivate property sales for redevelopment, but that delay could set back housing production by perhaps five to ten years or more.
In either of the above scenarios, the resulting increased rents will shift housing demand toward lower priced options. And that shift will cascade all the way down to the bottom of the market, reducing the availability of the cheapest market rentals, and creating additional need for publicly subsidized housing to make up for a larger affordability gap.
5. It is not a progressive tax. Proponents want to believe that linkage fees redistribute wealth from developers or high-income renters to the have-nots, but when all the effects are factored in that's wishful thinking. That's because the rent increases a housing tax would cause — whether by pass-through to renters or by suppressed supply — will always hit the poor the hardest, offsetting the gains made through the subsidized housing paid for by the tax.
When rents for new housing are forced up, vacancy rates drop for existing cheaper housing, driving up those rents, and ultimately squeezing out renters with the lowest incomes. Similarly, if depressed land values result in less housing production, the poorest renters will always get outbid for what's left of the limited inventory at the low end of the market.
6. The substantial benefits of infill housing development are ignored. It is well-established that concentrating housing growth in urban centers provides a wide range of social and environmental benefits, as reflected in countless policies at all levels of government. In addition, development generates substantial new tax revenue that supports a wide range of city services. If all the positive impacts were quantified, there would be justification for subsidizing infill housing development, rather than taxing it.
7. And lastly, linkage fees are probably not legal. Last week 13 local land use attorneys sent a letter to the City Council arguing that the proposed tax would be illegal under state law. Perhaps that question ought to be settled before the city expends significant resources moving ahead with linkage fees?
The City of Seattle deserves better. Taxing housing to address rising housing prices is every bit as illogical as it sounds — like a snake eating its own tail. Rather than targeting taxes on development — a sector that actually plays a critical role in keeping housing more affordable — solutions should spread the burden fairly across the city as a collective.
And in fact, Seattle already has two programs that do just that, namely the Housing Levy and the Multifamily Tax Exemption. Other solutions include utilizing publicly owned land for affordable housing, and city purchase and preservation of distressed affordable market rentals.
The proposed linkage fee is an untested new tax that would potentially impact billions of dollars of investment over the coming decades, and would have a host of unintended consequences that contradict its intent. The City Council's current urgent focus on the tax is misguided. The Mayor has convened a committee tasked with developing a comprehensive set of affordable housing solutions, which is the right approach.
The City Council needs to take a breath and let go of the ill-conceived linkage fee.