Funding Affordable Housing: Permanent Sources? September 19, 2007Housing Opportunity Committee Taxation Committee Legislative CommitteeThe following is for study only andhas NOT been approved by the Housing Opportunity Committee, Taxation Committee, Legislative or Executive Committees or the Board of Directors.Issue Should C.A.R. consider permanent sources of funding for affordable housing?Action OptionalOptions 1. Conclude that one of the available funding options for affordable housing is acceptable and sponsor or support legislation to establish that option:• Employee Tax • Interest on Escrow Deposits • Mello-Roos Districts • Second Home Mortgage Interest Tax Deduction • Split Roll Tax • Local Taxes (Vote Threshold Reduction)2. Do nothing. Existing C.A.R. policy addresses the affordable housing issue with a focus on “supply” oriented legislation (i.e., measures which attempt to compel cities to build more affordable housing).3. Other.Status/Summary State policy-makers and housing advocates have yet to find an acceptable solution to finding a permanent source of funding with which to address the affordable housing problem. Legislativeattempts to establish a permanent source of funding continue unabated. Undoubtedly, such efforts will continue until policy makers believe that sufficient funds are being devoted to the problem. Given the continuing focus on the funding problem by policy makers and their inclination to support funding sources that C.A.R. has historically opposed (e.g., transfer tax), should C.A.R. consider advancing its own solution to the affordable housing funding problem – one that may serve to pre-empt the adoption of a permanent funding source that is unacceptable to REALTORS®? To that end, this issue briefing paper outlines a number of potential permanent funding sources for addressing the affordable housing problem.Discussion C.A.R. has a long history of grappling with the affordable housing problem. In February 1989, the Housing Policy Task Force released its final report titled: “California’s Housing Crisis: The American Dream Deferred.” The report concluded:[W]ithout some creative solutions to the problem of housing affordability, further restrictions on growth, and increasing land and building costs, will continue to push housing prices up faster than thegrowth in incomes. The resulting lack of affordable housing is likely to force greater numbers of people to move away from their jobs, exacerbating traffic tie-ups, pollution and infrastructure shortages in general. Eventually, the productivity of the workers and the state’s economic competitiveness may be impaired. Over the long term, such a trend could lead to an exodus of businesses from the state.In October 1991, the new Housing Affordability Task Force approved a motion that “C.A.R. sponsor legislation which would create a state-run trust fund.” However, that task force was well aware of the difficulties involved in adequately funding such a trust fund. In a staff-prepared memorandum,it was noted that:[How to fund such a program] is the sixty-four thousand dollar question. In order for any program to have a chance of passing the Legislature, it must identify the funding sources. The [task force] has done an exhaustive study of a long list of funding sources. Almost every one of them was eliminated for one reason or another. For example, some of the funding sources were politically unacceptable for housing programs such as increasing the state sales tax, raising the state income tax or repealing Proposition 13. Other sources were not practicable (e.g. imposing a tax on services).At the end of the 1990s, yet another Housing Affordability Task Force was appointed to, once again, attempt to address the housing affordability problem. Ultimately, the task force was sunset prior to the completion of its mission and its role assumed by establishment of the Housing Opportunity Committee.However, eight years later, state policy makers, housing advocates and some REALTORS® find themselves still wrestling with the same funding problem. In a reflection of its support for affordable housing, C.A.R. supported Propositions 46 in 2002 and 1C last year, bothof which devoted billions of dollars to addressing the state’s affordable housing problem. Nevertheless, housing advocates believe that the state should adopt a permanent source of funding for affordable housing because the one-time nature ofbond funding does not lend itself to addressing an on-going problem. There have been several recent legislative attempts to generate funds for affordable housing. These have included, for example, Assembly Bill 239 (DeSaulnier, 2007) which would have authorized Contra Costa and San Mateo Counties to assess a $25 “fee” for the recordation of any real estate document. (This measure fell on the heels of Senate Bill 521 (Torlakson, 2006) which would have assessed a $1 per page fee on the recordation of real estate documents.) The proceeds from the “fee” would have been used to fund housing trust funds in both counties. C.A.R. has a long standing policy of opposing transfer fees or taxes; C.A.R. stopped SB 521 last year and was able to successfully stop AB 239 this year in the Senate.However, the author of the measure has already reportedly stated that he is going to again attempt to enact such legislation next year. Undoubtedly, attempts will continue to be made to generate funds to address the affordable housing problem until policy makers decide that sufficient funds are being devoted to the problem. Lynn Jacobs, the Director of the Department of Housing and Community Development, is forming a working group – and has invited C.A.R. as a “stakeholder” – to discuss a permanent source of funding with which to address the affordable housing problem.Clearly, C.A.R. has an interest in the affordable housing issue, given the establishment of the Housing Opportunity Committee, as well as that of the Housing Affordability Fund. C.A.R. has successfully sponsored numerous bills that address the supply side of the problem by attempting to compel cities to build more affordable housing. Nevertheless, with regard to the funding issue, C.A.R.’s policy has been one crafted by default – REALTORS® know what they oppose with regard to proposed funding sources. However, given the continuing focus on the funding issue by policy makers, should C.A.R. consider a permanent source of funding for affordable housing – one that may pre-empt the adoption of a permanent funding source that is unacceptable to REALTORS®? To that end, this issue briefing paper outlines a number of potential permanent – and, for the most part, tax-based – funding sources with which to address the affordable housing problem. These funding sources have been the subject of discussion among affordable housing advocates around the capital. This paper is limited to revenue sources that have some nexus with housing, as opposed to those that do not (e.g., income or sales taxes) – though the latter can also serve as revenue sources.Potential Revenue SourcesEmployee Tax Arguably, employers in areas where housing prices are high have an interest in seeing to it that housing is available in the immediate area for their employees. (As opposed, for example, to somewhere in the Central Valley for Bay Area employees.) Employers in such areas are rightly concerned with attracting and retaining employees because of the relatively high cost of housing. So, some type of “per head” employee tax could be instituted to provide affordable housing in more high priced areas. The amount of the tax will bear a direct correlation to the level of opposition from the state’s businesses. At least one local REALTOR® association has given consideration to this approach.Interest on Escrow Deposits When attorneys receive retainers they are required to place the funds in an interest bearing account with the interest going to a State Bar fund to provide legal services to the low-income, poor or indigent. Similarly, when homebuyers make a good money offer, funds are held in escrow. Escrow (and title) companies hold these funds in depositoryaccounts and receive credit towards services for interest that would have been earned (compensating balances). However, like with attorney trust funds, the interest from the funds held in escrow could be devoted to funding affordable housing. It’s likely the escrow and title companies will oppose such a move arguing that retention of the compensating balances allows them to keep the price of their services low.Mello-Roos Districts Conceivably, the purposesfor which Mello-Roos districts can be formed could be expanded to include the construction of affordable housing. Please see the concluding paragraphs of the issue briefing paper prepared for the October 2007 business meetings entitled “Private Transfer Taxes: Next Steps” for a more detailed discussion of this option.Second Home Mortgage Interest Tax Deduction Currently, mortgage interest paid on a loan secured by a taxpayer’s primary residence, as well as a second home (e.g., a vacation home) is tax deductible. (This would include mortgages to purchase the home, second mortgages, home equity loans and lines of credit.) The second home does not have to be used by the owner in order to deduct the mortgage interest. However, if the home is rented, no interest can be deducted unless the taxpayer uses the second home for at least 15 days; this rule requires that the days devoted to personal use must exceed the greater of 14 days or 10 percent of the rental days. In addition, the definition of a home includes mobile homes (e.g., recreational vehicles, aka RVs) and boats so long as the home has sleeping, cooking and toilet facilities. The largest financial benefit to taxpayersof the mortgage interest deduction occurs on their federal income tax returns; however, by virtue of California conforming to the federal definition “taxable income” there is a tax expenditure by the state for allowing the interest mortgage deduction for second homes. It is difficult to rebut the argument that the state should be helping those that cannot even afford to purchase a primary residence before it helps others purchase second homes, RVs or boats.SplitRoll Tax Under Proposition 13, property is reassessed upon transfer. Commercial properties, however, rarely transfer as it is usually the case that the ownership of the company that owns the commercial property changes hands instead of the property itself. As a result, an increasingly larger portion of the property tax revenue growth is derived from residential as opposed to commercial properties. Conceivably, the definition of transfer could be changed so that a change in ownership of the company holding title to a piece of real estate would constitute a transfer. The increased revenue could be devoted to affordable housing. Needless to say, the state’s business interests would vehemently oppose sucha proposal and C.A.R. has historical opposed such legislative efforts as well.Vote Reduction A few years ago, the vote requirement for approval of school facility construction bonds was reduced to 55% as opposed to a two-thirds vote requirement. The rationale was that education is a fundamental need and, as such, it should not be held to the same standard as all other needs. Arguably shelter is an even more fundamental need – more along the lines of something as basic as food. Therefore, an attempt could be made to lower the vote threshold (i.e., the Proposition 218 required two-thirds vote) for local taxes intended to fund affordable housing to 55% or, given that it is of such a fundamental nature,to a simple majority vote. Given the recent reduction of the vote threshold for school facility construction bonds to 55%, this option may present a viable option for generating funds for affordable housing. (Note: A vote reduction could be combined with one or more specific tax increases such as the employee tax described above.)A Final Note The funding options described above are not mutually exclusive and, moreover, given the costs associated with providing the needed affordable housing, more than a single funding source may be required.