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California Housing Laws, Meeting Al Gore, and Taxing the Rich

In the spring of 1990, I found myself in Washington DC, spending a few days with a small group of donors to the Environmental Defense Fund, meeting Senators and members of Congress to discuss a variety of environmental issues. One of our sessions was a presentation from the senator from Tennessee, Al Gore, promoting his thesis that greenhouse gas emissions were radically altering global climate and it was time the government did something about it.

We all listened carefully and watched his PowerPoint presentation that showed graphs of rising carbon emissions and how they correlated to global temperature rise. It was bold and unvarnished stuff in those days.

When the presentation got around to what to do about it, the discussion of auto emissions inevitably came up. Senator Gore told us that the automobile was pretty much the root of all evil and its use had to be terminated. When it was over, he asked if we had any questions.

The audience members were staunch environmentalists so the comments and questions were generally flattering. I hesitated for a bit then got up and said,

“Thank you for the great presentation. But, here’s the thing. I love my car and I’m not going to give it up. The only thing wrong with cars is they pollute and they’re not recyclable. So, why not just pass laws that force car companies to fix that?”

Al Gore looked at me, disapprovingly. What was I doing saying that in a place like this? There was silence for a beat as I held my breath… then the room burst out in applause. A DC campaign consultant rushed over to me and asked if I was running for office, anywhere.

Al Gore looked flabbergasted.

I y’am what I’yam ~ Popeye

Don’t get me wrong, I agreed with Al Gore’s goals. But, human nature is human nature. People want what they want. There are human proclivities that have been around for millennia, like having a home of one’s own (or a cave or a mud hut). It’s a waste of time to try to “re-engineer” human nature to be otherwise.

Let me put it this way: No one ever immigrated to this country and said, “We suffered and did whatever it took to come here, so someday we could live in a high-density apartment near a bus stop.”

Similarly, if owning a personal vehicle (or a horse-drawn cart) is in our nature, it is what it is. And if cars pollute and aren’t recyclable, why try to force everyone out of cars—the most convenient way for people to move, change jobs, shop, recreate, or do a thousand other things, autonomously--instead of building quality public transportation and subsidizing electric, hydrogen, or other alternatively powered cars, and passing laws that require parts to be recyclable? (“Cradle to Cradle” design)

People can want what they want and also care about the planet at the same time, but not be offered enough viable options to address both.

If buildings produce 40 percent of our greenhouse gases and a lot more in their total materials' lifecycles, would you “outlaw” buildings? No, you’d incentivize and subsidize alternative energy to power them and a host of technologies to make materials, their sourcing, manufacturing, and transportation carbon neutral and less environmentally destructive.

The point is, doing things that align with the flow of human desire, works. It capitalizes on our creativity and what we will work hard at it because it aligns with self-interest and ensures a much higher rate of success. People want what they want and they always will. And, surprisingly, research indicates that caring for others in their neighborhood and community is part of what people want. Self-interest is not necessarily analogous to selfishness, particularly when people believe that the system is fair to all.

Perhaps, Sacramento should take a lesson from this.

If single-family homes are in high demand, why not figure out a way to build more of them less expensively and increase home ownership? Wouldn’t that be the logical thing to do? (ownership off all types of housing: single-family, townhomes, condos, houseboats, whatever... maybe a new version of the 1950s GI Bill) And if they’re not “green” enough or tend to be at a distance from jobs (which otherwise is known as the ability to live wherever one chooses), why not invest in better public transportation and alternative energy technologies and improve how homes are constructed to make them carbon neutral, more water-saving, or whatever?

The System: A Great Conundrum

My brother thinks he’s a chicken

You should take him to a psychiatrist

We would, but we need the eggs

~ Woody Allen

We live in a market economy and on balance, it produces more benefits than detriments, at least for us. Looking around the world at its impacts, this conclusion is far less certain. And although China is presently operating on a competing system, its impacts are no less dire. So, for the sake of discussing housing in California, right now, it is what it is. But that doesn’t mean there’s not enormous room for improvement, particularly when it comes to who pays for what.

For example, how affordable housing is currently financed has produced some paradoxical results. As much as one wants to support the Low Income Housing Tax Credit program (it’s one of the only things that actually works to produce affordable housing), it is ironic that the mega-corporations that are pouring millions into lobbying against local control of zoning and planning, are the same ones buying most of those tax credits from housing developers, to avoid paying their fair share of taxes on their enormous profits.

Maybe companies that don’t pay any taxes shouldn’t be allowed to buy Low Income Housing Tax Credits?

It’s time we recognized that housing affordability is just a part of our overall “affordability" problem, which is the real problem. Instead of trying to micromanage every aspect of local zoning and planning, perhaps, Sacramento might want to focus more on income inequality and do something to ensure that over-compensated CEOs pay more taxes on all those options-juicing corporate stock buy-backs. And while they’re at it, we could do something about corporate foundations (Translation: “nonprofit” corporate public relations departments) funding anti-single-family home advocacy propaganda (Translation: political lobbyists), which is a way for them to ensure they can continue to lay off the enormous costs of the public services, schools, roads, and all the other infrastructure they need to support their growth.

At this point, it might just be cheaper (for taxpayers) and more effective (for social justice goals) to take a page out of the 20th century and for the government to start building low-income housing, again, instead of underwriting endless market-driven, trickle-down, nonsensical housings schemes to appease moneyed lobbyists challenging single-family homeownership, which happens to be a major tent pole of our economic system.

The key component of such a policy would be to cut out all the bloated state and regional agencies and simply send funding directly to every city and county, with the restriction that it must be spent on building affordable housing.

The Cost of Housing

Homeownership is more difficult for first-time buyers today than it was in decades past. That’s true. But it’s not as much because of rising housing costs as falling average earnings.

Consider this chart of inflation-adjusted housing prices.

Zillow-Real-Home-Value-Chart.png

Doug Short Advisors

Surprisingly, despite the constant media drumbeat about skyrocketing home prices, the data shows that in inflation-adjusted terms housing prices are rising but only just approaching the peak of the 2007 housing bubble. So, real home prices have essentially not changed at all in the past 14 years.

The problem is not so much that “real” home prices are rising, it’s that “real” earnings are not keeping up and weekly work hours are falling (the gig economy—also known as under-employment-- is mostly part-time work).

And lest you think that lack of housing affordability is uniquely an American problem, take a look at this chart.

OECD-Housing-Chart.png

We have a global income inequality problem. The causes of that are extremely complex and have been building for more than 40 years. Perhaps, Sacramento ought to focus on that instead of micro-managing local zoning and the like, because the truth is they can pass as many anti-local zoning laws as they want. It will not change what people want.

Rarity creates value, which is the whole point of having equity in homeownership in the first place. And based on recent statistics showing how Millennials and young families are in a mad rush to purchase single-family homes in states across the country, I’d say most people understand that.

So, the more laws Sacramento passes against single-family homes, the more the prices of single-family homes with private yards, in peaceful neighborhoods with stable property values, where homeowners pay taxes and fees to fund good schools and public services, will go up. And in that economic environment, developers will continue to build more high-end housing (whether single-family or multifamily) to sell for higher and higher prices.[1]

What else can they do? They operate in a market economy.

Tax the “rich?”

As a consequence of broad-based un-affordability, the latest fashionable sound-bite to all that ails us is the cry to “tax the rich.” That sounds fine to me, but what does it mean?

It is telling that this slogan is not used by YIMBY, housing advocacy groups, who are funded by rich financial interests and tech billionaire foundations looking to off-load their employee costs on the public. Instead, the YIMBY tactic is to redefine "the rich" as anyone owning a single-family home and to suggest that they must have gained that ownership through some illicit scheme or by taking advantage of some slimy tax “loophole.”

Nothing could be further from the truth when it comes to homeownership for the working middle class.

What is happening in California housing politics reminds me of the marketing campaigns big gas and oil companies have used for decades: underwriting the narrative that global warming is the responsibility of the average American, who needs to recycle and conserve more, not the responsibility of the mega-corporations that enjoy so much government financial support to pollute the planet.

The new anti-single-family homes narrative takes a page out of big oil's playbook and targets homeowners as the ones responsible for the housing crisis, which conveniently side-steps the whole discussion of overall affordability and its real causes.

Across the country, this narrative, this scapegoating driven by the redefining of who is or is not "rich" is taking hold. However, while all the talk in Washington DC is about ‘closing loopholes’ and ‘taxing the rich,’ it is telling that in the latest US budget proposal there are no cuts to defense spending,[2] no cuts to prices big pharma can charge Medicare for name-brand drugs,[3] and no cuts in subsidies to oil and gas companies,[4] but lots of tax schemes that will trickle down to average working families.

The consequences of this will ultimately have to equate to higher taxes for the working middle-class and make saving up enough equity to own a home in California more and more unaffordable.

Let's consider just one of the ideas currently proposed to tax the ‘rich’: new taxes on certain retirement account holdings.

The definition of "rich" now includes not just anyone who owns a home but any kind of assets: stocks, bonds, etc. It now includes any working person who happens to have a retirement account. And just to put this in perspective, according to ICI Global,[5] as of March of 2021, we are talking about,

a $35.4 trillion US retirement market, which includes employer-sponsored retirement plans (both defined benefit (DB) and defined contribution (DC) plans with private- and public-sector employers), individual retirement accounts (IRAs), and annuities. [Emphasis added]

The breakdown noted on the chart, below, from the Tax Policy Center, shows that there are,

Over 60 million taxpayers own individual retirement accounts (IRAs), which include traditional IRAs, Roth IRAs, Simplified Employee Pensions (SEP IRAs), and Savings Incentive Match Plans for Employees (SIMPLE IRAs). The average IRA balance for taxpayers with IRAs is about $157,000. Ownership of IRAs increases with income and with age, as does the average IRA balance. Men and women are about equally likely to own an IRA (table 1).[6] [Emphasis added]

Retirement-Accounts-Chart.JPG

We are hardly talking about the 1% here.

Now, consider this.

Exchange-traded funds (ETFs) are a type of investment, usually for a certain sector of the market or types of companies, which can be traded like a stock. A purchaser of an ETF does not pay any tax until that holding is sold, just like with a stock. This is because the transactions within the managed ETF are not taxable: they are classified as “like-kind” transactions. But the powers that be, desperate to find ways to get tax revenue (so they don’t have to reduce defense spending or offend drug companies or big oil), want to change that and make all those internal trades taxable to the ETF holders.

ETFs are heavily (if not exclusively) favored as the investment vehicle of choice by major financial retirement fund management firms for smaller investors (Schwab, Fidelity, Vanguard, etc.). The total value of ETFs held in the US markets is now approximately $5.4 trillion, most of which is held by institutions that manage this money for those 60 million, mostly middle-class Americans who have a retirement plan.

If they change the way ETF internal trading is taxed, they’ll be increasing taxes on all those retirement accounts, because EFT managers may make dozens of trades every year. As a result, individual retirement investors will be getting an annual tax bill for ‘phantom income,' effectively penalizing them for ownership.

This is what happens when you live in a sound-bite world. This is the equivalent of Sacramento vilifying middle-class, single-family homeownership. It's marketed as "closing a loophole" but it's really just another tax increase on working families. When you combine this Washington DC nonsense with our California nonsense, the result is homeownership will be even harder to achieve (people need savings and wealth creation to buy a home).

Washington DC's failure to tax the truly rich (over $5 million in annual income from all sources) using a fair, progressive tax rate is the same as California's failure to stop large, corporate investment interests from reaping outsized rewards from developing market-rate housing with zoning ‘subsidies” in our hot housing market, without providing for any reasonable amount of affordable housing.

Meanwhile, our cities operate under the increasing threats of lawsuits and are giving away public land that has been maintained by taxpayers, for free, to “nonprofit” developers so they can make their investor’s[7] required return on investment.[8] And despite all the rhetoric, the truly rich continue to coast along, unscathed and unchallenged.[9]

This is not socioeconomically sustainable.

Meanwhile back at the ranch

Almost 30 years ago, I bought an old house originally built in the 1940s for military officers stationed at Sausalito’s shipyards. It was 924 square feet and it didn’t seem cheap at the time. In fact, it seemed outrageously expensive considering it was abandoned and uninhabitable. But it was a place to start. Today, I worry about all the people who need quality housing in California, who still want the American Dream (yes, low-income people need trees and greenspace, too) but have no place to start.

After the republication of my article entitled, High-Density Transit Oriented Development Won’t Reduce Greenhouse Gases, I received a biting email from a YIMBY proselytizer, who chastised me because, he said, “Everyone knows that lawns are bad for the environment.”

Huh?

This is how far we’ve come since 2008 when Senate Bill 375 started with “high-density housing is good for the environment.” I guess I shouldn’t be surprised someday if someone comes to my door and tells me that killing the 20-foot by 22-foot patch of lawn in front of my house is the “fair” thing to do.

Governor Newsom recently signed SB9 and SB10. It is interesting that he waited until after the recall election to do so, considering how wildly unpopular these laws are with most California voters. Even so, one might be tempted to think this will be it for a while. After all, the impacts of these two laws will be very far-reaching and will take time to fully manifest themselves. But don’t count on it. I think Sacramento is just getting started.

What we can count on is that in the end, the taxes, regressive fees, and special levies that will be required to pay for the local public services and infrastructure, and pay for the debt to finance Sacramento’s zoning giveaways to large, private, developers will ultimately fall on the backs of the working middle-class, and more and more families will fall deeper into wage-slave servitude and become lifelong renters, who are doubly disadvantaged.

Because that's how our system 'works.'

A lot of us worry about that. And I’ve been writing about potential solutions for years. As it is, we're on a path for a continued downward slide of the standard of living for the average Californian.

This is something Sacramento should be taking a long and hard look at. It’s something our nonprofit is diligently working on, despite Sacramento’s nonsense.


[1] In Mill Valley, in response to the ADU laws, we are not seeing speculative developers building what they call the “new estate living:” a miniature baronial estate on a 5,000 square foot lot, complete with the 2,000 square foot main house, the maid’s quarters (ADU) and the guest cottage (ADU) all for the “affordable” asking price of $4.6 million.

[2] The Biden-Harris Administration today submitted to Congress the President's Fiscal Year (FY) 2022 Budget request of $752.9 billion for national defense. Source: US Defense Department

[3] Being able to negotiate pricing of brand-name drugs with manufacturers for Medicare Part D could save on average $11 billion per year.

[4] The Environmental and Energy Study Institute reported that direct subsidies to the fossil fuel industry totaled $20 billion per year.

[5] https://www.ici.org/faqs/faq/401k/faqs_401k

[6] https://www.taxpolicycenter.org/briefing-book/who-uses-individual-retirement-accounts

[7] Nonprofit developers make a substantial portion of their profits syndicating Low Income Housing Tax Credits to large corporations and as derivatives in the public markets.

[8] The recent giveaway of land at San Quentin in Marin County by the state is a prime example.

[9] Forbes Magazine recently reported that “According to the US Treasury, the top 1% of taxpayers, ranked by income, failed to pay about $163 billion in taxes last year, making up about 28% of total unpaid taxes, while the top 5% evaded about $307 billion, or nearly 53% of the overall sum. https://www.forbes.com/sites/jonathanponciano/2021/09/08/richest-5-of-americans-choose-not-to-pay-307-billion-in-taxes-each-year-treasury-reports/?sh=258051e9459d



Bob Silvestri is a Marin County resident and the founder and president of Community Venture Partners, a 501(c)(3) nonprofit community organization funded by individuals and nonprofit donors. Please consider DONATING TO CVP to enable us to continue to work on behalf of California residents.