Fund Affordable with Windfall Profits Tax from Rents

Stephen Barton | 04/29/2015
Building under construction

Cities around the Bay Area desperately need money for affordable housing and there is a potential source of funding that is right in front of them. Rents in the San Francisco Bay Area are among the highest in the country and are likely to keep going up for the foreseeable future, creating an affordability crisis for tenants. The only way off the treadmill is to build or buy housing that will be owned by non-profit organizations, land trusts and limited-equity cooperatives. And that takes money, a lot of money. So let’s tax the rising rents that increase the need for affordable housing in the first place. 

Increase the Business Tax on the Gross Receipts from Residential Rental Property

It can be done in any city in the Bay Area. San Francisco, Oakland, Berkeley and many other cities have business taxes that are a percentage of gross receipts, which are all earnings before expenses. The tax on gross receipts from residential rental property can be increased by a vote of the people with a simple majority, 50 percent plus one. The tax measure could include a committee made up of people with expertise in developing affordable housing and in homelessness prevention programs to advise the City on how to spend the money, just as Berkeley did in setting up a committee of health professionals to accompany its “soda tax”. Alternatively, a corresponding ballot measure could allocate the same dollar amount raised by the new tax to go from the General Fund to affordable housing. That way we can be pretty sure the money will go for its intended purposes without making the tax increase a “special tax” requiring a two-thirds vote.  

San Francisco has over 200,000 rental units whose tenants pay $4 billion a year in rent. An increase in the gross receipts tax of a modest 2%, even with exemptions for small landlords, would bring in $60 million a year that could be invested in creating permanently affordable non-profit housing. Berkeley has nearly 30,000 rental units whose tenants pay $400 million a year in rent. Even with generous exemptions, an increase in the current 1% gross receipts tax to 3% would bring in $6 million annually for the City’s housing trust fund. That would cost the landlords $30 per unit per month, far less than the last rent increase the landlord imposed after their previous tenant moved out. 

The Tax Will Be Paid from Excess Profits, Not Passed on to Tenants 

The tax would not be passed on to tenants. In San Francisco, Oakland, Berkeley and East Palo Alto rent controls limit rent increases and would not allow the tax to be passed along to current tenants. Nor would the tax be added on when a new tenant moves in or added to the rent of current tenants in the newer apartment buildings that are exempt from rent regulation. The owners already raise the rent as high as the market will bear whenever they have the chance. Landlords might claim they will raise the rent if the tax passes, but the reality is that they will raise the rent just as much with no tax.    

Recapture the Value We Create As a Community

Adam Smith, in The Wealth of Nations, the classic work that is the foundation of market economics, recognized that “the rent of houses” has two parts. First, there is the “building rent”, which is the minimum amount actually necessary to profitably operate and maintain the building. The amount over the necessary minimum is the “ground rent” which is paid for the value of the location. This unearned income in “ground rent”, he pointed out, can very appropriately be taxed for the benefit of the community that created the value of that location.

Landlords get to charge us an admission fee for the privilege of living here in the Bay Area, over and above the part of the rent actually needed to profitably operate and maintain the buildings we live in. They get to turn the value we all have created into their own private profit. 

The residents of the Bay Area, tenants and homeowners alike, have made this a desirable place to live. We created a diverse, open and creative culture supported by transit systems, schools and universities, parks, support for the arts, and so much more. And this made the area attractive to entrepreneurs and businesses whose workers want that creative culture, quality services and natural beauty. 

Homeowners’ contributions to the Bay Area help raise their property values. Tenants’ contributions to the Bay Area help raise their rents. They raise their landlords’ property values. This inequity results in a massive transfer of wealth, taking hundreds of millions of dollars of income away from people who do not own real estate and giving it to those who do own real estate. Nothing could be fairer than to recapture some of this unearned, windfall profit and return it to the community through a windfall profits tax on the gross receipts of the landlords who are raising our rents.   


Update: Berkeley City Council considers tax on rising rents

At its July 14, 2015 meeting, the Berkeley City Council will take up an item directing the City Manager to begin preparations for putting a version of the proposed tax increase on the November 2016 ballot. The item is sponsored by Councilmembers Laurie Capitelli and Jesse Arreguin and contains several alternatives for consideration. Affordable housing and tenant advocates will be at the meeting to encourage Council to move ahead with this important effort to fund affordable housing. Strong opposition is expected from Berkeley's landlords.