A ridiculous idea from the city council

There’s a simple concept in economics regarding taxation: Tax what you want less of.

So, we tax gas, smoking, booze, (increasingly) marijuana, etc.

In light of the above, can someone please explain the city council’s decision to tax housing in the middle of what everyone agrees is a massive housing shortage?

Too lazy to click? Basically, the city council is tacking on a $5,000 / unit charge for new developments in order to better fund parks and recreation.

Obviously parks are a good thing and we all want more of them.*

But throwing a big tax bill on new construction projects will absolutely mean we have fewer units built.

Here’s an example of the how the math works: We have a piece of land in a very housing constrained area on which we can squeeze 17 new units, two of which will be affordable to people on very low incomes (with rents of like $250 / month or something).

The total cost of the project is in the range of $3MM, on which we expect to earn an unlevered yield of 7%, or $210k / year.

If you add $5k / door (excluding the affordable units, as the law allows), you’re adding $75k to the total project cost. That’s only 2.5%, right? Not a big deal?

Wrong, because we basically have a hard floor of a 7% unlevered yield and the extra $75k takes us from a 7% to a 6.8%. So now I’m looking at other alternatives, including building a smaller building without the affordable housing component.

*Want to fund parks? How about parcel taxes for the areas around the parks? That way, all of the local users pay, rather than just new resident!