Rent Control Raises Homeowners' Tax Bills
Economists have their share of disagreements, but not on this: rent control is bad policy, and its impacts are overwhelmingly negative.
The FT-Booth US Macroeconomists Survey regularly surveys leading economists on key economic issues. In 2012, a panel of prominent economists spanning the ideological spectrum was asked to agree or disagree with this statement: “Local ordinances that limit rent increases for some rental housing units, such as in New York and San Francisco, have had a positive impact over the past three decades on the amount and quality of broadly affordable rental housing in cities that have used them.”
The confidence-weighted expert responses: 95% disagree, 4% uncertain, 1% agree.
Economists broadly agree that rent control reduces housing supply and quality, increases rents in the non-controlled sector, lowers mobility, and creates housing mismatches. Studies have also demonstrated that rent control is poorly targeted, often favoring higher-income renters. While the ill effects of rent control are insufficiently appreciated by the general public, the facts are widely available, with many empirical studies backing up these conclusions. I can’t add much to the core argument.
But in a recent paper with the Fiscal Alliance Foundation, I do explore one under-appreciated effect of rent control: it increases homeowners’ property tax burdens.
This is not, in my view, the primary reason to oppose rent control. Other effects are far worse and affect more vulnerable populations. But as voters consider rent control proposals in Massachusetts and elsewhere, they deserve to know that rent control impacts them even if they own their own home.
Here’s the process, which I detail and demonstrate empirically in the paper:
Rent control reduces future returns to rental property, mechanically reducing those properties’ assessed values.
Rent control also reduces maintenance and investment in rental properties, further reducing their value and desirability, with spillover effects that reduce the value of other properties in the community as well.
Both rental and owner-occupied properties decline in value, but rental property values decline far more precipitously. As a result, they represent a smaller share of the tax base while owner-occupied property’s share increases even if those properties are also less valuable than before.
Unless municipalities respond with budget cuts, property tax rates (mill levies) rise automatically to maintain the level of revenue necessary to fund the budget. These increases are not constrained by any levy limits, since the increases are intended only to maintain current collection levels, resulting in higher taxes on homeowners’ larger share of the tax base.
Initially, some rental properties will convert to condominiums and other forms of owner-occupancy, but over time, the rent control regime will create additional housing scarcity since it discourages investment in additional units. This scarcity will increase the assessed value of non-controlled (e.g., owner-occupied) residential property relative to controlled properties, further increasing their tax burden.
Under rent control, therefore, homeowners — despite not being directly impacted by rent control — pay higher property taxes than they do now, under assessed values that are much higher relative to rental properties than currently, though which may still be depressed in absolute terms because of spillover effects of neighborhood deterioration due to underinvestment in the maintenance of rental properties.
You can read the full paper here.
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