Vacancy Taxes Are Insufficient and Poorly Targeted Housing Policy
Vacancy taxes can be beneficial at the margins, but are overshadowed by far more effective and better-targeted policy prescriptions
In January 2022, upon commission by Dean Preston of the San Francisco Board of Supervisors (SFBOS), the SF Budget & Legislative Analyst’s Office (BLA) published a report on residential vacancies in San Francisco. While some news headlines referred to it as a “new” and “bombshell” revelation, the data itself is neither bombshell nor new — the report cites the Census Bureau’s American Community Survey (ACS) 1-year 2019 report, which has been publicly available since 2020. Nonetheless, the report concluded that San Francisco had just over 40,000 vacant units. Preston used this opportunity to unveil his plan to file a ballot measure for a tax on the owners of certain vacant residential units, calling vacancies “the elephant in the housing policy room”.
Closer scrutiny of economic data and evidence (including in the very report cited by the SFBOS) indicates otherwise; while vacancy taxes can achieve certain positive effects for housing availability and affordability, their benefits are fairly marginal and insignificant overall. Additionally, for both revenue-raising and behavior-changing purposes, vacancy taxes in their many varied forms is often poorly targeted, and would be better replaced with comprehensive property tax reform: specifically, a property tax regime that shifts tax burden away from productive improvements and instead towards land.
Vacancy taxes as supply-side housing policy can achieve positive effects — even if limited
Vacancy taxes as supply-side housing policy do achieve positive effects, even if limited. In theory, by increasing the opportunity costs for owners who leave their units vacant, vacancy taxes incentivize owners to rent their units out at lower rates, which helps exert downward pressures on rent levels. This reintroduces vacant units back into the market by “activating” currently existing vacant residential units to become occupied housing.
Empirical data supports this in part. The BLA cites data at the localized city level from Canada, specifically the “Empty Homes Tax” implemented in Vancouver, BC in 2016. Vancouver reported that out of 7,672 homes declared vacant (or exempt) in 2017, the tax returned 1,309 units to occupancy in 2018, followed by an additional 337 units in 2019, for a total of 1,818 units returned to occupancy over three years. The vacancy rate lowered from 4.1% to 3%, representing a 27 percent decrease in the overall housing vacancy rate (HVR).1
The BLA also cites the vacancy tax passed in Washington, D.C. (in 2011) and neighboring city Oakland (in 2018), as well as the more discretion-based temporary repossession and/or compulsory sale regime in Barcelona, Spain (in 2016 and 2019). However, Barcelona’s government has been incredibly selective in its limited uses of said fines and repossession powers; there is relatively little available data on the impact of the three aforementioned vacancy tax implementations.
Interestingly, the BLA neglects to mention one of the best case studies on vacancy taxes in economic literature: Mariona Segu’s study on the effect of vacancy taxes in municipalities in France. The study, published in the Journal of Public Economics, is notable due the France applying the vacancy tax at the national level across hundreds of municipalities, providing a large sample size and a plethora of data for both experimental and control groups.2 The study’s results showed that the vacancy tax led to average HVR decreasing by 13 percent, with most vacant units turning into permanent residences.
To wit: a vacancy tax can indeed achieve reductions in housing vacancy rate, anywhere in the ballpark of 13 to 27 percent depending on the level of administrative implementation.
Vacancy taxation pales in comparison to building more housing
The good news for vacancy taxes, unfortunately, ends there. While these reductions in housing vacancy rates can look impressive in HVR percent change terms, they are a red herring; overvaluing HVR data ignores the simple fact that the vast majority of housing units are not vacant at all. Fixating on “activating” housing units in the limited pool of existing vacant housing fails to take into consideration how much housing supply wasn’t “activated” by never having been built in the first place. This is especially relevant given the consistently growing demand for more housing in the same areas due to job growth, population growth, and need for larger living spaces and smaller household sizes.
Extrapolating data at various administrative levels illustrates just how large these gaps can be. At the local municipal level, according to the BLA report, applying data from Vancouver to San Francisco predicts “activating” around 5,000 housing units in San Francisco over 2 years. The same report also mentions, however, how the most recent Regional Housing Needs Allocation (RHNA) Plan assigned 82,000 new homes to San Francisco for the 2023-2030 planning period — a vacancy tax would only cover a mere 6 percent of San Francisco’s future housing needs. Keep in mind these figures do not even take into account the underestimations for housing demand in the three preceding planning periods due to faulty methodology. Roughly applying the same proportional increase from the updated methodology (mandated by a state law passed in 2018) to those three planning periods, while accounting for past failures to meet even those underestimations, yields an estimated housing backlog of over 199,000 homes.3
At a larger administrative level, applying data from France to the State of California predicts “activating” 120,000 in California over three years.4 The California Department of Housing and Community Development (HCD) estimated in 2015, however, that the state needed to build a whopping 1.8 million new homes by 2025 (a goal that they are thus far on track to achieve less than half of) — a vacancy tax would only cover a mere 7 percent of California’s future housing needs. Keep in mind, again — these figures do not take into account the underbuilt housing from the years before. A comprehensive report from the University of Southern California’s Sol Price School of Public Policy (which notably takes into account historic household formation rates across various age and racial/ethnic demographics) reveals an estimated housing backlog of over 1.1 million homes.
To be clear, the numbers for “reactivated” housing are certainly nothing to entirely dismiss; a home is absolutely still a home for those who make it their residence. It is critical, however, to compare these numbers at scale to housing demand in aggregate. Doing so reveals that every measurement for new available housing as a result of vacancy taxation pales in comparison to the sheer amount of both past unmet and expected future housing needs.
Certain vacancy tax structures distort incentives against more housing
Another issue with vacancy taxes lies in how they can skew incentives towards certain forms of housing production and ownership depending on how they are structured and implemented.
As the BLA report mentions, a flat vacancy tax (in the form of a fee/fine) is relatively easy to implement administratively, but does not reflect the specific proportional negative impact or cost of vacancy imposed by each vacant property (due to variance in demand depending on location). Such can be seen in the Oakland vacancy tax –– the city increases the flat fine with every additional apartment unit, penalizing multi-family homes while exempting single-unit residences.
A variable tax based on property value can partially address this issue. In the case of Vancouver, the tax is levied as an additional percentage of a property’s assessable value. Property taxes do capture a large proportion — but not all — of land value; however, due to property value assessment increasing with the number of built housing units, the tax still ends up exempting owners of single-unit residences on top of equally valuable land as the land under neighboring multi-family homes.
In San Francisco, the Board of Supervisors’ submitted ballot proposal somehow achieves the worst of both worlds. The proposed tax levies flat fines that do not in any way capture the massive flows of land value under the desirable city of San Francisco. More notably, the proposed fines entirely exempt single-unit and two-unit residences/buildings while increasing the size of the fines depending on total square footage of the property. In a city facing massive housing shortages and overcrowded living conditions, this vacancy tax proposal penalizes the very two things that would solve those issues — multi-family housing and increased physically built square footage — all while exempting the most inefficient forms of land use in one of the most high-demand cities in the country.5
The consistent throughline here is one of vacancy taxes letting the most unproductive land use and speculative behavior off the hook. While Oakland did have the merit of imposing a flat fee on vacant land lots (despite immediately lowering it due to complaints from incumbent landowners), and while Vancouver does exempt vacant lots that have active development applications in order to incentivize development, the final result is still a tax regime that fails to account for vacancy in the form of housing that is sorely needed but was never built at all.
Build more housing | Tax the land
The primary issue with focusing on taxing housing vacancies is clear: it simply does not affect enough housing to make a significant dent in addressing the massive housing shortages already faced by cities. Even addressing “backlogs” in housing production merely returns housing markets to their conditions as measured at some point in the past; even more housing production is required in order to improve the carrying capacity of cities for additional population (such as newborn children, immigrants, and refugees) while increasing the amount of livable floorspace per person (reducing household sizes and/or residential overcrowding).
The lynchpin of any housing policy interested in promoting affordability and accessibility must focus on the true “elephant in the housing policy room”: rapidly increasing the supply of new housing. It is entirely self-defeating to attempt to only further redistribute within shortage; the goal must always be an agenda of abundance. The best time to build a house was twenty years ago; the second best time is now. These principles apply everywhere and anywhere facing varying housing crises, be it overcrowding in California, to soaring rents in New York, to 20-year apartment waiting lists in Sweden.
There are many components to addressing the supply issue, all of which involve reducing the costs and legal barriers to building new housing. These solutions include, but are not limited to:
Legalizing the construction of multi-family homes by ending sparsity mandates in the form of exclusionary zoning
Abolishing minimum parking mandates that increase the cost of new housing construction
Accelerating housing permit pipelines by reforming discretionary approval processes and establishing by-right development
Funding public housing developers that can produce and maintain new social housing, even during cyclical downturns
As for vacancy taxes themselves: while they may achieve modest improvements, the specific method in which they are implemented can wildly change how equitably they are applied with regard to both proportionate locational impact as well as land use efficiency. The most well-targeted approach to taxing vacancy gives equal treatment to “built” and “unbuilt” vacancy on top of valuable land by reforming property taxation to maximize land value capture while exempting productive improvements — a land value tax would fix this.
The SF report uses old data from before 2021; the data shown here is from the most recent updated and updated Vancouver Empty Homes Tax Annual Report
France implemented its vacancy tax at the national level in a staggering 680 municipalities across eight urban units in 1999, and later further expanded the option to all other municipalities (depending on municipal council vote) as well in 2006.
Increasing from 28,869 in 2015–2023 to 82,069 in 2023-2030, San Francisco’s RHNA minimum was increased by nearly 65%. Adjusting RHNA in previous two planning periods (2007–2014 and 2015-2023) by the same percentage, while accounting for failure to keep pace in housing production in 2000-2006 and 2007–2014, yields ~199,000 missing housing units.
With almost 14.4 million housing units and 921,000 vacant units in 2020, the HVR in California is 6.4%. Applying a 13% reduction to that 6.4% would result in California’s HVR decreasing to 5.6%. This yields ~120,000 “activated” housing units over three years.
San Francisco and Oakland face particularly difficult legal and political circumstances in implementing any variable tax based on property values due to the existence of Proposition 13, the infamous anti-tax law passed via California’s unique ballot proposition system that simultaneously capped both the property tax rate and annual increases in property assessment value. The exemption of low-density housing from the vacancy tax, however, is entirely due to choice by the SFBOS.