Proponents of Proposition 123, titled “Dedicate Revenues to Fund Housing Projects,” promise that the ballot measure will create a reliable revenue stream to increase affordable housing in Colorado. Unfortunately, neither proposition is true.
If passed by voters in November, the measure would exempt 0.1% of state personal and corporate income taxes, estate taxes, and gift taxes from revenue limits under the Taxpayer’s Bill of Rights (TABOR), while dedicating the money to funding for affordable housing projects. Those projects are described in some detail, but generally fall into three broad categories: 1) support for land trusts, which buy and hold land for a specific purpose, in this case, affordable housing; 2) debt financing and gap loans at below-market interest rates, where the fund would take no ownership position in a project; and 3) equity financing, where the fund would take a partial ownership position.
Both the equity and debt financing methods would retain the earnings from the investments, and either reinvest them, or be used to fund a tenant equity vehicle, whereby the tenants would share in the equity growth of the development, and be able to use the proceeds for a down payment on their own homes. The money could also be used for other forms of down payment assistance. I will say that, despite the drawbacks of this scheme, it was a pleasure to read a measure that at least used “equity” to mean capital, rather than race-conscious discrimination.
Any jurisdiction receiving money from the fund would have to increase its affordable housing stock by 3% each year, which may or may not be sustainable without running out of space.
Defining ‘affordable’
The measure defines “affordable” as rent or mortgage costing no more than 30% of the tenants’ or owners’ incomes, where renters would earn no more than 60% of the area median income, and homebuyers would earn no more than 100% of the area median income. But if a jurisdiction thinks that using that standard is cramping its style, causing “implementation of this article in a manner inconsistent with housing and workforce needs within the jurisdiction,” it can ask to base its affordability calculations on it a neighboring jurisdiction instead.
As I read that, it could cut both ways. It could prevent gentrification, but it could also prevent lower-income residents from moving into the Country Club precinct, as well. It also smacks of central economic planning: workforce needs change all the time, and after a factory leaves or moves in, government will likely be slow to react.
Some of the explicit requirements are problematic in their own right. Preference is to be given to “high density” housing, which has been show to increase traffic, and has been associated with increased crime. Preference is also to be given to “projects consistent with the goal of environmental sustainability.” In other words, adding the sort of building code requirements that add thousands of dollars to the cost of new or replacement housing. The measure also inappropriately conflates the homeless problem with lack of affordable housing.
A volatile revenue stream
In addition, the revenue stream is likely to turn out to be less secure and predictable than expected. The authors of the measure chose personal and corporate income tax (estate and gift tax revenue is negligible by comparison) because those constitute the bulk of the state’s revenue. According to the Pew Trusts’ State Fiscal Health project, Colorado received 54.5% of its revenue from state income tax in fiscal year 2021, and an additional 6.8% from corporate income tax. Only three states – Oregon, California, and New York – derived more of their revenue from personal income tax.
The problem is that Colorado also has the 14th-most volatile state revenue from 2001-2020. Of that, the personal income tax component was the most volatile. Total income taxes declined 20% from peak to trough in the 2008 recession, and 19% in the milder 2001 recession. The State Treasury will transfer money quarterly based on revenue projections, trued up against actual revenue. But second quarter corporate income tax revenue is typically 3 times as much as first quarter, and personal income tax is usually between 60% – 80% higher over the same period. Finally, those projections rarely see recession revenue drops until they’re already in the rear-view mirror. All of this combines to make projection and planning difficult at best.
And it’s not even clear that the money raised would be enough to make a difference. In fiscal year 2021, Colorado took in $11.5 billion in income tax revenue (gift and estate taxes were $0). That translates to $11.5 million under the bill. That sounds like a lot of money, until you realize that a group recerntl.y purchased housing for 99 veterans and it cost nearly twice that. A less-affordable building is planned for in the Denver Tech
Center, with 252 units, costing $90 million. Indeed, the state legislature put nearly forty times that amount into affordable housing projects this year.
All of this adds up to getting the government even deeper into the real estate business, using volatile revenue streams that neither developers nor those looking for housing will be able to rely on, to produce housing that ends up trapping people rather than liberating them.
There’s another way
Rather than seeking to warp the housing market to central planners’ ideas of how people should leave, gently loosen zoning regulations. Rather than focus on high-density housing that makes traffic worse and gives people no place to move up, relax single-family housing zoning to allow semi-detached housing where lots will support it. Allow people to build rental units in their back yards or convert their garages. These things could be done without changing the character of a neighborhood the way that plopping a 7-storey apartment building down into a cul-de-sac suburb will.
Above all, stop trying to turn the Colorado Department of Transportation (CDOT) into the density police, cramming people next to highways and light rail while keeping huge tracts of Jefferson, Adams, and Arapahoe Counties undeveloped.
These measures will create more inventory of all types, making sure that all the rungs from apartment to ex-urban spread are available to people as they move up.
And you won’t have to spend any taxpayer money to do it.
Joshua Sharf is a senior fellow in fiscal policy at the Independence Institute, a free market think tank in Denver.
