Developer Taxes and the Minimum Wage

One of the more interesting tensions in the urbanist left is over development taxes. Everyone is looking for a funding source to build subsidized housing, and skimming from developer profits is an attractive possibility. On the other hand, too much taxation will deter development, and exacerbate the housing shortage from the other end of the income spectrum. People who share a wide array of values still manage to fall on all points of this spectrum.

It might be useful to try to understand these differences in the context of another recent local debate, that over raising the minimum wage to $15 per hour. There are important similarities in the vocabulary of these discussions. Everyone is for improving the earning power of low-income workers. But if the minimum wage is set too high, it will deter job creation at the bottom. Unhelpfully, the history of almost every debate on regulation and taxes in American history is business owners complaining that change will destroy their business, a claim that usually proves to be heavily exaggerated.

Put that way, the similarities between this tradeoff and the developer tax tradeoff are obvious. One can be forgiven for dismissing protests that development will halt, in the same way the claims about hiring freezes were. As someone who tends toward the skeptical-about-fees side but supported the minimum wage, that's a bit uncomfortable. But there's a crucial difference: there's a third side in the housing debate.

No matter what people thought about the minimum wage, no one was interested in destroying large numbers of jobs. That provided very strong incentives to not overshoot the wage level. Economics research is hard, but there's a decent body of scholarship on this one-dimensional problem. Unfortunately, in the case of housing there's a large contingent of people that would be thrilled if development ground to a halt. That utterly transforms the process of finding the optimum tax rate. It's very easy to intentionally overshoot and cloak oneself in social justice when one's true intent is to simply preserve neighborhoods in amber.

Now obviously we have no capability to figure out the true motivations of any particular actor. But it does introduce a structural objection to setting up a system where the City Council tries to figure out exactly how much they can extract out of developers before impairing population growth with all the benefits it brings. I find that objection convincing.