Measure N’s empty home tax: Is new tool aiming to boost affordability handy or flawed?

A model of a house with a set of keys
(Via Pixabay)

If residents of the city of Santa Cruz vote to pass Measure N, residential property owners would be liable for a new annual tax of about $3,000-$6,000 if they don’t have their properties occupied for at least four months each year. It’s a new idea to get more housing units into play — and it has generated lots of controversy about how well it could work.

Surging cost of living has every level of local and state government scrambling for answers, as housing anxieties pervade nearly every political conversation around Santa Cruz’s future. Just in the past year, we’ve seen major new housing projects and significant new building standards proposed, even as the push-and-pull between local governance and state-mandated growth increases.

Against that backdrop, those who gathered enough signatures to put Measure N on the November ballot say they are clear on their goal: getting more affordable housing in the city of Santa Cruz. The tool they are proposing to voters: an empty homes tax.

This new tax is intended to push property owners to either find tenants for their unoccupied residential spaces or pay an annual tax, the proceeds from which would fund a new affordable housing fund.

“This is a chance for us to step up and raise revenue to create more affordable housing,” said Cyndi Dawson, chair of the City of Santa Cruz Planning Commission and Yes on Measure N campaign manager. “A lot of people are pretty disillusioned with our leadership, and they don’t trust them to meet really what is our No. 1 community need.”

That sense of distrust is set come to a head on the November ballot, and appears to be centered around a public belief that the city isn’t sufficiently meeting the need to create and build affordable housing. Proponents of both Measure N and, in part, the hotly debated Measure O make affordable housing a key part of their pitches to voters — and suggest to varying degrees that both the city’s elected officials and its planning staff are not sufficiently addressing the issue.

In short, the empty homes tax measure is intended to achieve two inextricably linked goals: to raise new money for a new affordable housing fund and to create more available housing units by seeing unused or partially used capacity available for tenants.

“The most important thing is affordable housing options for our community. We know that empty homes destabilize our workforce and weaken our community ties, and we need people to be in homes to create community,” Dawson said.

The opponents say they agree on the housing need, but paint the measure as one that won’t work.

“Nobody disputes the severe affordable housing shortage, but the empty home tax is a bit of an empty promise, and will only put funds for affordable housing sometime in the distant future with plans and money that haven’t been identified,” said Lynn Renshaw, a leader of Santa Cruz Together, which has led the opposition.

More specifically, the No on N advocates say the measure is structurally flawed, describing its administration as onerous and punitive. Further, the group believes the tax’s estimated revenue is inflated and will not raise enough money in the quest to provide thousands of new housing units in the city.

Administration would be onerous for all the city’s homeowners, they add. The ordinance would require property owners to file an annual report asserting that their property is occupied for more than 120 days. Any residential property owner in the city could be subject to an audit.

What would the tax do?

What does the measure define as an “empty home?”

Property owners with residences occupied for fewer than 120 nonconsecutive days (four months) in a calendar year would be subject to the empty home tax. That means that out of 365 days in a calendar year, if a residential property is occupied for any 120 or more of those days, the owner does not have to pay the tax. They do, however, still have to submit an annual “vacancy status declaration.”

In this measure, the numbers matter. Those in the initiative itself are clear, but others are projections, and they are part of the contention.

From the measure itself, we know these numbers:

The tax would apply to those property owners with residences occupied for fewer than 120 nonconsecutive days in a calendar year. Properties registered under the city’s short-term rental ordinance are exempt from the tax.

The tax rate would vary based on the type of residence:

  • $6,000 annually for a qualifying single-family residence.
  • $6,000 annually per vacant parcel for residential parcels with six or fewer units where all units are in use for fewer than 120 days. That means that a parcel of land with six or fewer vacant units, where all of them are empty for more than eight months, would have to pay the tax.
  • $3,000 per vacant residential unit on parcels with seven or more units. That means that a lot of land with seven or more units would see the property owner pay $3,000 per vacant unit.
  • $3,000 annually per vacant residential unit for each vacant unit in condo or townhome developments.

Then there are the numbers that are the projections in debate.

City finance staff estimates that the number of taxable properties in Santa Cruz could range from 427 and 705.

Given that range, staff estimates that the tax would raise somewhere between $2.5 million and $4.1 million annually for a new housing fund.

Though this type of tax is fairly novel, its proponents point to relatively recent examples of it in Oakland; Washington, D.C.; and Vancouver, British Columbia, all of which have passed vacancy taxes. Capitola considered one, but did not include it on the November ballot, and Berkeley and San Francisco have vacancy taxes of their own heading to voters in November.

However, if Santa Cruz voters approve the tax, it will look a bit different here than it does elsewhere — the main contrast being the burden of proof on property owners. In cities such as Oakland, city officials determine which properties are vacant and candidates for the tax.

Measure N would also establish a new “Empty Home Tax Oversight Committee” that would track administration of the tax and advise the city on zoning and land use to promote construction of affordable housing.

The measure would direct city council and city staff to establish an annual audit process to verify vacancy status of taxable properties, a review additional to the oversight committee. According to the measure’s text, a residential property owner would be required to submit an annual declaration of vacancy status, and may be required to provide information to the government at any time, and for a period of up to three years after the calendar year in question, regarding:

  • the property;
  • the identity and address of the registered owner;
  • the status of the property;
  • the nature of the occupancy of the property.

The city would also have the power to perform an audit whenever it believes a property owner is making a false declaration, if there is an ownership change or, broadly speaking, whenever the city feels it is appropriate.

In total, city staff estimated that the entire program would include one-time startup costs of $534,000 and annual costs of $450,000, which would come directly from the empty homes tax proceeds themselves.

Disputing the numbers

Then there is the money question. Proponents believe the $2.5-4.1 million city estimate is a low-end estimate. Opponents, though, believe it’s inflated, and will decrease over time due to fewer empty homes as the tax is observed.

“The number is the highest in the first year and decreases over time, because people either repurpose the units or have somebody move in,” said Renshaw, adding that Vancouver had 2,100 empty homes in its first year of the tax, then dropped to 1,600 the next year.

Then there is the question of how much impact a fund of that size would have on the affordability issue.

File image of a door with a key
(Via Pixabay)

Dawson understands that a $4 million estimate might not seem like much, but says that more housing does not necessarily mean building from scratch — and that “whatever money we raise will be more than we have now.”

“It could be used to purchase existing property and convert those units to deed restricted, which is obviously a lot less expensive than building new,” she said. “Also, amounts as low as $100,000 or $200,000 can become millions when they’re brought into a matching fund project from state and federal grants, and affordable housing experts tell us they’ve done that before.”

Renshaw said she does not think that the amount raised is significant.

“The Terner Center for Housing Innovation out of UC Berkeley found that to build just one affordable housing apartment unit in the Bay Area could exceed $1 million dollars,” she said. “Even with matching grants, you’re looking at maybe just one apartment that can be built.”

Dawson acknowledges that it’s impossible to estimate how many units might be created through the tax, and that the move would certainly not solve our affordability issue. But she says it’s a step in the right direction, and “every unit counts.”

As to the administrative costs, Dawson says each of the estimated annual and startup expenses are too high by about $100,000.

Where did the measure come from?

The measure qualified for the November ballot as its supporters gathered more than enough petition signatures, and the Santa Cruz City Council moved it to the ballot.

Councilmember Sandy Brown, who was also involved in crafting the measure’s language, said that it was while walking various precincts during her 2020 reelection campaign that she realized how many empty housing units there were in town.

“I started talking with neighbors and with those who had lived in some of these multiunit complexes and learned that, at least from their perspective, they were sitting empty because the property managers refuse to lower the rents even a little bit,” she said. “That got me thinking that it’s not just the smattering of homes on West Cliff and the increasing amount in Seabright, but it’s potentially bigger than that.”

The measure originated from conversations with community members as well as officials in other municipalities who were pondering similar progressive property tax policies.

Dawson said that Santa Cruz City Council members wouldn’t bring the matter to a council agenda, so she, Brown and others began gathering signatures from voters.

Opponents claim the signature-gathering was dubious.

Renshaw does not believe that the public was well informed about the petition.

“We saw them tabling and they just said to sign for affordable housing without any explanation,” she said. “People didn’t know what they were signing.”

“That is totally false,” said Dawson.”We trained volunteers thoroughly and had literature with the details that we handed out.”

Renshaw added that the petition’s proposal to mandate that homeowners register their homes and prove they are occupied for more than four months is “invasive,” as shown on the white and blue “No on Measure N” signs scattered around Santa Cruz bearing yellow text that reads “too invasive, too extreme.”

Dawson does not find this to be true, and instead, envisions a simple process with no registry involved.

“It will be one question of, ‘Is your property in use for 120 days or more, yes or no?’ followed by a checkbox where you confirm what you said is true, and then you’re done,” she said. However, the measure leaves the task of developing the procedural aspects of the tax with city staff.

Administrative worries

Renshaw, who said she has lived in the same house for many years, takes further issue with the measure’s misdemeanor penalties — $500 or imprisonment of no more than six months for any false declaration with the intention to evade the tax — as well as the city’s new auditing powers.

“People like me will have always been in their primary residence, but I can be audited once a year and have to prove it again and again,” she said. “Applying misdemeanor penalties to any violation of the law, including criminal penalties from just making a mistake and filing occupancy status is a severe structural flaw. Oakland doesn’t have criminal penalties on its tax.”

Since the Oakland vacancy tax makes it the city’s duty to determine which properties might be vacant, rather than taxing on a self-reporting basis, there is no criminal charge within the law. However, Renshaw added she would not support any empty home tax, even if the language more closely mirrored Oakland’s tax.

Dawson, though, points out that the enforcement and penalties are essentially the same, word for word, in the Santa Cruz Municipal Code regarding fraudulent tax returns (see section 3.16.210). Yet for Dawson, this is not about penalties. Rather, it’s about creating a dedicated revenue stream for affordable housing projects.

“We look at what the city can spend the [existing] affordable housing fund on, and they can basically spend it on anything,” Dawson said. “This is not just another thing to raise money for the general fund and then who knows where it goes. You’d be hard pressed to find someone that says they don’t support affordable housing, but the question is how you actually get a policy in place, and that’s what Measure N does.”

Christopher Neely contributed to this report.