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SCG Public Policy Analysis: Addressing California’s Affordable Housing Needs – AB 71 (Chiu) and SB 35 (Wiener)

Publication date: 
Monday, April 24, 2017

The California State Legislature is considering two prominent bills that seek to address California’s affordable housing shortage:

  • Assembly Bill (AB) 71, introduced by Assembly Member David Chiu, proposes to eliminate the mortgage interest deduction on second homes, and to use revenue through the elimination of the tax deduction to fund a proposed increase to the state’s Low-Income Housing Tax Credit program by $300 million; and,
  • Senate Bill (SB) 35, introduced by Senator Scott Wiener, creates a streamlined approval process for constructing affordable housing when cities fail to meet required housing development goals.

This memorandum provides a detailed background of California’s housing shortage as well as an analysis of both bills.

 

Background

The combination of higher demand for housing and insufficient supply in California has driven a rapid rise in housing costs.  According to a recent report by The McKinsey Global Institute, more than 50 percent of the state’s households are unable to afford the cost of housing in their local markets. Low-income Californians are disproportionately impacted with a state shortfall of 1.5 million affordable units for extremely low and very-low income renter households. Subsequently, nearly 70 percent of low-income and very-low income households spend more than half of their incomes on housing costs.

Two different approaches for developing affordable housing have been considered. One is to increase state funding for the development and preservation of affordable homes.  The other is to streamline the local approval process for housing development. Both approaches are discussed below.

Increase Funding for Housing Development Projects

California has reduced its funding for the creation of affordable homes by 79 percent. Voter-approved bonds in 2002 and 2006 – Proposition 26 and Proposition 1C, respectively – provided $4.95 billion for the construction, rehabilitation, and preservation of 57,220 affordable apartments. These funds also helped 57,290 families become or remain homeowners. Nearly all of these funds have been awarded.

In addition, the elimination of redevelopment agencies (RDA) in 2011 has exacerbated funding for housing developments. RDAs directed a portion of the property tax revenue to community development and affordable housing. For example, in fiscal year 2009-10, RDA collectively deposited $1.075 billion of property tax revenues into their low and moderate-income housing funds.

There is no current source of permanent funding to compensate for these losses. California’s Department of Housing and Community Development published a draft report in January 2017, finding that “unstable funding for affordable home development is impeding our ability to meet California’s housing needs, particularly for low income households.” Therefore, increasing funding for affordable housing though a permanent program is one considered approach.

Streamline the Housing Development Approval Process

Another approach is to reduce the number of local approval requirements faced by proposed housing developments. Every city and county in California is required to develop a general plan that outlines the community’s vision for future development. The plan must be consistent with housing element law so that it demonstrates how the community plans to accommodate for its fair share of local housing needs. Housing element law is determined through a process known as Regional Housing Needs Allocation (RHNA). The RHNA takes into account the housing needs of future households with very-low, low, moderate, and above-moderate incomes. Cities and counties then enact zoning ordinances to implement their general plans, for zoning rules determine the type of housing that can be built.

On March 8, the Legislative Analyst’s Office (LAO) released a report on the shortfalls of the housing element process. Predicting housing needs and identifying ideal sites for development are difficult tasks, made more challenging by residents’ resistance to build more housing. As a result, communities’ zoning standards are misaligned with the type of projects developers wish to build. Therefore, developers must ask city or county officials to modify zoning rules for desired projects, which raises costs and discourages building. The LAO report recommends that the Legislature modify the process of developing RHNA projects, increase local fiscal incentives to build housing, and streamline local approvals.

Streamlining local approvals has the potential to reduce the challenges many housing projects face. In addition to zoning rules, developers must obtain one or more local permits from local planning departments. They must also obtain approval from local planning commissions, city councils, or county board of supervisors. Public review is required for large housing projects as well. Notably, some housing projects are permitted ministerially by only city or county planning staff if the plan is consistent with existing general plan and zoning rules. These exceptions are termed “by-right” developments.

Past Attempts to Address Affordable Housing

In May 2016, the Governor proposed $400 million in affordable housing funds if lawmakers accepted his plan to broaden the eligibility for by-right approvals in the Governor’s Streamlining Affordable Housing Approvals bill.  Under the proposal, 20 percent of units developed through the streamlined approval process would be required to be affordable to low-income households. For developments in Transit Priority Areas, projects would be streamlined if at least ten percent of units were reserved for low-income households or five percent of units were reserved for very-low income households. The proposal was met with opposition from tenants’ organizations, environmental protection groups, and labor unions. The Legislature did not pass the proposal, and the Governor did not allocate the $400 million.

In Governor Jerry Brown’s proposed budget for 2017-18 fiscal year, there is no new funding for low-income housing subsidies in the budget. The Governor has stated that he will support bills that make it easier to build new homes, lower costs to develop low-income housing, and provide incentives for cities that meet housing production goals.

 

AB 71 (Chiu) – Bring California Home Act

This bill proposes to eliminate the mortgage interest deduction on second homes, and to use taxes gained through the deduction elimination to fund a proposed increase to the state’s Low-Income Housing Tax Credit program by $300 million.

Existing Laws

Federal: The Low-Income Housing Tax Credit (LIHTC) Program is a federal program that enables affordable housing developers to raise private capital through the sale of tax credits to investors. Two types of federal tax credits are available and are referred to as “nine percent” and “four percent” credit. The nine percent federal tax credit is a capped per capita resource designed to subsidize 70 percent of the eligible development costs. Interest in the program is three times higher than the available funds.  The four percent tax credit is an uncapped federal resource designed to subsidize 30 percent of the eligible development costs.  The program is highly dependent on the availability of state and local funding to make the development viable.  

State: The Legislature authorized a state LIHTC program to augment the federal tax credit program. State tax credits can only be awarded to projects that also receive federal LIHTCs, except for farmworker housing projects, which can receive state tax credits without federal tax credits.

Separately, in conformity with federal law, California law allows taxpayers to deduct the mortgage interest paid on up to $1 million in debt for a principal and second residence. A second residence is limited to a home that is either not rented out at any point in the year or one that the taxpayer can rent out but also lives in for part of the year. Taxpayers can deduct mortgage interest from both their federal and state tax liability. AB 71 will only affect the state tax deduction. According to the Franchise Tax Board, the average deduction for a second home in California is roughly $11,600. At an average tax rate of eight percent, the average taxpayer would reduce their taxes by $928.

Proposed Solution: Fill the Gap in Funding

AB 71 eliminates the mortgage interest paid on a qualified second home as a deduction taxpayers can take against their state income tax. This would increase the allocation of state LIHTC by an additional $300 million to award projects that are receiving four percent federal tax credits.  Increased state LIHTC would leverage additional federal funds to develop these projects, resulting in greater affordability in theory.

In addition, the amount of low-income housing tax credits set-aside for developing farmworker housing would increase from $500,000 to $25 million. This increase would address the shortage of farmworker housing in California, an issue that has emerged now that most farm owners no longer provide free housing for their seasonal workers.  If any funds of the $25 million go unused, it will be available for qualified non-farmworker housing projects.

Support:

Seventy equity, business, nonprofit organizations, and community organizations support AB 71. Supporters note that there is no valid public policy reason for the second home mortgage interest deduction. The major tax benefit from second homeownership is federal and will continue with this bill. Supporters state that since there is no other budget or statutory policy of the state to encourage second homes, the only policy argument for this provision is conformity with federal law. Supporters find that while sometimes the state conforms to federal law because of complexity, there is little complexity to disallowing the mortgage interest deduction for a second home.

Opposition:

The California Association of Realtors (CAR) opposes AB 71 unless it is amended to remove the elimination of the mortgage interest deduction for second homes. CAR supports increasing the amount of tax credits available for low-income housing. However, they argue that the amount of the mortgage interest deduction is already capped regardless of whether the taxpayer has one home or two. They also note that second homes may not necessarily be homes for vacation but would be used by the owner who commutes to work during the week.

 

SB 35 (Wiener) – The Housing Accountability and Affordability Act

This bill creates a streamlined approval process for constructing affordable housing when cities fail to meet required housing development goals.

Existing Laws

State: Existing state law requires cities and counties to adopt a general plan that includes a housing element law. As discussed, housing element law is determined through the Regional Housing Needs Allocation (RHNA) process from the Department of Housing and Community Development (HCD). Cities and counties within the territory of a metropolitan planning organization (MPO) are required to revise housing elements every eight years. Cities and counties in rural non-MPO regions must revise their housing elements every five years. At this time, there is no existing state law that requires cities and counties to fulfill RHNA housing production goals or report their annual housing production to HCD.

Proposed Solution: Streamline Zoning-Compliant Projects

SB 35 establishes a streamlined, ministerial (“by-right”) approval process for qualified infill developments with two or more residential units or for Accessory Dwelling Units (ADUs) in localities that do not meet their RHNA housing production goals. When unmet income-based categories are addressed, the approval of zoning-compliant projects will be streamlined, if they meet objective zoning, affordability, and environmental criteria, and if the projects pay prevailing wage. In addition, this bill also requires all charter cities (e.g. Los Angeles, Long Beach, Irvine, Huntington Beach) to report their annual housing production to HCD, and will require HCD to ensure housing production data is detailed, up-to-date, and publicly accessible on the internet.

Cities that are on track to meet their RHNA housing production goals at all income levels will retain full local control over how they approve housing under SB 35.

Support:

Ten non-profit and community organizations, including the Silicon Valley Leadership Group, Abundant Housing LA and East Bay Forward, support SB 35. Supporters note that this bill will help prevent abuse of environmental review by communities who resist additional housing. East Bay Forward has states that sensible streamlining of the housing approval process will help simulate the creation of affordable and mixed-income housing in California.  

Opposition:

More than 40 nonprofit and community organizations, including the League of California Cities, Courage Campaign and Koreatown Immigrant Workers Alliance, oppose SB 35. Opponents note that while SB 35 tries to find solutions to address the state’s housing shortage, there is also issues of gentrification and resident displacement in many urban communities. In a letter to Senators Wiener, Atkins, and Allen, these opposed organizations offered amendments for consideration, including: using project entitlements as the metric for evaluating performance by cities toward RHNA goals; requiring additional affordable housing for projects acquiring “by-right” approvals; outlining clear restrictions on eligibility for “by-right” approvals; and retaining its original strict prohibition on demolition of existing housing stock, among other amendments.

If you have any questions or comments, please contact Michelle Ito, Public Policy Intern at [email protected].

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