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“In a good economy, homelessness goes up”: The Paradox of Progress and Poverty

Why solutions to homelessness should be funded by a tax on local land values.

This is the first piece in an ongoing series in which we explain how local housing costs cause homelessness, why solutions to homelessness should be funded from a land value tax, and the merits of redistributing land values through a universal basic income.

Part 1: “In a good economy, homelessness goes up”: The Paradox of Progress and Poverty 👈 (you are here).

Part 2: Basic Income for the Homeless: Findings from Three Experiments

Part 3: Universal Land Dividend: Why LVT and UBI are even better together

Part 4: Citywide Land Dividend: Can a LVT-funded UBI help solve homelessness?

Homelessness is an urgent humanitarian crisis facing many American cities. Picture the tents lining Portland’s I-5 and I-84 highways, perennial encampments along Skid Row in Los Angeles, and constant news articles about the homelessness doom loop in San Francisco. But this problem is not the same everywhere.

Paradoxically, homelessness is at its worst in precisely those places where incomes and amenities are at their best. Homelessness has become increasingly concentrated in just a few coastal cities, namely New York, Washington DC, San Francisco, San Jose, Los Angeles, Seattle, and Portland OR. 

Sources: State of Homelessness 2023; Homelessness is a Housing Problem

Victims of their own success
Of the seven cities highlighted above, six are among the top ten highest-income metropolitan areas, while homelessness is at its lowest in the two poorest states: Mississippi and West Virginia. It was this observation that prompted Eric Garcetti, Mayor of Los Angeles in 2020 to make the depressing quip that “in a good economy, homelessness goes up.” Likewise, back in 2016, the Boston Globe observed that “Rich states, not poor ones, have the largest homeless populations.

This same paradox was the driving force behind many of the writings of American political economist Henry George, who used it to title his best-selling 1879 book Progress and Poverty, and noted that “the tramp comes with the locomotive, and almshouses and prisons are as surely the marks of ‘material progress’ as are costly dwellings, rich warehouses, and magnificent churches.”

Homelessness is a land rent problem
But what can explain this odd paradox? When a city becomes more desirable (perhaps because of higher wages due to a tech boom, or public investment into improving schools), there will be rising demand to live there. If the city fails to build enough homes, housing will become increasingly unaffordable. Marginalized and low-income households will be hurt the most by rising housing costs, feeling the looming threat of their next rent payment, having to respond by crowding together, fleeing to more affordable locales, or by being forced onto the street.

Henry George gave this same explanation way back in 1868, predicting that the completion of the transcontinental railroad to San Francisco would increase land prices and “it will be harder for a poor man to get a house and lot for himself, and if he has none that he will have to use more of his earnings for rent; means a crowding of the poorer classes together; signifies courts, slums, tenement-houses, squalor and vice.” This was echoed a century later by Richard B. Freeman and Brian Hall in their 1987 paper ”Permanent Homelessness in America?”, which explained that “[t]he pattern of rapidly rising land values, rents and housing market problems for the poor in Massachusetts raises the possibility that future economic progress…may exacerbate rather than alleviate the housing problems of the poor.

Put simply, thriving cities will see their progress flow into higher housing costs, pricing the poor out of house and home, into poverty and onto the street. Because these high housing costs relate to landlords and property sellers charging a premium for access to the thriving city, they can be said to derive from the location of the property, and can therefore be referred to as a location premium. We use the term ‘land rent’ to describe the proportion of house prices or the rent paid by tenants which relates to the particular location of the property. Places with high land rents have high homelessness.

High rents cause homelessness
Studies have consistently confirmed that high housing rents are the single most powerful predictor that a city will have high rates of homelessness. The Pew Charitable Trust’s housing policy initiative explains that “housing costs are the primary driver of homelessness.”

In Homelessness is a Housing Problem, Gregg Colburn and Clayton Page Aldern thoroughly disprove many of the common scapegoat explanations for homelessness. They show in excruciating detail that rates of homelessness are not correlated with typical explanations like drug addiction, mental illness, warm weather, migration into generous welfare states, and so on. Instead, they find that homelessness at the city level is most strongly predicted by places having higher income, higher rents, and lower vacancy rates for housing. Colburn and Aldern conclude that “homelessness at the metalevel is more a symptom of affluence than of poverty.”

Places with higher rates of mental illness tend to have less homelessness, while places with more expensive rents have more homelessness. Source: Homelessness is a Housing Problem.

Colburn and Aldern conclude that homelessness is fundamentally a housing problem, and recommend a range of strategies to boost housing supply in high-growth cities: upzoning land use regulations to allow more multifamily housing, building public & social housing, and increasing funding to the Low Income Housing Tax Credit (LIHTC) program. Likewise, they highlight policies to expand the financial support given to low-income tenants, for example through Section 8 housing vouchers.

Future articles in this series will consider the potential role of a universal basic income (UBI) in this suite of policies. UBI provides all citizens with an unconditional cash payment on an ongoing basis. By ensuring that all household budgets are above this minimum threshold, UBI can help ensure that everyone can at least afford a basic level of shelter on an ongoing basis.

Homelessness solutions must be funded from taxes on land
These are all good strategies. As we explain below, our key point is that whichever of these policies cities deploy in their fight to end homelessness, they should primarily be funded by a land value tax (LVT) paid by property owners on an ongoing basis. LVT functions much like existing property tax systems, but with the crucial difference of only being charged against the value of the land, thereby exempting homes and other physical structures.

As discussed above, there is an intrinsic link between high housing costs in a given location (which embed into higher local land values) and homelessness. LVT creates a virtuous cycle here: rising prosperity causes higher land rents, which threaten to cause higher homelessness. But because rising land rents are partially captured as additional LVT revenue, there are more funds available to expand homelessness prevention programs.

Virtuous cycle created by funding homelessness solutions from land value taxes. Prepared by Author.

Such a mechanism could be as simple as an annual 0.2% tax on land values with the funds earmarked towards affordable housing subsidies. Applied to all privately-owned land value in Seattle, such a tax would raise around $800 million per year, right in the middle of the $0.5 to $1.1 billion price tag to end homelessness estimated by McKinsey & Company. Cities/states with strict limits on property tax revenues, like California’s Proposition 13, would need to make legal accommodations for such a tax. However, this is a necessary move to reverse the current state of affairs whereby property owners receive all of the benefits but none of the social obligations associated with rising prosperity. Specifically, the full benefits of urban growth flow into rising land values, but tax protections ensure that property owners bear no responsibility for helping those Californians who are hurt by these rising housing costs.

LVT has several features which make it ideal for this purpose. It is an efficient tax, meaning that it does not discourage housing supply, will not cause rents to rise, and will not slow economic growth. If incumbent homeowners use zoning regulations and show up at community meetings to oppose the construction of multifamily housing, this will drive up local land values, causing their tax bills to rise under a baked-in LVT. If they wish to see a reduction in their LVT bill, these voters will need to support the expansion of affordable and market rate housing. As such, this LVT creates an unbreakable connection between those who are helped and those who are hurt by rising land values, guaranteeing that the former group must contribute to helping the latter.

Homelessness thrives in places with exorbitant land rents, so solutions to homelessness should be funded by a tax on land values.

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