A Vacancy Tax Can Strengthen Neighborhoods

By Karla Noyes

Many cities in California, and around the world, have instituted annual taxes on mostly-empty second homes to encourage owners to rent or sell the properties they’re not using, and to allow those properties to be lived in by people who work in the area. Municipalities use the tax revenue either to augment their General Funds – supplementing police, fire, and other local services (which requires majority voter approval) – or to target affordable housing programs (which requires 66 percent voter approval).

These annual vacancy taxes are called “Empty Homes Tax” in Berkeley; “Residential Vacancy Tax” in San Francisco; “Vacant Property Tax” in Oakland. In my opinion, “Non-Primary Home Tax” is a less confusing term for the people who live full-time in their homes and are not subject to the tax. They’re the ones who vote on it, since second homeowners vote in other jurisdictions.

The City of Sonoma has 5,992 housing units, of which 707 are vacant – an unusually high, 11.8 percent vacancy rate for a small city. Of those, 269 (38 percent) are second homes, and 178 are long-term, off-market units. Together, there are 447 homes that are not available to residents, not short-term rentals, not under major renovation, and not unsafe. They are simply unused most of the year.

Long-term residential vacancy affects more than housing supply. When homes sit empty, neighborhoods lose year-round residents, neighborhoods are hollowed out, schools lose enrollment, and local businesses lose steady customers. The city also loses tax revenue that supports public services. These impacts accumulate over time, eroding the social and economic fabric that longtime residents depend on.

Annual vacancy taxes are designed to increase housing availability, reduce long-term vacancies, generate locally controlled revenue, and strengthen neighborhood and commercial district stability – all by encouraging more consistent use of existing homes.

The City of Sonoma currently has no mechanism to discourage long-term residential vacancy. A vacancy tax would directly target the categories of homes that reduce supply for year-round residents while generating revenue for city priorities. Revenue modeling shows that a vacancy tax could generate $2 million to $4 million annually.

A vacancy tax is unlikely to affect most buyers in Sonoma, because residents who plan to live in their homes full-time would never pay it. The tax mainly applies to people who intend to leave a home empty for long stretches of the year – and those aren’t the buyers who strengthen neighborhoods.

If a few second-home investors decide to look elsewhere, that’s a trade that benefits residents. At the same time, the policy can attract buyers who value living in a community of year-round neighbors – people who want to belong, not just occupy a property part-time. In this way, an annual vacancy tax helps protect Sonoma’s character.

Some of the arguments against vacancy taxes include:

•       It’s taxation without representation. But, like any other excise tax, a vacancy tax taxes a chosen behavior – extended vacancy.
•       It’s a violation of the Fifth Amendment Taking Clause, and you can’t require me to rent or sell my property. But owners aren’t required to do anything. They can rent, sell, or leave the property vacant – they just have to pay the tax. A vacancy tax attaches a cost, it doesn’t impose a mandate.
•       It’s a violation of the California Ellis Act that prohibits cities from forcing owners to rent, or penalizes owners for withdrawing units from rental use. But, the Ellis Act restricts mandates, not taxes. A vacancy tax does not compel rental activity; it simply attaches a cost to extended vacancy.
•       It will reduce demand for properties. A vacancy tax may deter buyers who want to leave homes empty, but for some households, knowing that the city prioritizes occupancy and neighborhood stability is a selling point, not a drawback.
•       It will reduce sales prices. A vacancy tax may deter buyers who want to leave homes empty. On a $1,000,000 sale intended for long-term vacancy, a vacancy tax triggering a 3 percent reduction in the offering price equals $970,000; a 5 percent reduction equals $950,000.

In Sonoma, two big realities blunt that effect: Most primary-residence buyers won’t pay the tax at all, so it has no impact on their valuation. And many second-home buyers will use the property more, or rent it out, making the tax avoidable rather than a fixed cost.

On a $1,000,000 home, a $3,000-per-year tax looks small, unless the buyer is committed to keeping it empty.

Karla Noyes, M.B.A. is a Sonoma real estate agent and a member of the Sonoma Valley Collaborative.