Oregon Faces Problem with Expanding Housing in cities: Cities Can’t Pay for Services for New Residents

Oregon faces problems with expanding housing in cities: paying for services for new residents

Tim Nesbitt
February 6, 2024 
Gov. Tina Kotek has set a goal of building 36,000 new homes a year – nearly double the average number of homes built in Oregon in recent years.

Gov. Tina Kotek has set a goal of building 36,000 new homes a year – nearly double the average number of homes built in Oregon in recent years. (Dan Reynolds Photography/Getty Images)

Oregon, like our neighbors to north and south, is in the midst of an aggressive home building project. But we’re faced with a larger problem than either California and Washington when it comes to sustaining a growing population: Our local tax system can’t keep up with new development.

Here in Oregon, as we build new homes to house an expanding population, we won’t be able to pay for the services that keep our cities livable unless we update a tax structure that makes growth unaffordable within our urban growth boundaries.

I’m not referring to the supply of land or the cost of infrastructure, issues which are getting the attention they deserve, but to the ongoing revenues needed to sustain city services once new housing units are in place.

I was reminded of this problem recently when a group of billionaires filed an initiative with California’s Solano County to pave the way for a new city of 50,000 residents on mostly unoccupied grassland south of Sacramento. The backers of this “California Forever” demonstration city claim their project “will pay its own way from the tax revenue it generates.”

Checking the numbers, their claim looks plausible. California raises its property tax valuations for buyers of new and existing homes, passes on to local governments a share of its statewide sales tax collections and allows them to add a local surcharge to its sales tax rates.

And, Washington is a lot like California when it comes to new development. The state limits its local property tax rates but regularly updates its valuation of properties, both old and new alike. It also allows cities to piggyback on the state’s 6.5% sales tax with local rates that average another 2.0%.

In Oregon, by contrast, we maintain our below-market property tax valuations for buyers of new and existing homes and seem determined to live without a sales tax.

These differences are telling. Both California and Washington are able to capture revenue gains from new homeowners in amounts that at least come close to the cost of providing services for them. In Oregon, however, growth falls far short of paying for itself.

This problem has become most evident in Oregon’s fastest growing cities, from larger population centers like Bend and Salem to smaller towns throughout the Willamette Valley. In my local city of Independence, growth has been steady and well-planned, but its new homes are not generating the tax revenues needed to maintain its police patrols, parks and library.

Even since the passage of Measure 5 and Measure 50 in the 1990s, Oregon cities have faced a chronic revenue problem, patched over with fees on residents for services like water and sewer and payments gathered from outsiders via lodging and rental car taxes. But those patches have been wearing thin. And, growth only exacerbates this problem.

So, in what has become an ironic complication for our home building agenda, cities responding best to our housing shortage are paying the steepest price for their efforts.

For many years now, city officials who gather at the Oregon League of Cities have been discussing potential tax reforms. Some are inclined to pursue the California model of resetting property taxes to reflect market values when homes and other buildings are sold or built. But that would put them in a double bind politically. Any increase in property tax burdens for new buyers will make housing less affordable and exacerbate the inequity in costs borne by older, wealthier residents and younger, working families.

Earlier this month, the Governor’s Housing Production Advisory Council released a wish list of revenue options for financing new housing in the future. But their recommendations deal mostly with building new infrastructure and overlook the challenges that cities face in sustaining services for new residents.

Housing advocates and city officials should look to the state for more immediate and more feasible solutions, citing the precedence of what the state has done for another victim of our property tax limitations – our K-12 schools. Schools have overcome the constraints of our local property tax system with an ever-growing supply of state funds since the mid-1990s.

The city of Salem has started down this path. Following its voters’ rejection of a payroll tax to keep up with demands on its budget, Salem’s mayor is turning to the Legislature for help. Salem is something of a special case, because of the amount of untaxed state land within its borders. But, it’s just the first of many cities on the edge of a cliff, beyond which the Legislature offers the only relief in sight.

Cities can no longer fend for themselves, especially now that overcoming our housing shortage will require building the equivalent of a dozen new Independence-sized cities every year through the end of this decade.

The “California Forever” project probably wouldn’t be well received here in Oregon, even if our land use system allowed it. But it highlights important issues for managing growth in our state.

One is the need to overhaul our tax system. But that will take time.

The other is more immediate.

As we ramp up our production of housing, we’ll have to work with the system we have and the revenues that flow from the growth of our economy if we want to maintain our land use system and our quality of life. That, in turn, will put the onus on the state to come up with some form of revenue sharing to support cities that are meeting our housing goals. Otherwise, solving our housing shortage will be a short-lived victory, if we can’t sustain the livability of our cities.

Source: Oregon faces problems with expanding housing in cities: paying for services for new residents – Oregon Capital Chronicle

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