Minnesota’s Economic News — W/E 9/23/22
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Melvin Carter doesn’t have enough tools in his box to avert the coming havoc of rent control.
Trouble was already brewing for St. Paul Mayor Melvin Carter just a few weeks after his constituents passed one of the nation’s strictest rent control ordinances. As developers paused new housing projects, City Hall was in limbo trying to figure out how to enforce the rule, and the mayor was scrambling to find ways to make the ordinance more accommodating.
Good luck. Saint Paul’s historic vote came just a couple weeks after American Experiment published a report that listed how rent control policies in other cities have reduced housing supplies, increased housing prices, displaced low-income renters, and produced a decline in housing quality. Additional evidence indicates, perhaps ironically, that rent control mostly benefits middle- and high-income renters, in some cases almost exclusively.
Lawmakers around the globe have tried to mitigate the harsh negative impacts of first generation rent control policies that froze rents at specific levels. More recent versions exempt new construction, allow increases at limited rates, enable landlords to reset rents to market levels once a tenant moves out (vacancy decontrol), and index rent raises to inflation.
To some extent these provisions allow landlords and investors to recoup some of their lost profits, which then lessens the negative impact of rent control on housing supply. However, they do not eliminate the disastrous effects of rent control, a phenomenon evidenced in cities like San Francisco, Los Angeles, Berkeley, Brookline, Boston, Cambridge, Stockholm, and Berlin.
St. Paul’s ordinance is, however, in a league of its own. Oregon, for example, which passed rent control in 2019, allows rent raises of up to 7 percent plus inflation, allows vacancy decontrol, and exempts buildings that were built within the last 15 years. By contrast, if current high inflation persists, St. Paul’s 3 percent cap would mean that property owners would lose money. Certainly, the rule allows landlords to apply for a fair return exemption, but that will likely be a complex process costing time and money.
City officials should not have been surprised that developers paused housing projects in the face of rent control. Some of this hesitation may have been prompted by questions about how the rules will be enforced and when they will go into effect.
But it should also teach the city and its neighbor Minneapolis that enforcement of rent control is costly to taxpayers. For St. Paul, since the city already passed its own budget with a maximum property tax levy –– meaning there is no room to squeeze in rent control enforcement without making cuts –– residents might have to face cuts in other city projects.
Mayor Carter has communicated that he will petition the city council to amend the ordinance with an exemption for new housing. His challenge will be that the city charter prevents the city council from amending ballot measures within one year after their approval. Lawsuits will likely follow. Even if they don’t, Carter cannot mitigate the disastrous effects rent control will have on his constituents.
This is likely the tip of the iceberg.