For years, California’s housing crisis has been explained through a story that feels intuitively right. Proposition 13 capped property taxes, cities lost revenue, housing became a fiscal loser, and local governments responded rationally by blocking new homes. That story is not entirely false — but according to housing analyst M. Nolan Gray, it is wrong in exactly the way that matters most.
In an essay from May 2025, Gray argues that the dominant explanation for how Proposition 13 shaped California’s housing shortage suffers from what philosophers call a “Gettier problem.”
It is a belief that is widely held, factually true and seemingly justified — yet grounded in faulty reasoning.
“The trouble is,” Gray writes, “their justification is wrong.”
That error, he contends, has distorted the policy response for decades.
Proposition 13, passed by voters in 1978, capped property tax rates at 1 percent of assessed value and limited annual assessment increases to 2 percent unless a property is sold or redeveloped.
The standard narrative holds that this made housing fiscally unattractive to cities, particularly apartments assumed to generate more in services than they return in taxes.
Gray concedes elements of that account. In the immediate aftermath of Proposition 13, local revenues collapsed, and commercial uses that produced sales tax became more attractive.
But he argues that this fiscal zoning explanation no longer matches reality — and may never have fully explained California’s choices.
According to Gray, three structural shifts since the late 1970s have fundamentally changed the fiscal math.
First, Proposition 13’s reassessment rules mean redevelopment triggers massive increases in property tax revenue. The longer a parcel remains undeveloped or underutilized, the more it drains public coffers relative to its potential.
Second, the demographic profile of market-rate apartment residents has changed dramatically. Renters in new buildings are now far wealthier and far less likely to have school-aged children than the caricature that still dominates local debate.
Third, California has layered on some of the highest impact fees in the nation, requiring developers to pay tens — often hundreds — of thousands of dollars per unit before construction begins.
Taken together, Gray argues, these changes mean new market-rate housing is no longer a fiscal loser. In many cases, it is “free money” for cities.
Using a West Los Angeles apartment project as an example, Gray estimates that replacing a low-rise commercial property with a 60-unit apartment building increased annual property tax payments from roughly $7,400 to more than $93,000 — an $86,000 annual gain.
Over a decade, that translates into more than $860,000 in additional revenue, before accounting for sales taxes generated by high-income tenants or more than $2 million in impact fees paid up front.
“How catastrophically misgoverned would Los Angeles need to be for this development to be a fiscal net loser?” he asks.
If the classic fiscal zoning theory were correct, California’s cities would now be approving housing at scale.
The incentives line up. Reassessment windfalls are larger than ever. Impact fees are ubiquitous. Yet housing production remains anemic, rarely surpassing three units per 1,000 residents in recent years.
The data, Gray argues, simply do not support the claim that cities are blocking housing because it does not pay.
That mismatch leads to Gray’s central conclusion: Proposition 13’s most corrosive effect is not on city budgets but on homeowner behavior — and, by extension, local politics.
In most states, rising home values lead to rising property tax bills. That annual bill functions as a constant reminder of market conditions and creates what Gray calls an “empathy pump,” giving homeowners at least some incentive to care about affordability.
Higher prices mean higher taxes, which makes policies that increase housing supply appealing, even if begrudgingly so. New apartments generate revenue and can help moderate price growth, which stabilizes tax obligations.
California’s system severs that feedback loop. A homeowner who bought decades ago can sit on a multimillion-dollar property while paying taxes based on a long-outdated assessment.
“This person has no reason to pay attention to housing costs, let alone any incentive to bring them down,” Gray writes. Rising prices become “almost purely to their benefit,” even as renters and would-be buyers are pushed further to the margins.
Because homeowners are the most powerful constituency in local land-use politics, this incentive structure matters far more than any spreadsheet calculation by a city manager.
Fiscal zoning, Gray argues, does not primarily operate through municipal finance officers; it operates through voters. When scarcity enriches incumbents and imposes no ongoing cost, opposition to new housing becomes the default political position.
The consequences are visible across California. Longtime homeowners fight density while watching their children and grandchildren leave the state. Cities teeter on the edge of fiscal collapse while refusing the very development that would shore up their finances.
Encampments proliferate, commutes lengthen and greenhouse gas emissions climb — all while local electorates remain structurally insulated from the costs of inaction.
Gray does not claim that homes cannot be investments or that price appreciation is inherently bad. Housing, he notes, is a store of wealth almost everywhere in the United States.
Yet California stands out not because homes function as investments, but because the tax system rewards relentless appreciation without accountability.
The dynamic encourages speculative behavior by buyers and entrenches an “I got mine” politics among those already housed.
Misunderstanding this mechanism has led policymakers to pursue the wrong fixes. If housing were blocked because it drained city budgets, then revenue sharing, grants or growth incentives might work.
Gray doubts that such measures can meaningfully change outcomes as long as homeowners experience housing scarcity as an unalloyed good. Transferring more money to local governments, he argues, “will help on the margins,” but it will not alter the political economy of land use.
The only durable solution, in Gray’s view, is to move housing decisions to a level of government less susceptible to capture by incumbent homeowners. That means state preemption.
California has begun down that path with streamlining laws, ministerial approvals and enforcement actions against noncompliant cities. The resistance to those reforms, Gray suggests, is further evidence of how deeply Proposition 13 reshaped the politics of housing.
As other states consider imposing limits on property tax assessments, Gray offers California as a cautionary tale. You might not like higher taxes, he writes, but insulating homeowners from the consequences of rising prices comes at an enormous social cost.
The only sustainable way to bring down housing costs — and, over time, tax burdens — is to build far more housing than California has allowed for generations.
If we continue to misdiagnose the problem, we should not be surprised when the cure fails – or so Gray argues.
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California California Housing Crisis City Governments Homeowners land use politics M. Nolan Gray Property Taxes Proposition 13 State Government state housing policy