If you follow public policy debates, you are probably familiar with the concept of unintended consequences. Laws or regulations implemented with good intentions can, over time, have unexpected, unintended negative effects, sometimes undermining or fully negating the good intention behind the rule.
But even laws that have not actually passed can have unintended consequences. You can think of them as risk taxes, since they increase the costs of already-high-risk activities.
Case in point, the Senate’s housing bill. The bill is intended to address the nation’s housing crisis, making home ownership easier and cheaper for ordinary Americans by increasing housing supply. It’s a worthy goal, given that regulations, lawsuits, and price controls have left America with a dramatic housing shortage that has put home ownership out of reach for many. The bill contains a multitude of provisions intended to reduce the time and expense of building homes. A version of it passed the Senate in March with overwhelming support.
The bill is not yet the law of the land, and it’s possible it will change form. But even still, it’s already causing developers to nix home-building projects.
That’s a direct result of a provision in the bill that would require developers to sell newly built homes intended for renting within seven years. The idea is to ensure that large institutional investors don’t own too much housing stock, giving ordinary home buyers a chance to own. But the practical effect of even the possibility of this provision is to cancel housing developments already in the works.
“Developers say that investors won’t put money into new rentals that they can own for only a few years before having to sell them off,” The Wall Street Journal reported. “Even though the bill isn’t yet law, investors and lenders are scurrying away from simply the threat of this legislation.” At least $3.4 billion in funding for these projects is already stalled, the Journal reports, meaning that a bill intended to increase the supply of housing has, even before final passage, had the effect of blocking planned expansions.
Nor is this the only recent example of not-yet-passed policies having deleterious consequences.
California voters may be asked to vote on a ballot initiative imposing a one-time wealth tax. The union-backed proposal would retroactively tax billionaires on their net worth. Critics have warned that if the tax were to go into effect, some founders would be effectively forced out of their companies, since they would be required to sell shares in order to pay a tax bill on wealth that exists only on paper.
The tax is billed as a measure to boost public coffers in order to pay for welfare programs. But even the state’s own office of legislative analysis has said that it is likely to lead to reduced tax revenue over time. And some of the state’s wealthiest individuals have already left the state: One count identified a dozen billionaires, representing $1.07 trillion in wealth, who have exited. Not all of them have explicitly tied their moves to the tax, but the effect of those moves will be to make the state’s budget deficit worse.
Again, this proposal has not even passed. The unions backing the law only recently obtained enough signatures to put it on this year’s ballot. But even the mere possibility of the tax is already changing behavior.
Something similar has happened in New York City, where Mayor Zohran Mamdani recently posted a video singling out billionaire Ken Griffin and his $238 million apartment. Mamdani’s video was intended as an argument for a tax on second homes worth more than $5 million.
Griffin is the head of Citadel, a $67 billion hedge fund that is currently redeveloping a $6 billion office tower. But in response to Mamdani’s personalized attack, which Griffin said demonstrated a “profound lack of judgment,” Griffin has intimated that he might take Citadel’s business elsewhere. Griffin’s primary residence is already in Florida, which unlike New York has no state income tax. And he is reportedly set to meet with New York Gov. Kathy Hochul over the “future direction of New York.” Citadel’s exit would pull high-paying jobs and investment from a city that is already facing a severe budget crisis.
Part of the problem with all of these proposals—build-to-rent restrictions, California’s wealth tax, the pied-à-terre tax—is that they are simply unwise policies unsupported by evidence and driven by a combination of unsound thinking and political grandstanding. But beyond their fundamental foolishness, what connects them, and their unintended effects, is that they add political uncertainty to already risky endeavors. Building homes is costly and inherently speculative. So, for that matter, is living and doing business in New York and California. These risk task proposals change the risk calculus for investors and businesses even before they become law, making it more likely that socially beneficial but inherently speculative investments and economic behaviors won’t pencil out.
Politicians—and the public—should be aware of these sorts of risk taxes and the costs they impose. Even laws and taxes that haven’t gone into effect, and may never, can have unintended consequences.
