A Court Rules That San Francisco’s Empty Home Tax Is Illegal

Against the increasingly mainstream view that housing costs are high because new supply is constrained by regulation is an alternative thesis: There are plenty of homes once vacant units deliberately held off the market are accounted for. 

To fix this problem, a handful of California cities have adopted vacancy taxes to try and force these allegedly hoarded homes back onto the market. 

Critics of empty home taxes point to the minimal, consistent tax revenue these levies raise as evidence that only a small number of homes remain persistently unoccupied and the tax does little to bring them back onto the market. 

In addition to the policy case against vacant home taxes is the legal one. 

Earlier this month, a California appeals court upheld a lower court ruling that had struck down San Francisco’s empty home tax. In an opinion authored by Judge Kathleen Banke, the court reasoned that the city’s tax was superseded by a state law, known as the Ellis Act, which guarantees property owners’ right to withdraw their units from the rental market. 

San Francisco’s empty home tax, known as Proposition M, was passed by voters in 2022. The tax was scheduled to be implemented in 2024. 

In 2023, a collection of owners of vacant units and trade associations representing landlords challenged the tax on a range of legal and constitutional grounds. 

They argued the tax infringes upon the Fifth and Fourteenth Amendments of the U.S. Constitution by singling out property owners’ right to not rent out their units for special taxation. The tax also violates the California Constitution’s privacy protections, they claimed. 

They also argued that the tax was illegal because it charged property owners for exercising their rights under the state’s Ellis Act to remove rental units from the market. 

In 2024, the Superior Court of San Francisco ruled in plaintiffs’ favor on all these counts and forbade the city from collecting the tax. 

The city appealed the ruling to the First District of California’s Court of Appeal. 

That court also sided with plaintiffs on their claim that San Francisco’s tax was superseded by the Ellis Act. 

Throughout the litigation, San Francisco had argued that it was not restricting owners’ right to remove their units from the rental market. It was merely taxing them for holding units vacant. 

Banke was unimpressed with this argument. 

“As the City apparently sees it, while a property owner, indeed, has the right to exit the residential rental business, they have no correlative right to remain out of that business and can be pressured back into it on pain of significant taxation. This circularity in reasoning is a patently unreasonable reading of the Ellis Act,” she wrote. 

Because the tax is illegal under state law, the appeals court declined to rule on the plaintiffs’ constitutional claims.

A spokesperson for San Francisco city attorney David Chiu declined to say whether the city would appeal the ruling to the state Supreme Court. 

In addition to San Francisco, Oakland and Berkeley have both adopted vacancy taxes. San Diego has also considered adopting an empty home tax. 

The ruling in the San Francisco case would seem to put those taxes in legal jeopardy as well. 

Already, Berkeley officials have reported that some property owners have not been paying the city’s vacancy tax because of its uncertain legality. 

In a recent audit, Oakland officials rated their vacancy tax (which applies to both empty lots and vacant units) a revenue success. It’s consistently pulling in $6 million a year. The city’s auditor said it was having little impact on bringing productive use to empty lots and units. 

That’s not surprising. Vacancy taxes generally disappoint on the supply front. 

As studies have shown, there are just not that many homes that sit empty for long stretches of time. That’s particularly true in cities facing severe housing cost pressures. 

Indeed, low-vacancy rates are generally considered a symptom of an overall housing shortage. When rents are high, property owners face a strong incentive to rent out whatever spare square footage they have. 

Higher vacancy rates are typically associated with a healthier, better-supplied housing market. 

In addition to the legal problems they pose, taxes designed to drive high-cost cities’ already-low vacancy rates down to zero misdiagnose the problem.