Even Laws That Haven't Passed Can Have Unintended Consequences
Mere proposals can change the risk calculus for business and investors. Politicians, and the public, should be wary.
If you follow public policy debates, you are probably familiar with the concept of unintended consequences. Laws or regulations can have unanticipated negative effects, undermining the good intentions behind them.
Even laws that have not actually passed can have unintended consequences. You can think of these proposals as risk taxes, since they increase the costs of already risky activities.
Consider a recent Senate bill aimed at addressing the nation's housing crisis. It was supposed to make homeownership easier and cheaper for ordinary Americans by increasing the housing supply—a worthy goal, since regulations, lawsuits, and price controls have put homeownership out of reach for many. The bill includes many provisions intended to reduce the time and expense of building homes.
A version of the legislation passed the Senate in March. Although it had not been signed into law, it still drove developers to nix homebuilding projects.
That was a direct result of a provision that would require developers to sell newly built rental homes within seven years. The idea is to give ordinary homebuyers a chance by ensuring that large institutional investors don't own too many homes. But even the possibility of the build-to-rent provision stopped in-the-works housing developments.
"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 in April. "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 was already stalled, the Journal noted. So even before final passage, a bill intended to increase the housing supply had the opposite effect.
That bill is not the only recent example of policy to have deleterious consequences before it was enacted. This November, California voters may be presented with a ballot initiative imposing a one-time wealth tax. The union-backed proposal would retroactively tax the net worth of billionaires; it is billed as a way of boosting public coffers to pay for welfare programs. But the state's own Legislative Analyst's Office has said the initiative would likely lead to reduced tax revenue over time if billionaires exit the state.
Some of the state's wealthiest individuals have already left the state, in some cases prior to the date the law would be retroactively effective. One count identified a dozen billionaires, representing $1.07 trillion in wealth, who had moved out of California. Although not all of them explicitly tied their moves to the proposed tax, those exits will make the state's budget deficit worse. As with the housing bill, this happened before the proposal passed.
Something similar may happen in New York City, where Mayor Zohran Mamdani posted a Tax Day video singling out billionaire Ken Griffin and his $238 million Manhattan 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 on Park Avenue. 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. Citadel's exit would pull high-paying jobs and investment from a city that is already facing a severe budget crisis.
All of these proposals—build-to-rent restrictions, California's wealth tax, the pied-à-terre tax—are unwise policies unsupported by evidence and driven by a combination of unsound thinking and political grandstanding. But beyond their fundamental foolishness, they all add political uncertainty to already risky endeavors.
Building homes is costly and inherently speculative, and so are living and doing business in New York and California. These proposals increase the risks of economic activities, effectively increasing their price. They change the risk calculus for investors and businesses even before they become law, making socially beneficial investments and transactions less likely.
Politicians—and the public—should be aware of such risk taxes and the costs they impose. Even laws that have not and may never go into effect can have unintended consequences.
This article originally appeared online. The web version has been updated to reflect the print edition.
This article originally appeared in print under the headline "Even Laws That Haven’t Passed Can Backfire."
