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‘This will be transformative for affordable housing’: States say if you can buy ‘mansion,’ you can pay affordable housing tax

By Kevin Hardy, Stateline.org
Published: February 17, 2024, 6:05am

Washington lawmakers last year dedicated a record $400 million to the state’s Housing Trust Fund, which distributes loans and grants to create affordable housing.

But that was only a one-time infusion, Democratic state Rep. April Berg said.

“What we heard from communities is that we need to know, year over year, that we can actually start doing projects and money will be flowing,” she said.

To create a long-term revenue stream, Berg has proposed raising taxes on the most expensive real estate transactions, an increasing nationwide trend sometimes dubbed a “mansion tax.”

Her legislation would increase the state’s tax on property sales above $3 million while decreasing the tax rate for less expensive sales. The change is estimated to create an additional $300 million in revenue each biennium, said Berg, chair of the House Finance Committee.

“This will be transformative for affordable housing,” she said.

But development and real estate interests in Washington and across the country argue that higher transfer taxes will drive up the cost of housing or tenants as well as for wealthier homebuyers, since the taxes often apply to apartment buildings in addition to single-family homes. At a time of already limited supply and high interest rates, they say, that is the wrong approach to improving the affordable housing crisis.

“You can’t make housing more affordable by making it more expensive,” House Minority Leader Drew Stokesbary, a Republican, told the Washington State Standard.

Washington’s current tax has four tiers. The portion of the sales price up to $525,000 is taxed at 1.1 percent; that ranges upward until the portion above $3.025 million is taxed at 3 percent.

Berg’s proposal would expand the first tax tier to include property sales up to $750,000 and tack on another 1 percent tax on the portion of sales prices that exceed $3.025 million.

Called real estate transfer or real estate excise taxes, these one-time fees on the sale or purchase of property have been a fixture of many state tax codes for decades. But local and state governments are increasingly looking to create a “mansion tax” targeting the higher ends of the real estate market.

So far, 16 mostly left-leaning cities and counties and seven states have approved that type of tax, according to the Institute on Taxation and Economic Policy. The states are Connecticut, Hawaii, New Jersey, New York, Rhode Island, Vermont and Washington.

These explicitly progressive taxes, which impose the biggest burdens on higher earners, largely have been popular among policymakers and voters, said Andrew Boardman, a policy analyst at the Institute on Taxation and Economic Policy who has studied the issue.

But the idea has led to litigation in several states.

In Santa Fe, nearly three-quarters of voters in November approved a new 3 percent tax on residential property sold for $1 million or more. But the Santa Fe Realtors association is challenging the move in court.

Similarly, LA voters approved a mansion tax measure last year. But it faces both a court challenge and a proposed statewide ballot measure that would dismantle the tax.

But officials continue to embrace the idea to tackle the nation’s growing housing challenges.

Next month, Chicago voters will decide whether to approve Democratic Mayor Brandon Johnson’s Bring Chicago Home referendum, which would increase the real estate transfer tax on expensive properties. And legislators in Massachusetts are weighing a bill that would allow cities to impose their own real estate transfer fee.

‘A tipping point’

Massachusetts Democratic Gov. Maura Healey introduced a $4.12 billion housing bill in October that would, among dozens of policy changes, allow cities to create their own tax on the sale of homes above $1 million.

It’s similar to pending stand-alone legislation sponsored by state Rep. Mike Connolly.

Similar efforts failed in the past amid widespread opposition, including from Healey’s predecessor, Republican Charlie Baker. But Connolly said the idea may finally gain traction this year, since even some in the real estate industry have voiced support as housing prices skyrocket.

“It does feel to me like we’re reaching a tipping point where perhaps some of the reflexive opposition to raising new kinds of revenue is starting to give way to just pure desperation,” he said. “Massachusetts is a state where so many people are finding it impossible to continue to live.”

His legislation came at the request of local cities including Boston and Cambridge. If approved, it would allow — but not require — cities to tax 0.5 percent to 2 percent on the portion of property transactions over $1 million. The bill includes a carve-out that allows communities with a median home price under $750,000 to levy the tax on all sales above the median sale price.

The “damn good idea” would give cities flexibility, said state Sen. Jo Comerford, who sponsored the Senate version of the bill.

Comerford represents communities in the western portion of the state that have struggled to maintain reliable tax bases.

“You’re fighting to keep teachers and firefighters employed,” she said. “But they want to develop affordable housing very badly. In fact, their survival depends on them developing affordable housing because we’re losing population in Western Massachusetts.”

But such transfer taxes don’t target the root cause of the affordability crisis, said Jared Walczak, vice president of state projects at the Tax Foundation, a pro-business research organization.

“Policies that increase the cost of housing and then try to use some of the revenue to subsidize housing are not solving the fundamental problem,” he said. “The single biggest reason why housing prices are so high is because there is an inventory problem.”

Even when targeting more expensive properties, Walczak said these taxes affect the entire market by increasing the costs and scarcity of housing.

“There is a point at which these costs will drive out high earners, or particularly with a tax on property sales, encourage them to look to purchase elsewhere where such taxes are not in place,” he said.

Voters to weigh in

On March 19, Chicago voters will weigh the mayor’s plan to triple the current real estate transfer tax on residential and commercial property sales between $1 million and $1.5 million and quadruple the tax for properties above $1.5 million to fund homelessness services. The tax on properties below $1 million would decrease.

Chicago currently levies a 0.75 percent transfer tax on all property transactions. Under the referendum, the tax rate for properties under $1 million would drop to 0.6 percent, but rates of 2 percent to 3 percent would be levied on the portion of the sale price above $1 million. That’s if the proposal survives a legal effort to knock the issue off the ballot.

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The Building Owners and Managers Association of Chicago, which has hundreds of office building owners and managers among its members, is the lead plaintiff in the lawsuit.

Amy Masters, the association’s director of government and external affairs, said the tax change would deal another blow to the city’s commercial real estate sector, which is still reeling from the pandemic.

Downtown office buildings are facing record vacancy rates of about 23 percent as few post-pandemic workers go into an office every day, she said.

“When we look at empty space in the downtown area, if you can picture 16 Willis Towers of empty space that gives you an idea of what we’re facing right now,” she said, referring to the city’s tallest building, formerly the Sears Tower.

Masters said the referendum campaign has not provided details about how its projected $100 million in annual proceeds will be spent. “All of us want to support and find ways that we can help the homeless,” she said. “But we can’t do it on the backs of the real estate industry. Because not only does it hurt our industry, it ends up hurting every resident in every neighborhood in the city.”

Those concerns have been disputed by Bring Chicago Home, the campaign pushing for the referendum. Jose Sanchez Molina, the campaign’s communications adviser, said spending millions of dollars each year to address homelessness will make the city a more enticing place for real estate investment. “It’s going to make the city an even more attractive place to want to do business.”

While specific programs haven’t been identified, Sanchez Molina said a committee that includes homeless individuals and service providers would set priorities to help the city’s more than 68,000 people who are experiencing homelessness on the street or in a shelter or temporarily staying with someone else.

“The ballot question on March 19 is simple: Do we want to help people get out of the cold and into a home?” he said.

Stateline is part of States Newsroom, a national nonprofit news organization focused on state policy.

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