Tom Hormel: Proposed real estate tax increase undermines affordable housing goals
By Tom Hormel
Housing has been one of the Legislature’s top priorities, and it appears lawmakers will direct approximately $750 million of the capital budget to affordable housing programs.
Unfortunately, another measure under active consideration would actually work against the goal of that spending. House Bill 1628 would impose a new, top state real estate excise tax rate of 4% on property sales in excess of $5 million. At 3%, we’re already tied with Delaware for the highest in the nation, and this hike would make Washington’s state REET the highest in the nation by far.
But the bill doesn’t stop there. It would also allow local governments to increase their REET from 0.5% to 0.75% on all sales – adding $1,000 in taxes to the sale of a $400,000 home. Taken together, Washington’s combined state and local REET would be as high as 4.75% on sales of $5 million or more.
For comparison, most state real estate excise or property transfer taxes are 1% or less. There are 15 states – including Idaho – that impose no state tax on property sales. And less than half of the states allow local jurisdictions to charge a separate tax.
Proponents of this major tax hike argue that anyone selling a $5 million home can afford to pay more. But the reality is that there just aren’t that many $5 million single-family home sales, even with today’s inflated housing prices. Most transactions of that size are either commercial or industrial properties or large, multifamily apartment buildings.
Having the nation’s highest REET would hurt the sales of these types of properties, which in turn would have a significant negative impact on housing affordability and the local economy.
Apartment buildings usually offer some of the most affordable housing options in any community. Increasing the real estate excise tax on the purchase and sale of these properties is a cost increase that ultimately will be passed on to tenants in the form of higher rents, making these homes less affordable.
Similarly, higher taxes that increase the cost of commercial and industrial properties mean higher operating costs for employers and fewer jobs. This is especially true in the building trades, where large projects provide important family-wage job opportunities.
The real estate sector is already facing major challenges. Rising interest rates are making properties more expensive. Banks are wary of the uncertainties in the economy and are less willing to lend. Major employers are retrenching, laying off workers and canceling leases. Remaining employees are more likely to be working from home some or all of the time, and vacancy rates are climbing.
The state’s own data shows how the market is slowing down. The Economic and Revenue Forecast Council doesn’t separately report the transaction volume of $5 million-plus transactions, but it does track and report those over $10 million. In the first two months of this year, the volume of those transactions was down more than 80% compared to a year ago.
In other words, imposing the nation’s highest REET would never be a good idea, but doing so in the current market would be especially bad. It’s a lot more likely to further dampen real estate activity than it is to make a major contribution to solving our housing affordability problems.
No one is blind to the fact that some things have to change to make housing more affordable. But government spending is never going to be enough to completely change the direction of the market. We need strategies to dramatically increase the supply of housing, and that means making more land available and looking at current zoning and permit regulations to see what can be done to reduce the costs of building housing.
It’s impossible to make something more affordable by increasing the cost of production. If you want more affordable housing, lawmakers should provide incentives for its creation, rather than heaping on additional expenses.
Tom Hormel is president of the Spokane Association of Realtors.