Comment: Real estate tax boost could hurt affordable housing

A higher rate for $5 million-plus projects could discourage multi-family projects and more.

By Tyler Litzenberger / For The Herald

Economists argue that governments should tax products and activities they want to discourage, while providing incentives for those they want to encourage. Unfortunately, when it comes to affordable housing, some lawmakers in Olympia have that backward.

House Bill 1628 would impose a new, top state Real Estate Excise Tax (REET) rate of 4 percent on the value of property sales in excess of $5 million with resulting revenues going to various government-run housing programs. Washington’s current top rate of 3 percent is already tied with Delaware for the highest in the country. Hiking that by another third would give us the dubious distinction of being the nation’s highest by a large margin.

For comparison, most state real estate excise or property transfer taxes are 1 percent or less. There are 15 states that impose no state tax on property sales. Washington is also one of 23 states that allows local governments the option of tacking on an additional REET, and HB 1628 would allow them to add another quarter percent on the entire value of the sale.

Let’s look closer at the impact that imposing the nation’s highest REET would have on the supply of affordable housing. With apologies to Charles Dickens, what follows is a tale of two housing projects.

The first project is a group of 50 single-family residences, on small lots and each with a two-car garage. When completed, each unit is sold individually, with an average sales price of $400,000. The second housing project is a multi-family apartment facility, a group of 50 two-bedroom apartments with common landscaping, recreation and parking areas. When completed, the complex is sold to a real estate investment company utilizing funding from a union employee retirement system, for a total of $20 million.

In many ways, it can be argued that the multi-family project provides more benefits to society. It uses less land and fewer natural resources to construct. It’s easier to serve with public infrastructure, significantly more energy efficient, and offers more options for public transit services. Renting also provides more affordable housing options for a broader range of residents, because many people haven’t yet saved up sufficient funds for a downpayment on a house or might not be able to afford the full costs of homeownership.

But Washington’s REET structure punishes those who build and sell this more affordable option. The 50 units included in the $20 million apartment complex sale would incur a state REET bill that’s nearly triple that charged on the single-family homes, despite the units having similar market values. This inequity exists today thanks to Washington’s tiered REET tax structure. But HB 1628 would make the problem much worse, placing a larger tax burden on housing units that themselves place a smaller burden on the community and the environment.

What are some of the implications of this inequity?

The most obvious is that, after the apartment complex is built and sold, tenants will face higher rents as landlords recoup those expenses, making their apartment homes less affordable.

But the higher REET also changes the economics of new, energy-efficient projects. At a time when property values for commercial and multi-family real estate are dropping, interest rates are rising, and banks are more reluctant to lend, anything that increases a project’s costs by hundreds of thousands of dollars is a real problem. If a project is delayed — or, worse yet, cancelled — it means new housing units that are desperately needed to correct the imbalance in the market aren’t coming on line. What’s more, skilled trades workers who count on construction jobs created by these projects will have fewer employment opportunities to support their families.

The bottom line is clear. Listen to the economists: If you want more affordable housing, provide incentives for its creation rather than heaping on additional expenses.

Tyler Litzenberger is president of Vector Development Co. The company has several Snohomish County projects.

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