Comment: State ‘mansion tax’ would bite at all income levels

More than high-priced homes, it would increase costs for employers and multi-family housing projects.

By Shannon Underwood / For The Herald

Increasing affordable housing is once again one of the Legislature’s top priorities this session in Olympia. Unfortunately, also once again, some lawmakers think that raising real estate taxes is a way to do that.

At issue: a proposal — House Bill 2276 — which would impose a new 1 percent transfer tax on the sale of properties over $3.025 million. This tax would be on top of the 3 percent real estate excise tax (REET) already levied on these sales, one of the very highest REETs in the county. In fact, the new combined rate would be the second-highest rate imposed by any state; a dubious distinction.

In comparison to the proposed combined rate of 4 percent, California’s is 0.11 percent. There are 14 states, including our neighbors in Oregon and Idaho that do not impose any REET at all. Washington also allows local governments to impose an additional REET, something allowed in less than half of the states.

In other words, it’s already expensive to sell property in Washington.

You may wonder why you should care about this rate increase if you aren’t planning on selling a multi-million dollar house. Here’s why: Even though the tax increase is being pitched as a “mansion tax,” the reality is that single-family residential sales are a small portion of real estate transactions at that price level. Instead, most of these transactions involve commercial or industrial facilities — think jobs — or multifamily housing projects, which traditionally provide many of the most affordable housing options in a community.

Increasing the tax on those transactions will have repercussions throughout the local and state economies, because you can’t make something — like housing — more affordable by increasing its cost or diminishing the available supply.

Proponents also claim that the bill would give anyone selling a house valued at less than $3.025 million a tax cut. That’s not the case. Anyone selling a house under $525,000 would see no tax reduction at all, which is ironic given that the goal is supposedly to make housing more affordable. For someone selling the average priced house here in Snohomish County, which is approximately $680,000, the tax reduction would only be about $280, minimal savings that will be overwhelmed by the negative impacts on the local economy.

This is one of the worst times imaginable to consider increasing the REET. Employers continue to redefine their office space needs as more employees opt for remote or hybrid work. Major economic sectors, including technology companies that have long propelled our state economy, are retrenching and laying off employees. Those are some of the reasons why commercial real estate sales are down 82 percent in the last two years according to the Commercial Brokers Association.

Interest rates are also up, making all real estate construction and sales more expensive. Given the market uncertainties, lenders are less likely to underwrite purchases or new projects. Without financing, builders cannot move forward with projects that bring new affordable housing units online and provide much-needed family wage construction jobs.

None of these trends are likely to reverse themselves anytime soon, and the cumulative impact on the industry directly affects the supply of affordable housing.

Multifamily housing provides more affordable housing options in most communities around Washington. Here’s another spot where the logic of a REET increase falls short: Increasing the excise tax on new multi-family units would eventually be passed onto the renter, making affordable housing less accessible to those who need it most.

One final irony is that last session legislators took important steps toward increasing affordable housing; all without hiking the REET. They made more than $1 billion in new housing investments, and took some initial steps to reforming zoning and permitting regulations that discourage construction and make housing more expensive. They should look for additional steps that would allow the private sector to build more homes and reject HB 2276 that drives up housing costs.

Shannon Underwood is the owner of Underwood Gartland Development, which operates in Snohomish and King counties.

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