High-End Real Estate Taxes to Fund Affordable Housing And Other Priorities
In many U.S. cities, gentrification trends are exacerbated by a surge in international capital as wealthy investors seek safe havens to park their money. Cities should consider taxes on luxury real estate transfers and annual taxes targeting luxury second homes and unoccupied, vacant properties. Ordinances can be designed to target residential, commercial, and corporate-owned properties. Such legislation raises revenue while discouraging the disruptive impact of luxury development on local housing markets.
Some municipalities may require state enabling legislation to allow such local taxes. Jurisdictions should also consider requiring disclosure of the true owners of real estate (which is not always the name on the legal title) so they better understand who is buying up their communities.
In 2016, San Francisco voters approved a tax on high-end (over $5 million) commercial and residential real estate transactions, with funds used to make community college more affordable.
In 2019, the New York state legislature strengthened an existing “mansion tax,” with rates ranging from 1 percent on sales over million to 3.9 percent rate on transactions over $25 million. The new tax is expected to raise $365 million in FY2019-2020 to help finance mass transit.
At least 35 states have luxury real estate transfer taxes, and seven states levy a surcharge on the highest-value homes or have a progressive bracket structure through their real estate transfer tax system. Some of these laws enable municipalities to piggyback on the state transfer tax.
In 2019, Washington state implemented a progressive real estate transfer tax that also enables cities and towns to create a local add-on tax for affordable housing and homeless services. The statewide transfer tax ranges from 1.1 percent on the first $500,000 in real estate value to 3 percent on sales over $3 million. Cities and counties have great flexibility to add-on to the state transfer tax to fund capital projects. Seattle’s municipal add-on tax will generate an estimated $15 million-$20 million per year for affordable housing and homeless services.
In Massachusetts, state legislators are considering a bill to enable municipalities to implement luxury transfer taxes. In December 2019, Boston city councilors passed a “home rule petition” to the state legislature to enable them to levy a 2 percent real estate transfer tax on properties valued at over $2 million. The fees could raise over $160 million for the City of Boston and would be dedicated to affordable housing programs.
Vacancy Taxes
A growing number of cities are also exploring “vacancy taxes” to discourage wealthy investors from treating properties as “wealth storage units,” not homes. In Vancouver, Canada, for example, a new Empty Homes Tax aims to combat a recent housing crisis caused by property owners’ refusal to enter into rental agreements. Vacant residential properties are taxed at 1 percent of their value.
Such taxes build on state “split roll property taxes” that apply different rates to different types of property. The District of Columbia, for example, taxes vacant commercial and residential properties at a much higher rate.
Reduce Corporate Tax Subsidies
In addition to fair tax increases, municipalities should eliminate wasteful tax subsidies that do little to ensure businesses create good, sustainable jobs. New accounting rules require all state and local budgets to report revenues lost to such tax breaks, generating useful information for eliminating subsidies that drain resources from vital public services.
This article is drawn from a policy brief prepared by the Institute for Policy Studies for Local Progress, a movement of local elected officials advancing a racial and economic justice agenda through all levels of local government.