By Greg Lane
No one is arguing with the fact that Washington state, and especially the central Puget Sound region, has a real problem with housing affordability. But some of the ideas being tossed around in Olympia show a fundamental lack of understanding of the causes of this problem and how higher taxes will harm the local economy.
House Bill 1628 is a proposal to raise the real estate excise tax (REET), taking our state tax from a tie for the highest in the nation into the dubious position of having far and away the costliest REET in the land. Additionally, it would allow local governments to increase their REET by 50 percent. All told, if HB 1628 were enacted, the combined state and local REET taxes would top out at 4.75%. For comparison, most states which impose a REET charge 1% or less, and 15 states charge no REET at all.
What’s the goal behind this massive tax hike? To generate money for more government programs to provide affordable housing!
That’s right – to make housing more affordable, legislators want to make it more expensive!
This would be on top of the hundreds of millions that the state has spent on affordable housing over the last few budget cycles and the hundreds of millions more legislators already plan to include in the upcoming capital budget. Not to mention the hundreds of millions for local measures that have been passed or are being proposed in communities across our state. There’s a lot that’s already being done in the name of affordable housing, and prudence dictates that we make sure those public dollars are being spent effectively before the state comes back for more.
The reality is that no matter how much more money state and local governments pump into housing, it will never be enough to completely overcome supply and demand trends and eliminate affordability issues in local markets. The best way to make housing more affordable is to actually make it less expensive to build homes by streamlining local zoning and permitting requirements that currently add tens of thousands of dollars to the price of houses.
So if HB 1628 won’t do anything to address the root causes of the current housing affordability challenges, what will it do?
First, it would make multi-family residential projects, which typically provide some of the most affordable housing options in a given area, more expensive. Washington state’s tiered REET structure imposes higher taxes on housing units in multifamily projects than on similarly valued single-family residences. If HB 1628 were enacted as proposed, units in multi-family apartment buildings could be assessed close to three times the state REET compared to what would be paid on the sale of a similarly valued single-family house. These higher costs inevitably drive up rents for tenants, making the units in these buildings less affordable.
Second, it would make things even worse for an already challenged commercial real estate sector. Vacancy rates are up as more employers adopt remote or hybrid work environments for their employees. Major companies are cutting jobs and vacating leases. Interest rates are up and there are concerns about capital levels at some banks, making it harder to get financing. Higher taxes won’t improve any of those market conditions – just the opposite.
In a daring bit of misdirection, proponents of the higher tax argue that wealthy individuals selling expensive homes can afford the highest tax rate, which is imposed on transactions of $5 million or more. But the vast majority of $5 million-plus transactions are not made by the “rich people” some legislators love to demonize, but are for commercial and industrial properties and multi-family apartment properties. That means higher costs to businesses, higher rents for tenants, and fewer family-wage construction jobs.
High-value real estate transactions have already fallen off dramatically. The state’s Economic and Revenue Forecast Council doesn’t report the total volume of $5 million-plus transactions, but it does report those that were $10 million or more. In the first two months of 2023, the volume of those transactions was down more than 80% from the same period a year ago. With this lower volume clearly indicating a weaker market, a REET increase is less likely to produce the dollars proponents hope for and more likely to accelerate market decline.
Solving our housing affordability problem requires the government to work with housing providers, not penalize them even more. Sadly, HB 1628, would be another step in the wrong direction.
Greg Lane is the Executive Vice President of the Building Industry Association of Washington.