Massachusetts is entering the national debate over the affordable housing crisis with a proposal to tax the sale of high-priced properties.
Governor Maura Healey’s $4 billion housing bond bill, the state’s largest-ever investment in housing stock, includes a provision allowing cities to charge a property transfer fee of between 0.5% and 2% on property sales exceeding $1 million. Proceeds will go towards affordable housing projects.
An initiative that reflects a recent measure rejected by Chicago voters, has sparked debate among local governments, housing advocates and critics who fear it could lead to a decline in home sales and further burden developers who are struggling with record levels of office vacancies.
Supporters, including Boston Mayor Michelle Wu and leaders of more than 15 other municipalities, see transfer fees as a critical tool for addressing the growing shortage of affordable housing. State Housing Secretary Edward Augustus says Massachusetts needs 200,000 more homes to keep up with population growth.
“This policy is a win for local governments, but most importantly, it is a win for renters and homeowners who would otherwise be priced out,” Augustus said in an emailed statement.
Critics argue that the additional tax would be a burden on commercial real estate developers who already face high vacancy rates, especially in office buildings, and could reduce overall property tax revenues. Office vacancy rates are rising in Boston, Cambridge and surrounding suburbs as the remote work trend continues. Occupancy in the Boston office market is at its lowest level since 2010, according to Colliers’ first-quarter market analysis.
“If you put a tax on it, it would lead to an even bigger depression,” said Greg Wasil, head of the Real Estate Board of Greater Boston. “How can this be useful?”
Meanwhile, supply in the housing market remains tight as rising interest rates keep homeowners from selling. According to data from Redfin Corp.
The state housing agency estimates that a 2% statewide transfer fee could generate approximately $784 million in fiscal year 2022, with more than half of that coming from commercial sales.
“Commercial property owners are under a lot of pressure right now,” said Evan Horowitz, executive director of the Center for Public Policy Analysis at Tufts University. “So while their properties are valuable, they are not profitable. And they are in a bad position to pay.”
Such concerns played a role in voters rejecting Chicago Mayor Brandon Johnson’s mansion tax proposal earlier this year, stalling a plan that his administration said would raise $160 million a year to fund construction of more Houses.
Meanwhile, a year-old Los Angeles mansion tax that added 4% to 5.5% fees on property sales exceeding $5 million has fallen short of projections and failed to raise hundreds of millions of dollars in expected revenue. Offering an alternative approach to increasing housing affordability, the Biden administration aimed about closing costs and additional fees, especially title insurance.
The debate comes amid calls for budget restrictions in Massachusetts. Although April tax revenues exceeded forecasts by more than $1 billion, Firstly from capital gains and the recently enacted 4% millionaires tax on income above $1 million. Meanwhile, corporate and business taxes continue to lag.
State budget negotiations move to Senate after House past a roughly $58 billion spending plan for the fiscal year beginning July 1.
Massachusetts House Speaker Ronald Mariano said the legislature may next turn its attention to a housing bond bill that will begin debate this month, the State House News Service reported.
Despite these concerns, cities view the real estate transfer tax as a valuable tool. Provincetowna seaside town on the tip of Cape Cod, has been advocating for this option since 2010.
“We have families that have lived here for generations that may be considered rich but cash poor,” said Alex Morse, Provincetown’s city manager. “Many first-time buyers can afford the transfer fee, which could then be funneled into our housing stock to encourage affordable housing development and launch programs for housing security, mental health support and the creation of new housing units.”
In Easthampton, Mayor Nicole LaChapelle wants to agree to pay for the transfer. If this provision is passed, she believes the city will see improvements almost immediately.
“I would go straight to my council and we would begin the process of looking at the transfer tax, especially as it relates to affordable housing,” she said in a phone interview. “I’m crossing my fingers on that.”