States, cities consider ‘mansion taxes’ to fund affordable housing
An aeriel view of Rhode Island mansions in Newport. The state has a progressive mansion tax. Visions of America/Joseph Sohm/Universal Images Group via Getty Images
Connecting state and local government leaders
From sales taxes to real estate transfer taxes, governments are desperately trying to identify dedicated funding tracts for homelessness and housing initiatives.
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States and cities have been throwing darts at the wall, trying to find dedicated funding to tackle affordable housing needs.
Nationwide, tens of millions of families are struggling amid a housing shortage with rent and housing costs. Home prices are up about 60% over the past decade, adjusted for inflation. And about a quarter of renters—some 12 million households—spend more than half their income on housing, which is far above the recommended 30%.
To support affordable housing development and other initiatives in the rapidly growing Denver area, Mayor Mike Johnston on Monday unveiled a proposed new tax that would add 0.5% atop Denver’s current effective 8.81% sales tax rate. The tax is estimated to bring in $100 million a year in proceeds for the efforts.
“That is how you make the math of the city work for the folks who are trying to work here and live here,” Johnston said at a press conference announcing the proposal. “This will not be the highest tax rate in the state. We think we’re still very competitive with the region.”
Johnston’s push for the new tax comes amid surges in home prices and rents that have made Denver unaffordable for many workers. His office says that without the tax, Denver is on pace to see about 19,000 affordable housing units built over the next decade, which is nearly 45,000 short of what the city estimates it needs.
Rita Jefferson, local policy analyst at the Institute on Taxation and Economic Policy, or ITEP, said the tax would add on to an existing program. Voters in 2020 passed a dedicated sales tax for homelessness initiatives that brings in about $50 million a year. Denver also draws from the Affordable Housing Fund, which was established in 2016 and is funded by property taxes, recreational marijuana taxes and fees on new development.
“The general idea of the original [dedicated sales tax] was to get people off the streets,” said Jefferson. “But it was only so well funded as to get people off the streets. It didn’t help building housing.”
States and cities across the country have been scrambling to figure out how to encourage more affordable housing, and the focus, according to Jefferson, has been to put homelessness and housing on dedicated funding tracts. “Local governments are trying any way they can to pay for [these initiatives],” she said.
The Problem with Sales Taxes
“It would be wonderful for people new to the city to have affordable housing options,” Jefferson said of the proposed sales tax, but added that it might not be the best approach. That is largely because it is regressive, she said. Households with fewer resources generally have little choice but to spend a larger share of their incomes on items typically covered by sales taxes, compared to households with higher incomes.
Denver is far from the only government to consider raising the sales tax to fund homelessness and affordable housing initiatives.
In Minnesota, some housing affordability advocates this year pushed for a constitutional amendment for housing, which would have raised the state sales tax by three-eighths of 1%—about 38 cents for every $100 spent—to fund housing and homelessness initiatives. But, from the start, the bill faced a steep climb in the legislature, where leaders were hesitant to introduce new taxes or major spending on the heels of historic investments in last year’s budget session. The bill failed to receive a hearing in time to meet the deadline to be included in any of the omnibus bills.
Using a portion of a sales tax to fund homelessness and housing initiatives is far from new, though. King County, Washington, added 0.1% to its sales tax in 2020 to raise around $70 million a year to fund housing for people experiencing long-term homelessness.
And Miami-Dade County, Florida, has had a prepared food and beverage tax for almost 30 years. It targets tourists, about 85% goes to homelessness initiatives and the rest goes to domestic abuse prevention. “There’s a floor. So if a restaurant doesn’t make a certain amount,” Jefferson said, “it doesn’t have to contribute. The problem with this is that it fluctuates. During COVID, tourists cleared out.”
She continued, “These [homelessness] programs are administered by nonprofits, and if they don’t know if the money will be there next year, it is hard for them to plan and provide services.”
Is the Answer Mansion Taxes?
One newer trend, Jefferson said, is local governments looking at real estate transfer taxes, or so-called mansion taxes.
Real estate transfer taxes are common in most states. But in the last several years, more cities and states have created higher transfer tax rates or mansion taxes for more expensive homes. Unlike property taxes, transfer taxes are a one-time deal, and the money goes toward the various things governments pay for, such as roads, schools and health care.
“Mansion taxes can improve tax fairness by ensuring that people with the most housing wealth are paying their share for social needs like affordable housing, schools and health care,” said a report authored by ITEP and the Center on Budget and Policy Priorities.
The report found that seven states currently have these progressive rates: Connecticut, Hawaii, New Jersey, New York, Rhode Island, Vermont and Washington state. In addition, many states allow their localities to levy their own transfer taxes, and some of these places have progressive rates, such as Berkeley, California; Evanston, Illinois; New York City; San Francisco, and Washington, D.C.
In 2022, Los Angeles voters famously passed a mansion tax by ballot initiative in 2022 to support affordable housing initiatives and help alleviate homelessness. It added a 4% tax on the total transaction for property sales over $5 million and a 5.5% rate for sales above $10 million. Since taking effect April 1, 2023, the policy has raised roughly $215 million, according to the city’s housing department.
Similarly, Boston has been trying for several years to pass a mansion tax to fund local affordable housing developments. The city tried in 2020, 2022 and again this year. But the third time was not a charm, as it appears to have died on Beacon Hill.
The mansion tax is not popular with business groups, specifically realtors. In Boston, they lobbied hard against it. The same is true in L.A., where the amount raised this year is far below the projected $672 million the city said the mansion tax would reap annually. Local real estate agents say that’s because the initiative has put a damper on luxury home sales, prompting wealthy prospective buyers to look elsewhere.
In May, a court struck down a mansion tax meant to create a funding stream for affordable housing in Santa Fe. Approved by voters, the tax was challenged by the Santa Fe Association of Realtors and several property owners, who argued that city officials lacked the legal authority to impose such a tax and that it would harm the organization and homeowners. The judge agreed, ruling against the 3% tax on the portion of a home sale that exceeds $1 million.
Other Possible Approaches
But while mansion taxes seem to be getting all the attention, Jefferson said there are other approaches that have been lucrative for local governments.
She pointed to Portland, Oregon, and Seattle, which both levy business-level taxes to support homelessness and housing initiatives.
The Portland region has a supportive housing services tax that targets high-income households and large businesses to pay for programs that help move people experiencing homelessness into housing. Approved by voters in 2020, the tax has consistently overperformed. “This year, the tax is expected to bring in at least $300 million in revenue,” reported Oregon Public Broadcasting. “Without any changes to the revenue model, Metro anticipates the tax will bring in $1 billion in unexpected revenue by 2029.”
Other local governments, specifically Ann Arbor and Kalamazoo in Michigan, have property tax bills that are dedicated to homelessness prevention.
But at the end of the day, Jefferson said, the right funding source comes down to what tools are available to localities.
Santa Fe’s mansion tax, for example, was struck down because the court ruled that it did not have the authority to levy such a tax. Local governments have a limited number of ways to raise money, she said. Only a handful of states allow municipalities to tax sales, income and property.
“So, is Denver doing the best they can with the tools available to them?” she asked. “Depends on what they are allowed do.”
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News to Use
Trends, Common Challenges, Cool Ideas, FYIs and Notable Events
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Picture of the Week
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Government in Numbers
Zero
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