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.

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

Finance

Fleeing taxpayers cost Blue states $52 billion, according to IRS data. Released last week, data show that California ($23.8 billion), New York ($14.2 billion), Illinois ($9.8 billion), New Jersey ($5.3 billion) and Massachusetts ($3.9 billion) suffered the biggest income loss in 2022 from population out-migration. A report from the Wall Street Journal asserts that the exodus from these Blue states has continued after the pandemic as taxpayers seek lower taxes and a lower cost of living in Republican-controlled states. The IRS data reflects that posited trend, in that it shows the five states with the highest gains in income due to migration in 2022 were Florida ($36 billion), Texas ($10.1 billion), South Carolina ($4.8 billion), Tennessee ($4.7 billion), and North Carolina ($4.6 billion).

Insurance

As a warming planet delivers increasingly damaging weather, the cost of home insurance has jumped drastically. But companies are charging some people, especially in the middle of the country and parts of the Southeast, far more than other homeowners with similar levels of risk, an examination by The New York Times has shown. Industry experts offer several reasons for the disparities, including the fact rural states have fewer homeowners to share risk, and states have varying rates of insurance fraud, which can drive up premiums. But new research points to a striking pattern: Higher premiums are being charged in states where regulators apply less scrutiny to requests for rate increases, compared with states where officials question the justifications offered by companies and try to keep rates low, the data show.

Broadband 

Government officials and advocates alike refer to the Broadband Equity Access and Deployment, or BEAD program, as a once in a generation or, as a contractor working with the California Public Utilities Commission put it, a “once in a century” investment in affordable high-speed internet access. But advocates say maps compiled with data provided by internet service providers are highly inaccurate while the challenge process is short, arduous, and unfairly places the burden of proving that inaccuracy on people in areas unserved or underserved. They warn this could lead to the once in a generation money being misspent.

Energy

Three Mile Island, the dormant power plant renowned as the site of the worst nuclear accident in U.S. history, may be switched back on, driven in part by the ravenous energy appetites of artificial intelligence developers, reports The Washington Post. The plant along the Susquehanna River in Pennsylvania, where a partial reactor meltdown in 1979 sent the nation into a panic and the nuclear industry reeling, is part of a broader push backed by the White House to bring mothballed nuclear facilities back to life, something that has never before been done in this country. To the alarm of some nuclear safety advocates, owner Constellation Energy is laying the groundwork for a recommissioning with recent tests at Three Mile Island’s dormant Unit 1 reactor. The company told investors recently it is weighing its restart, a process that would take several years.

Passenger Rail 

The Borealis, a midday Amtrak train from downtown St. Paul, Minnesota, to Chicago, launched in late May following decades of advocacy by rail fans eager to see a second train roll out daily after the storied, but often delayed, Empire Builder. The Twin Cities-Milwaukee-Chicago corridor has proven popular, with preliminary figures showing more than 18,500 riders hopping aboard in the first month alone. That’s an average of about 300 daily passengers in each direction, which Amtrak officials called a promising showing given that peak summer travel season is still to come. Nationally, Amtrak is on track, so to speak, to set a new all-time passenger record, with more travelers embracing rail in the post-pandemic era.

Police

Instead of issuing tickets for broken headlights and tail lights, some cops in Minnesota are giving out vouchers to fix them for free. These law enforcement agencies—130 in Minnesota—are part of the Lights On program, which creates a partnership between police departments and participating auto repair shops to cover the cost of repairs up to $250. There have been more than 10,200 vouchers issued to date since the program launched in 2017 in the wake of Philando Castile's killing during a traffic stop for a broken taillight. The goal is to keep low-income Minnesotans from a "downward spiral" that might come from that ticket—the cost on top of the cost of repairs, or additional fines and fees if that ticket is not paid. It also diffuses the police encounter and provides an opportunity for building a relationship between the police and the community that they serve.

Basic Income

The Denver Basic Income Project recently released a report detailing research showing how no-strings-attached cash assistance helped people experiencing homelessness find stability. The year-long randomized study, which assigned over 800 participants to three cohorts, found that after 10 months in the program, 44% of the participants who received $1,000 per month lived in a house or apartment they rent or own. Of those who received a $6,500 lump sum and then $500 each month, 48% lived in a house or apartment they rent or own. The figure was 43% among the control group, which received  $50 a month to complete a survey so the project has a solid baseline for comparison. The project is the first and largest to provide cash assistance at this scale in the country.

Artificial Intelligence 

Utah’s new Office of Artificial Intelligence will first focus on mental health care. State leaders said the new Office of Artificial Intelligence Policy is aimed at staying on top of technology changes, fostering innovation, protecting citizens and building trust. Created by lawmakers earlier this year, it will be housed in the Utah Department of Commerce and one of its main functions will be its “Learning Laboratory.” The lab will focus on understanding pressing AI issues and making policy recommendations to the state legislature. The first topic will be to examine generative AI in mental health care. The topic was picked because of the prevalence of mental health issues in Utah, the shortage of resources and because it addresses multiple AI issues, like data privacy and health care.

Electric Vehicles

The Biden administration plans to award General Motors and Chrysler-parent Stellantis nearly $1.1 billion in grants to convert existing plants to build electric vehicles and components, it said on Thursday. The Department of Energy announced $1.7 billion in planned grants to help fund the conversion of 11 “at risk” plants in eight states to enable the production of 1 million EVs annually, help retain 15,000 existing jobs and create 3,000 new positions. The awards are for plants in Michigan, Ohio, Pennsylvania, Georgia, Illinois, Indiana, Maryland, and Virginia—several of which are crucial in the November presidential election.

Remote Work

A Nebraska labor court on Thursday ruled on the side of Gov. Jim Pillen’s order to send remote workers back to their state offices—and went farther to harshly chastise the state’s biggest employee union for the “disingenuous maneuver.” Central to the case is Pillen’s November executive order directing state workers to return to the office beginning Jan. 2, save for certain exceptions. Nebraska Association of Public Employees leaders, representing more than 8,000 state workers—of which an estimated 1,300 worked remotely—immediately objected. The union’s contention was that such a change in the terms and conditions of employment is a prohibited practice that can’t be done without bargaining between the union and the state. The commission countered that the state employees’ collective bargaining agreement covered worksite assignments, including for telework. The case was dismissed “with prejudice—meaning it cannot be refiled.

Picture of the Week

A New York lifeguard supervisor operates a new shark-monitoring drone. | Michael M. Santiago via Getty Images

A fleet of drones patrolling New York’s beaches for signs of sharks and struggling swimmers is drawing backlash from an aggressive group of seaside residents: local shorebirds. Since the drones began flying in May, flocks of birds have repeatedly swarmed the devices, reported the Associated Press. No birds have been harmed, but officials say there have been several close calls and forced adjustments by police departments and other city and state agencies to flight plans. The drones, which come equipped with inflatable life rafts that can be dropped on distressed swimmers, have yet to conduct any rescues. They spotted their first shark on Thursday, resulting in a closure of most of the beach.

Government in Numbers 

Zero

The percentage of overhead wiring that supplies electricity to moving trains between along the Northeast Corridor between New York and Wasington, D.C., that is in a state of good repair, according to Amtrak’s own regulatory filing from last year. On a scale of zero to five, with zero signifying that the system is so decrepit that it cannot function, Amtrak rates the electrical system a 1, reported New York Magazine. It has failed at least 10 times in the past two months, leaving tens of thousands of people stranded. Most of the catenary—the overhead wiring—on the Northeast Corridor is about 80 years old. Fifty years ago, federal officials were already saying that they needed to replace it wholesale with a modern setup, only to shelve the program amid budget overruns. In last year’s regulatory filing, Amtrak’s Electric Traction unit, which manages the catenary, acknowledges that it’s getting worse. A maintenance backlog, which measured less than $100 million in 2018, now sits at an estimated $829 million. Another $2.9 billion is needed to replace or repair poles and other structures that hold the wires.

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