Second Real Estate Excise Tax Would Hurt Housing Affordability

House Attack On Eight Current Tax Incentives Would Also Target Retailers, Consumers

Second Real Estate Excise Tax Would Hurt Housing Affordability
The excitement of becoming a homeowner would get more expensive if Washington approves a second REET. Photo: mainstreethomes

A cascade of reports and analyses have already established that Washington State’s
Growth Management Act and its implementation locally drives up housing costs in Seattle and King County to a level classified in a recent major national survey as “severely unaffordable.” But lawmakers could make it even worse, warns a top Washington real estate industry official.

Here’s the backdrop. The Washington State House has proposed a nearly $400 million six-pronged package to rescind legislatively-approved business tax incentives or add new business taxes. It’s embodied in House Bill 2996, sponsored by Kristine Lytton (D-40th), Chris Reykdal (D-22) and Sharon Tomiko Santos (D-37th).

Special New Or Raised Taxes On Certain Goods, Services, Transactions

The “necessary to implement the budget” measure seeks to fund more teachers to reduce class sizes and expand all-day kindergarten in low-income and Central Washington K-12 schools through special new or raised taxes on certain goods, services and transactions.

At hearings on the bill late last week in Olympia, Bob Mitchell had something to tell lawmakers. Director of Executive Projects for the 17,000-member Washington REALTORS, Mitchell reminded them that like other property sellers, banks and credit unions already pay a tax on the value of a foreclosed home after they rehab it and sell it – something called a real estate excise tax, or REET.

If as proposed in HB 2996 financial institutions were required to pay a second REET, upfront, on behalf of a seller of a foreclosed property, they would have to hike sales prices to cover the added costs, Mitchell warned.

‘We Spend A Lot Of Time Talking About Affordability’

“We spend a lot of time talking about affordability” of housing in the state and Central Puget Sound, Mitchell said, and this will make homes even less affordable.

The REET which banks must already pay when selling foreclosed properties is based on combined state and local REET rates amounting to about 1.78 percent, or $5,340 on a $300,000 sale. If financial institutions were hit with the front-end REET when taking ownership of a foreclosed home, several thousand dollars more would be added to their costs.

According to the state’s own estimate, the aggregate costs of adding the new REET for initial foreclosure property transfers would be $34.4 million in 2016-17 and $72.3 million in the 2017-19 budget biennium.

B&O Tax Incentives Targeted

Among the other targets in HB 2996 are current tax incentives approved by legislators for out-of-state retail shoppers and purchasers of bottled water. Both get a Washington sales tax exemption under law. Also pinpointed are resellers of prescription drugs, and travel agents and tour operators. They get lower rates for the state’s gross receipts tax, called the business and occupation or B&O tax.

House Democrats in a budget brief say the B&O incentives for drug resellers and tourism businesses aren’t warranted any more and mainly benefit out-of-state entities. They say the sales exemption “prioritizes nonresidents over Washingtonians.”

Industry representatives shared very different views with the committee, or in statements.

Expedia, Macy’s Stress Washington Ties, Fiscal Impacts

To the committee, Expedia’s Thomas A. Pucci, Senior Director of Global Indirect Tax, said the company is hardly “out-of-state” as it has 3,400 employees in Washington, is headquartered in Bellevue and has purchased 40 acres in Seattle for a new HQ. Pucci said the company’s brands include Travelocity and HomeAway. He also stated Expedia hires engineers and other highly-trained workers, and pays “better than average wages.”

The proposed B&O tax hike for travel agents and tour operators would cost those industries in Washington state another $13.1 million per biennium. That the lifting of the tax incentive would raise the industry’s current B&O tax rate substantially at the same time the industry already contributes so robustly to the state’s economy, is “unconscionable,” Pucci concluded.

Macy’s had a few thoughts to share, as well. The national company operates 34 stores in Washington, employing 4,600 workers. In written testimony to the committee, Carol Jackson, Macy’s Vice President of Government and Public Affairs, said, “The Washington non-resident sales tax exemption is a very successful program” incentivizing shoppers from neighboring states to spend money in Washington.

They do more than just buy sales-tax-exempt goods here, Jackson added: “they are eating at local restaurants, staying at local hotels and motels, and buying gas for their cars at local gas stations,” which generates spin-off business and increased B&O, lodging, and gas taxes for the state.

Concerns About Burdensome Refund Provision

The bill’s provision to turn the exemption into a refund program for purchases greater than $25 would be so “burdensome” that “many out-of-state residents…will simply stop shopping in Washington,” said Jackson.

Prescription drug wholesalers also testified in opposition to HB 2996 and in a brief argued they’re a low-margin business employing more than 700 in-state workers and supporting jobs in more than 1,000 local pharmacies. The proposed bump in their B&O tax rate from .138 percent to .484 percent would be a 250 percent increase. Lawmakers in 1998 approved the B&O incentive and the Joint Legislative Audit Review Committee in 2013 recommended retaining it.

“For more than a decade, voters in Washington have continually shown their disapproval of additional taxes on products and services to pay for specific state projects or programs,” said Tim Daugherty of the Northwest Bottled Water Association in testimony to the Committee.

Asked after the hearing how much longer lawmakers would continue to try and rescind already-enacted tax incentives to meet funding needs of the moment, Rep. Lytton told Lens, “every year, until we pass one or two. We have to look at both sides of the ledger” to get the services we need in the state. “Some of these preferences are outdated” and lawmakers are grappling with how to raise an estimated $3 billion to $4 billion as a result of the State Supreme Court’s McCleary ruling that legislature must better fund K-12 education, Lytton said.

HB 2996 was scheduled for executive session consideration in a meeting of the committee starting at 8 a.m. Monday. Two amendments have been offered. One would strike down the current state sales tax exemption for janitorial services. Another would do the same for farm machinery replacement and repair.

Big Education Funding Fix Will Unfold Next Year

The legislature has punted from this year to next on the first installment of the big funding fix ordered by the Court in McCleary. It’s expected that will involve a politically complicated approach to equalizing the distribution of local school tax revenues between more and less affluent districts across the state. Currently, taxpayers in poorer districts must pay more through higher school tax levy rates because their district’s aggregate property value is so much lower than in districts on the state’s booming west side.

The McCleary solution, Capitol sources say, could also mean state control of teacher salaries with some exceptions for local cost-of-living variations, and a major net outflow of school tax monies from districts in more affluent areas such as King County. The political and policy implications would be considerable.

1 COMMENT

  1. Bring on the income tax! Solely for education. Fully-funded. Yes, a revolutionary idea. And then lower all,of the other taxes currently paying for education, proportionally. Throw out the initiatve and referendum process, it has been meretriciously abused, as you well know.

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