Seattle’s income tax could lead to even higher home, rental prices, industry leaders say

Seattle’s income tax could lead to even higher home, rental prices, industry leaders say
Seattle’s local income tax proponents say it will only affect the rich. However, Seattle’s high home prices mean that owners looking to sell their property and retire could find themselves stuck with the 2.25 percent tax – on top of state and local real estate taxes. Real estate leaders warn this could lead to even higher home and rental prices.

One of the justifications cited in the city ordinance for Seattle’s income tax is to address the “affordable housing crisis.” However, real estate industry leaders warn that if the tax is implemented it could do just the opposite by raising the costs of selling a home or maintaining a rental property. And while the tax’s proponents say it would only apply to the wealthy, many middle-class residents could fall under that category when they go to sell their home, thanks to the region’s booming housing market.

The city’s 2.25 percent tax applies to individuals who make more than $250,000 or $500,000 for married couples filing jointly. With a median income of $80,000, many city residents may think the tax will never apply to them.

However, the city ordinance says these figures represent “total income” as described in the Internal Revenue Service (IRS) 1040 form. Among the types of incomes listed is “capital gains,” which includes house sales.

In September, the median price for a Seattle house sold was over $700,000 — well above both income thresholds. For home sales above these income thresholds, the seller would pay the 2.25 percent income tax on top of the combined city/state 1.78 percent real estate excise tax (REET).

In other words, an individual that never makes anywhere near $250,000 a year may still have to pay the tax when selling a home and hoping to use the equity for retirement, or a down payment for another home.

“The irony of this whole thing is they’re not the described targets of the high earners tax, yet they would be subject to it,” Seattle King County Realtors CEO Russ Hokanson said. “It’s appreciated over time, and all that time they’ve been paying local taxes, property taxes, supporting the community, building the value in their home. It’s not like they haven’t been taxed already on it. And now you’re going to hit them with essentially a capital gains tax that they’re paying…on the sale of their home.”

It was an observation also noted in a recent policy brief by Jason Mercier, the director of government reform at the Washington Policy Center. “By far the largest capital gain the average taxpayer will realize during their lifetime is from the sale of a home or small business. If the income tax survives legal challenges, it will snare far more than just ‘the rich’ and will also burden many middle-class Seattle families.”

Hokanson added that the tax will have both short-term and long-term consequences to the housing market. “The behavior that you’ve seen in the past related to federal taxes is that if you know something is going to go into effect, that will impact a transaction that you have completed. They get moved forward in time so they’re not subject to tax penalty.”

The tax will also get added to the final price of Seattle’s home sales, because “the seller is realizing less of the equity of the home that they own.”

Hokanson’s sentiment is shared by the Rental Housing Association of Washington, which this week filed an amicus brief in King County Superior Court on the side of the plaintiffs challenging the city’s income tax. In the brief, the association argues that the tax “will hit not just high-salary earners, but those who sell personal homes or rental properties for a one-time gain in Seattle’s red-hot market. This will shrink nest eggs for retired people and make it harder for working-wage families to re-locate to more affordable places.”

The brief also states that, if the tax survives legal scrutiny, it will “encourage rent increases in an area where soaring real estate prices and record-breaking demand already are making it difficult for low- and middle-income families to get by. Seattle will be even less affordable as the only city in Washington with an income tax.”

According to the latest figures provided by Rent Café, studio apartments in Seattle go for a whopping $1,442 a month. One-bedroom apartments rent out at $1,854 a month, and the average two-bedroom is $2,193. These prices already place Seattle among the top 10 most expensive places to rent, according to a CBS report.

The income tax could also lead to absentee homeownership, RHA’s brief states. “An owner of rental properties in Seattle can avoid paying income tax on net rental income by choosing to live outside the City of Seattle. It is the owner’s residence, not the location of the rental housing, which determines whether the income tax applies. This creates an incentive for Seattle’s rental property owners to become absentee landlords. This is not fair to the owners or to the renters, whose interests are better served by proximity.”

However, some observers note that the city’s tax is unlikely to survive its legal challenge. In a response to the Economic Opportunity Institute’s (EOI) motion for summary judgment, the attorney for the plaintiffs, Matthew Davis, wrote that the progressive think tank’s argument for the legality of a local income tax relies entirely on a gross misreading of a state law, which EOI claims violates the single-subject clause due to one of its headings.

However, Davis says that was only added by the code reviser after it was passed by the legislature. “Headings added by the Code Reviser have no bearing on the single-subject or subject-in-title rules,” he writes. “It is difficult to believe that EOI was not aware of this fact when it submitted its motion.”

A hearing on the joint lawsuit is scheduled for November 17.

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