With home prices typically rising faster than inflation in Massachusetts, it’s only a matter of time before as many as the average home seller from 1 in 7 towns could have to pay the Millionaires Tax.
For those who are skeptical that regular old home sellers might get dinged by the Millionaires Tax, I have one question: Have you taken a look at Greater Boston home prices lately?
It doesn’t take a rocket scientist to figure out that local home prices have become grossly distorted by decades of underbuilding to the point where a renovated, 1950s-era Cape recently hit the market in Natick for over $1 million.
The real impact of the Millionaires Tax on home sellers who temporarily strike it rich won’t come next year, or even the year after, but a decade or two down the line.
Much ink has been spilled chronicling the laments of a relatively small number of people selling homes and businesses who, as things stand today, might get ensnared by Question 1.
But the local media, in its coverage of the hyperbolic debate over the proposed, additional 4 percent tax on annual earnings and gains over $1 million, after tax deductions, has almost completely missed the much bigger issue with the proposal, which will go before voters in next month’s state elections.
Prices Rise Faster Than Inflation
The number of people who wind up paying the tax due to a one-time windfall, such as empty-nesters selling homes after two or three decades, while tiny to begin with, is only destined steadily grow due to a quirk in the proposed ballot question.
The culprit? The federal index the new law would use to keep up with inflation, which has been historically outstripped by the growth in both Massachusetts home prices and incomes.
That was the finding of a 2018 Pioneer Institute report by Greg Sullivan, a former state inspector general, on an earlier version of the proposed Millionaires Tax. I worked as a freelancer for Pioneer on Sullivan’s report, writing out the text, though the ideas and stats were solely his.
The report found that Boston-area home prices have risen at more than triple the rate of the federal Consumer Price Index for All Urban Consumers over the decades.
And that, in turn, means trouble ahead for one-time millionaires who wind up with windfall after selling the family home.
By 2027, anywhere from 20 percent to roughly half of long-time home sellers in 13 different communities will get hit by the tax, mostly in high-income communities that have seen the biggest gains in home prices: Cambridge, Somerville, Brookline, Needham, Wellesley, Weston, Lexington, Belmont, Sherborn, Dover, Hingham, Winchester and Newton.
By 2041, that group will have expanded beyond this well-off core to include towns like Watertown, Waltham, Newburyport, Natick, Melrose, Duxbury and Reading.
Fast-forward to 2047, and the average home seller in 52 different suburbs and towns, including Braintree, Boston, Hull and Winthrop will see some of their real estate gains siphoned off by the tax, according to the Pioneer report.
If anything, the gap between Massachusetts home prices and the federal inflation index, with the possible exception of the last year, has only grown, given Pioneer’s now five-year-old projections.
Since then, the pace of home price appreciation has accelerated dramatically, with the median price in Massachusetts up more than 20 percent over the past two years, according to The Warren Group, publisher of Banker & Tradesman.
How to Protect Long-Time Homeowners
That said, the Pioneer study has something in common with the proposed Millionaires Tax – it’s not perfect.
The conservative think tank’s research has at least two flaws.
While it accounts for the $250,000 capital gains exemption that single homeowners can use, the analysis does not include the impact of the $500,000 exemption available to couples filing jointly.
And second, it does not appear to have included the cost of home improvements, which can also be used to bring down the seller’s tax bill.
But it’s more than just a reporter’s hunch than there is going to be more of an impact on home sellers than the backers of the proposal are letting on.
Scott Van Voorhis
So, what’s there to do going forward? The latest polls show Question 1 is favored to pass. And amending it after the fact to, say, change the inflation index to better match Massachusetts realities, could be difficult. In fact, it might even require passing an amendment to the state constitution.
But there’s another way to head off some of the bracket creep built into the law and protect long-time homeowners (and everyone else, for that matter), and it doesn’t require fiddling with the state constitution.
And that’s to dramatically increase the amount of housing that gets built in the Boston area and across the state to level off the dramatic growth in home prices.
Scott Van Voorhis is Banker & Tradesman’s columnist; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
