The latest proposal to let municipalities establish new, local-option sales taxes on real estate sales continues to be a bad idea. State legislators should strip the measure from Gov. Maura Healey’s housing bill until its problems can be remedied.

The tax, as currently conceived, would create yet more costs for anyone trying to develop housing – whether market-rate or affordable – while being of only questionable utility in most municipalities.

Healey’s administration has proposed to let towns and cities chose to levy a fee of between 0.5 percent and 2 percent of the sales price of any property over $1 million or the median single-family sale price for that county, whichever is greater. Exemptions include transfers between family members and sales of fully affordable buildings.

The money each community raises would be obligated towards its municipal or regional affordable housing trust fund.

From a municipal perspective, the idea has significant appeal. Local leaders are typically face-to-face with the grinding realities of our housing shortage, yet have few tools to deal with it themselves. The sales tax also only hits wealthier residents and real estate developers, stakeholders who can hardly be called “hard-luck cases.”

And they can kid themselves – or legislators – into believing that careful, deliberative processes at the local level will stop transfer fees from being implemented in a community if the measure would truly hurt housing production there – a dubious proposition in communities that have a long track record of ignoring the real estate industry’s technical expertise on housing policy.

“The housing crisis has made it almost impossible for renters to get by and for families to continue to make Massachusetts their home. Where municipalities elect to have a transfer fee for housing, it simply asks that those who have profited the most to contribute a tiny portion of the proceeds to build and preserve sorely needed affordable housing, and importantly stabilize communities,” Mark Martinez, co-chair of the coalition pushing for these real estate sales taxes, said in a statement earlier this month.

Piling on Costs

We are broadly sympathetic with Martinez’s contention that the wealthiest in our society have an obligation to pay their fair share towards public goods, like transit, education and affordable housing.

The problems come first when transfer tax supporters seek to apply the tax to land destined for a housing development.

As a recent Pioneer Institute report shows, Massachusetts’ builders experienced huge jumps in building materials and construction labor costs caused by the COVID-19 pandemic. The trends in both cost centers show few indications of coming down to pre-pandemic levels. In addition, the report found Massachusetts is second only to Rhode Island nationwide for the average price of a piece of land: $333,200 per acre last year.

These conditions mean there is precious little space in any market-rate or affordable housing developer’s budget to absorb additional costs, before one even begins to talk about financing costs: the interest rates on construction loans are now in the 10 percent to 15 percent range.

In this respect, transfer taxes feel like an idea that belongs in the previous and entirely ahistorical era of ultra-low interest rates, when money was so cheap housing developers could afford to finance higher land costs.

As minutes from the last meeting of the Federal Reserve’s interest rate-setting committee show, there is a very real chance that the central bank’s benchmark rate will continue to stay quite elevated for some time. And no economist or banker believes we’ll return to the near-zero interest rates that dominated the last 15 years between the Global Financial Crisis of 2008 and the end of the COVID-19 pandemic.

Good Money After Bad

Even if legislators found a way to exempt housing development sites from these local transfer taxes, they still won’t address what may be the biggest problem with the concept: zoning.

As work by the Boston Indicators team at The Boston Foundation and other experts shows, the way most suburbs are implementing the MBTA Communities law will generate far fewer homes than originally thought. Optimistic estimates now sit at 20,000 to 40,000 new units over the next 20 years, with the real total likely to be even lower. This is despite our roughly 200,000-unit shortage across the state.

Thus, in the Boston area, most of the affordable housing a transfer tax would support will still likely need to go through the same sclerotic and costly permitting process that exists today – one that seems to be getting more and more hostile to new development.

The rest of the state largely lacks even the rudimentary level of housing-focused zoning reform being driven by the MBTA Communities legislation and, in Boston, Mayor Michelle Wu’s neighborhood rezoning initiatives. And in Hyannis, a notable exception to this sad state of affairs, local backlash is threatening what housing-focused zoning progress has been made.

In this environment, all the current transfer tax proposal will do is make it more expensive to build housing while simultaneously forcing affordable housing money to be spent on exorbitant permitting costs. Legislators should pass on the idea until those problems are resolved.

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Transfer Taxes Not Ready for Prime Time

by Banker & Tradesman time to read: 3 min