Washington REALTORS has released a Call to Action to oppose increase of the REET. Increasing a real estate tax rate that is already one of highest in the country, and is not a fair or stable revenue source, will hurt affordability for homeowners, businesses, and renters. REALTORS® request you oppose increasing the Real Estate Excise Tax.
What if Washington State adopted a 7% tax on gains from the sale of real estate? You might be surprised to learn that this law is already on the books – it’s called the Real Estate Excise Tax (REET).
Consider a house in King County, bought in 2006 (for $850,000) and sold in 2016 (for $1.13 million) prices that are double the actual average home price in King County for those years. Under current REET rates, the total tax paid on the sale would be over 7% of the gain. (Ironically, the rate proposed for a new capital gains tax). It is common for the amount of REET paid on real estate sales to be 5% – 10% of the owner’s actual gain. This is because the REET applies to the total sales price, it doesn’t tax only the gain. In this way, real estate sales are unlike the sale of other capital assets like stocks, which generate no state tax revenue for Washington State or local governments.
And this is just one reason why REALTORS® oppose efforts to further increase the state’s REET. HB 2186 and SB 5929 propose to increase REET by over $400 million per biennium, a tax increase that will impact business owners, renters, and homeowners in a state that already taxes real estate transfers at one of the highest rates in the country. The cost of real estate is already an impediment to small business owners and for renters seeking affordable housing, and increasing REET will make our real estate affordability problems worse.
In Washington, real estate sales generate their fair share of taxes already and more: Washington State has the 3rd highest total real estate transfer tax in the nation (1.78%), and just the local government portion alone (.50%) is higher than the total tax in most states.
While the bill seeks to lower REET for lower priced residential properties and increase the cost for higher end sales, the decrease will benefit only about 1/3 of sales, primarily in areas where housing affordability is least problematic. And over time, fewer sales will be subject to the lower rate, and more sales to the higher rates. HB 2186 and SB 5929 do nothing for the majority of property sales where REET can be 5-10% of the gain, often higher than the sales tax rate.
HB 2186 and SB 5929 would increase the state REET from 1.28% to 2% for commercial, farm, or multi and single-family residential properties above $1 million, and to 2.5% for properties above $5 million. Many of the properties at these price levels are commercial buildings or apartment complexes. The increased taxes will simply be passed on to the small businesses and tenants who need affordable real estate the most.
The Supreme Court’s McCleary decision requires a “stable and dependable” source of funding for basic education, and REET is volatile, not stable. State REET revenue fell by over 50% between 2007 and 2011. And, state REET revenue in 2016 was still lower than state REET revenue in 2006, even in Washington’s recovering economy. Tax sources like property tax, sales tax, and B&O tax are far more “stable and dependable.”
Increasing a real estate tax rate that is already one of highest in the country, and is not a fair or stable revenue source, will hurt affordability for homeowners, businesses, and renters. REALTORS® request you oppose increasing the Real Estate Excise Tax.