Rolling Effects of Housing Wealth Redistribution

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As hints had suggested Rhode Islanders should expect, Democrat Governor Gina Raimondo’s proposed budget for fiscal year 2021 (beginning July 1, 2020) includes a new program with new dedicated funding to build affordable housing.  (Naturally, Democrat Senate President Dominick Ruggerio, of Providence and North Providence, a Laborers Union careerist, loves the idea.)

WPRI’s Eli Sherman summarizes the plan:

The budget, which will now be vetted by lawmakers during the coming months, suggests creating a two-tiered tax system that doubles the so-called “conveyance tax” to 0.92% on all property sales – both residential and commercial – totaling more than $500,000. The current rate — 0.46% — would apply to the first $500,000 of any transaction. …

State officials estimate the new tax would generate about $3.6 million in state revenue next fiscal year, and $8 million in each budget year afterward. The money would create a dedicated funding stream that would go into a restricted receipt fund at Rhode Island Housing, a quasi-public agency, and be controlled by the Housing Resources Commission.

This scheme brings to mind some analysis I did of tax rates in Tiverton back in 2018.  My conclusion was that the exorbitant tax rate was suppressing home values at the high end of the market.  At the same time, broader market forces were increasing house values at the low end.  Because the tax rate is uniform across the town, and because the tax rate is set in order to match the town’s budget (not the other way around), this had the effect of moving the tax burden toward the working class neighborhoods.  Their houses were worth more, while the expensive houses were worth less, so the taxes followed the value.

Of course, adding a couple thousand dollars at the point of sale will have much less effect than a tax rate that charges that amount every year, but the principle is the same.  Taxing high-end houses more will make them less valuable, shifting the real estate tax burden down the scale.

At the same time, the state projects that it will be building an additional 250 “affordable houses” every year.  Increasing supply at the low end of the market will tend to reduce prices there, too.  So, while the increased stock will expand the low-end’s share of total value, taxpayers’ bills will decrease with the value.  Whether this helps spread municipal tax bills to more homeowners will depend on whether the affordable houses are distributed evenly across the state.

This leaves the middle of the market, which will see upward pressure on its annual tax bill, while also being nudged toward the $500,000 line, where it will be more-expensive to sell.