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By Tamara Small | This post originally appeared in Banker & Tradesman on April 3, 2022

The shortage of affordable and workforce housing is currently one of the greatest threats to the Massachusetts economy. With rents and home prices continuing to increase, we see more and more of the workforce priced out of the market – and the ability to create generational wealth in the lower and middle classes through home ownership is diminishing rapidly. With a life science sector that is the envy of the world, Massachusetts needs to find ways to produce more housing to ensure all workers have a place to live.  

A large institutional employer in the region recently spoke out in support of what may seem to be an easy solution: a transfer tax. Unfortunately, like all things that seem to be too good to be true, transfer taxes have many unintended consequences that could do more harm than good for affordable housing and the overall economy in Massachusetts.  

Property Taxes Vital to City 

While there are several proposals now before the legislature, the overall concept is the same – a transfer tax is imposed on the sale price of a residential or commercial property. The revenue is deposited into a locally administered affordable housing trust. In some proposals, the transfer tax is split by the owner and seller, and in others it is paid by the seller.  

In Boston, Mayor Michelle Wu recently filed legislation that would allow the Boston City Council to impose a tax of up to 2 percent (paid by the seller) on most residential and commercial property sales over $2 million. It’s also important to note that all analysis of this proposal from the city assumes the full 2 percent levy – a harbinger of how, if passed, this proposal would be implemented. 

Property tax revenues have long been Boston’s largest and most dependable source of revenue. In fiscal year 2022, the net property tax levy accounted for 73.1 percent of the city’s overall revenue or $2.75 billion. The majority of those taxes are derived from commercial real estate properties. Further, new commercial development fuels the growth of new property tax revenue year after year. Property taxes allow the city to pay for schools, public safety and crucial social and infrastructure programs – and because new growth can be volatile year to year, the existing property tax base provides critical stability to those programs. As a result, Boston is a leader in providing services to residents and businesses who call the city their home.   

Costs Passed to Renters 

However well intended they may be, transfer taxes with the goal of generating revenue for affordable housing do not achieve their goals. In fact, they have been proven to increase the cost of housing while dissuading new investment.  

Transfer taxes would drive up residential rents and would compound the pandemic’s devaluation of commercial property. For multifamily properties, in order to recoup the additional costs associated with purchasing a property, the tax would simply be passed down to tenants, driving up rents. For commercial properties – and almost all commercial properties are valued at over $2 million in Boston – a transfer tax would discourage investment in the economic center of the commonwealth, at a time when we most need it. It would also reduce the total number of transactions.  

Boston is already predicting a decrease in new growth property taxes this fiscal year, plummeting down to $45 million from a high of almost $103 million during the last fiscal year. This means the stability of Boston’s existing property tax base is more important now than it ever has been as residents and businesses in the city struggle to recover from the effects of the pandemic.  

If workers do not return and leases are not renewed, the value of commercial properties – and the property tax revenue they generate – will decrease. This will put the city’s budget in dire straits, and transfer taxes would only worsen this situation and create numerous unintended consequences. Other municipalities who rely on property taxes should take note.  

Unclear Provision Threatens Mergers 

Furthermore, the Boston language would impact a wide range of transactions – not just the sale of property. 

The Boston proposal would apply to “the transfer of any real property interest in any real property in the city of Boston, or the transfer of a controlling interest in a trust, limited liability company, or other entity that directly or indirectly holds an interest in any real property situated in the city of Boston.” Presumably, based on the lack of clarity in the language, mergers of companies that lease space in Boston could trigger a transfer tax. At a time when we should be doing all we can to attract businesses to Boston, this is deeply concerning.  

Given the negative impact the transfer taxes would have on home ownership, residential rents and investment in the commonwealth, other solutions are needed. Efforts that focus on increasing the overall supply of housing are more effective than punitive taxes which will do more harm than good. Allowing for the production multifamily housing by right throughout the commonwealth, expediting the permitting process, expanding the Low Income Housing Tax Credit, or expanding subsidies and vouchers are far more effective at doing what is most needed – ending the housing crisis, encouraging investment and ensuring Massachusetts remains a place people where people want to live and work.  

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