Massachusetts jumps into housing debate with mansion tax proposal

Massachusetts is jumping into the national debate on the affordable housing crisis with a proposal to tax high-value property sales.

Governor Maura Healey’s $4 billion housing bond bill, the state’s biggest-ever investment in its residential stock, includes a provision allowing cities to impose a transfer fee of 0.5% to 2% on property sales exceeding $1 million. The revenue generated would go toward affordable housing projects.

The initiative, which mirrors a measure recently spurned by Chicago voters, has sparked a debate among local governments, housing advocates and critics who fear it may squeeze home sales and further burden property developers who are grappling with record office vacancy rates. 

Supporters, including Boston Mayor Michelle Wu and leaders of more than 15 other municipalities, see the transfer fee as a critical tool to address a growing shortage of affordable housing. State Housing Secretary Edward Augustus says Massachusetts needs 200,000 more homes to keep pace with population growth. 

“This policy is a win for local governments, but most importantly it is a win for renters and homeowners who have otherwise been priced out,” Augustus said in an e-mailed statement. 

Critics argue that the additional tax would burden commercial property developers already facing high vacancy rates, particularly in office buildings, and could lead to a decrease in overall real-estate tax revenue. Vacancy rates for office space are on the rise in Boston, Cambridge and surrounding suburbs as remote work trends persist. According to Colliers’ first-quarter market analysis, occupancy in Boston’s office market has hit its lowest point since 2010. 

“If you impose the tax, it’s gonna depress it even more,” said Greg Vasil, head of the Greater Boston Real Estate Board. “How can that be beneficial?” 

Meanwhile, supply in the residential market remains tight as rising interest rates deter homeowners from selling. The median home sale price in Massachusetts jumped more than 9% in March from a year earlier, while the number of transactions fell almost 8%, according to data from Redfin Corp.

The state’s housing agency estimates that a statewide 2% transfer fee could have generated roughly $784 million in fiscal year 2022, with more than half of stemming from commercial sales.

“Commercial property owners right now are really struggling,” said Evan Horowitz, executive director of Tufts University’s Center for State Policy Analysis. “So even though their properties are valuable, they’re not profitable. And they’re in a bad position to pay.”

Similar concerns played a role in the defeat by voters of Chicago Mayor Brandon Johnson’s mansion tax proposal earlier this year, stopping a plan that his administration said would raise $160 million a year to fund the construction of more homes

Meanwhile, the year-old mansion tax in Los Angeles — which added a 4% to 5.5% charge on property sales exceeding $5 million — has fallen short of projections, failing to raise hundreds of millions of dollars of anticipated revenue. Offering an alternative approach to improving housing affordability, the Biden administration has zeroed in on closing costs and ancillary fees, especially title insurance.

The debate comes amid calls for fiscal constraint in Massachusetts. While April tax revenue exceeded projections by over $1 billion, the windfall came primarily from capital gains and the recently enacted 4% millionaire tax on income above $1 million. Meanwhile, corporate and business taxes continue to underperform.

Negotiations on the state’s budget have moved to the Senate after the House of Representatives passed a roughly $58 billion spending plan for the fiscal year starting July 1.

Massachusetts House Speaker Ronald Mariano has said the legislative body could next turn its attention to the housing bond bill, with debate beginning as soon as this month, according to State House News Service.

Despite these concerns, cities see the real estate transfer tax as a valuable tool. Provincetown, a seaside town at the tip of Cape Cod, has advocated for such an option since 2010.

“We have families who have lived here for generations who might be considered asset-rich but cash-poor,” said Alex Morse, Provincetown’s town manager. “Many incoming buyers can afford the transfer fee, which could then be directed toward our housing trust to incentivize affordable housing development and launch programs for housing security, mental health assistance, and the creation of new housing units.”

In Easthampton, Mayor Nicole LaChapelle is eager to opt into the transfer fee. If the provision goes through, she believes the city could start seeing improvements almost immediately. 

“I would go right to my council and we would start the process on taking a look at that transfer tax, especially as it relates to affordable housing,” she said in a phone interview. “I am crossing my fingers on this.”