Bills are moving in the Legislature that would impose statewide residential rent control policies and levy the business and occupation (B&O) tax on rental income. As economists have shown, negative impacts would be felt by both renters and landlords, and the statewide housing supply would suffer.

Rent Control

HB 2114 was approved by the House Housing Committee last week and was heard by the Appropriations Committee yesterday. Its Senate companion, SB 5961, is scheduled for executive session in the Senate Housing Committee tomorrow.

Under HB 2114 and SB 5961, landlords would not be allowed to increase residential rent (or manufactured/mobile home rent) during the first 12 months of tenancy. After that first 12 months, a landlord would not be allowed to increase rent by more than 5% during any 12-month period. Additionally, landlords would not be allowed to charge higher rent for month-to-month rental agreements than for longer term agreements.

The rent restrictions would not apply when the first certificate of occupancy for a unit was issued not more than 10 years before the notice of a rent increase. They would also not apply when a unit is operated by a public housing authority, public development authority, or nonprofit and rents are otherwise regulated.

Other provisions of the bills include:

• Violations of the rent restrictions would be violations of the consumer protection act, which means that renters could sue to recover damages, costs, and fees and the attorney general could sue on behalf of the state and collect civil penalties.
• Landlords who intend to increase rent by 3% or more would have to provide written notice to tenants at least 180 days before the increase is effective. (Under current law, written notice of any increase in rent is required 60 days prior.)
• Tenants who are notified that rent will increase by 3% or more would be allowed to terminate their rental agreement at any time if they give the landlord 20 days’ notice.
• Move-in fees and security deposits combined would not be allowed to exceed one-month’s rent.
• Late fees would not be allowed to be more than $10 a month.

As we’ve written, rent control reduces the supply of rental housing, discourages maintenance of rental housing, and lowers tenant mobility. More recently, ECONorthwest found that if rent control policies are enacted in Washington:

• 26,000 fewer units could be built over 10 years,
• Property tax revenues could decrease by $200 million over 10 years,
• Sales tax revenues could decrease by $301 million over 10 years, and
• Housing investment could be reduced “to the tune of $3.5 billion in economic activity over 10 years.”

Additionally, ECONorthwest writes, “Rent control does not address the underlying causes of increasing rents.” Further, “Evidence across decades of academic literature shows that well-intentioned rent control policies often have unintended harmful effects on the overall housing market and the populations they intend to support.”

Taxing Rental Income

Meanwhile, SSB 6136 was approved by the Senate Housing Committee yesterday. The bill would apply the B&O tax on service and other activities to “any person engaging within this state in the business of renting or leasing or real property.” It would apply to both residential and commercial rent. The current B&O tax rate for service and other activities is 1.5% (if gross rental income in the prior year was less than $1 million) or 1.75% (if gross rental income in the prior year was $1 million or more), which would be applied to “gross proceeds from all rent.”  

SSB 6136 specifies that B&O tax would not apply to hotels, municipalities, or rent subject to the leasehold excise tax. Revenues would be deposited in the home security fund account for the eviction prevention rental assistance program. There is not yet a fiscal note for the substitute bill.

(As introduced, SB 6136 would have imposed the B&O tax on rental income, but it would have provided a tax deduction for all rent if the landlord chose to participate in a rent stabilization program.)

As the Department of Revenue (DOR) writes in the 2024 Tax Exemption Study, the B&O tax was levied on rental income in 1959. In 1960, the state Supreme Court ruled that it was unconstitutional (Apartment Operators Association of Seattle, Inc. v. Schumacher). However, SSB 6136 notes that in last year’s capital gains tax decision, the Supreme Court called the Apartment Operators decision “flawed.” As DOR writes in the fiscal note for the original SB 6136, “There is significant litigation risk associated with this bill.”

If both these bills pass, landlords would be restricted in their ability to increase rents even as their rental income would be taxed.

At the same time, the Legislature is considering a new real estate transfer tax, which would effectively raise the top real estate excise tax (REET) rate from 3% to 4%. A proposed substitute HB 2276 was heard by the House Finance Committee last week and its Senate companion, SB 6191, is scheduled to be heard by the Senate Ways & Means Committee tomorrow. The increased rate would be on properties with selling prices of over $3.025 million. As the ECONorthwest report notes, the 3% rate for properties selling for over $3 million was put in place in 2019, putting “more burden on multifamily, commercial, and industrial properties.” Ultimately, as ECONorthwest writes,

 When taxes, fees, and policies drive down housing developers’ ability to pay for the property, the prospective site goes from being a housing development opportunity to maintaining the status quo of the existing use. All things being equal, adding additional tax burdens slows the market for housing production.