Yesterday a bill was introduced that would create a new real estate transfer tax, which would be levied on top of the real estate excise tax for properties that sell for over $3.025 million. HB 2276 is scheduled to be heard in the House Finance Committee on Jan. 18.

This is a new tack in an effort to increase the real estate excise tax (REET) on high value property sales in order to help fund state housing programs. Last year, different versions of HB 1628 were passed by two House committees but ultimately stalled. Both would have increased the maximum REET rate, among other changes.

HB 2276 would first increase the threshold for the lowest REET rate. Currently, properties sold for less than or equal to $525,000 are subject to a 1.1% rate. HB 2276 would apply the 1.1% rate to properties that sell for less than or equal to $750,000. The remaining REET rates and thresholds would not change under the bill.

Then, the bill would create a new 1% real estate transfer tax. It would be in addition to the REET for properties that sell for more than $3.025 million. The REET rate for such properties is 3%, so this would effectively increase the top combined tax rate to 4%.

However, I think the language about how the transfer tax would apply needs to be clarified. The 3% top REET rate applies to “the portion of the selling price that is greater than $3.025 million.” (Emphasis added.) The 1% transfer tax rate would apply to “the selling price greater than the amount listed in RCW 82.45.060(1)(d)(iv)” (i.e., $3.025 million). The bill could mean to apply the 1% transfer tax to the portion of the selling price that is greater than $3.025 million (which would mirror the REET). But it could also mean to apply the 1% transfer tax to the entire selling price, if the price is greater than $3.025 million. (As an example, a property sold for $3.5 million would generate combined REET and transfer taxes of $78,420 if the transfer tax is just on the portion greater than $3.025 million. The same property would generate combined REET and transfer taxes of $108,670 if the transfer tax is owed on the entire $3.5 million selling price.)

HB 2276 specifies that 93% of the transfer tax revenues must be distributed in the same manner as the REET: 79.4% to the general fund–state (GFS), 14.0% to the education legacy trust account (ELTA), 5.2% to the public works assistance account, and 1.4% to the city-county assistance account.

The other 7% of transfer tax revenues would be distributed in this way: 25% to the housing trust fund, 25% to the apple health and homes account, 25% to the affordable housing for all account, 15% to a new developmental disabilities housing and services account, and 10% to a new housing stability account.

The Washington State Standard reports that Rep. Berg, a sponsor of the bill, “estimates that revenue from the new 1% transfer tax would bring in about $283 million every two years after it goes into effect.” There is not an official fiscal note yet. If the $283 million estimate is correct, the transfer tax would generate just $19.8 million a biennium for the five housing accounts. $245.8 million would go to the GFS and ELTA (which are funds subject to the outlook).

I estimate that the combined effect of the REET threshold change and the new transfer tax would reduce the combined REET and transfer taxes due for properties sold for more than $525,000 up to $3.0655 million. (That’s assuming the transfer tax would just apply to the portion of the selling price over $3.025 million.) There would be no change for properties selling for $525,000 or less, and taxes would increase for properties selling for more than $3,065,500.

Finally, a few points in the bill should be corrected. First, Sec. 2 and Sec. 3 specify that the REET and transfer tax changes would begin Jan. 1, 2025. However, Sec. 10 states that sections 2 through 4 would take effect Jan. 1, 2026.

Second, Sec. 1 of the bill states, “Washington has the most regressive tax code in the nation, with low-income families paying six times more in taxes, as a share of their income, than the wealthiest individuals in the state.” That claim is based on a 2018 report from the Institute on Taxation and Economic Policy (ITEP). We have detailed our concerns with the report. But if the Legislature insists on citing the ITEP report, it should at least reference the most recent version, which was released this week and estimates that Washington does not have the most regressive tax code.