Massachusetts Legislature Considers Property Transfer Tax

State legislators in Massachusetts are preparing to consider Gov. Maura Healey’s $4B housing bond bill, the centerpiece of the governor’s effort to address the national housing crisis by building or renovating more than 65,000 homes.

Tucked away in the bill is a provision that would allow cities in the Bay State to impose a property transfer tax of 0.5% to 2% on property sales exceeding $1M. The revenue from the tax will go toward affordable housing projects.

If it seems like we’ve seen this movie before, we have: in Los Angeles—which in April 2023 enacted a transfer tax of 4% on property sales exceeding $5M and 5.5% on sales of more than $10M—and, most recently, in Chicago, where voters in March rejected a transfer tax similar to the proposal under consideration in Massachusetts.

The debate unfolding in the state legislature in Boston appears to be following the same script as the previous transfer tax dramas. It starts with lavish projections of a huge windfall in tax revenue and a chorus of support from municipal leaders, followed by warnings from developers that a new transfer tax will lead to even fewer property transactions.

Here’s the windfall: the state housing agency in Massachusetts is estimating that a statewide 2% transfer tax could have generated $784M in fiscal year 2022, with half of that coming from commercial sales, Bloomberg reported.

The chorus of support includes Boston Mayor Michelle Wu and the leaders of more than 15 other municipalities who see the transfer fee as an essential tool to address a growing shortage of affordable housing. Critics are arguing than the additional tax will burden struggling commercial property developers and could lead to a decrease in overall real-estate tax revenue.

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

SPOILER ALERT (here’s what may happen if the measure is enacted): proponents of Measure ULA, the transfer tax in Los Angeles that was approved by state voters in November 2022 by a lopsided 58% to 42% margin, estimated that the tax would bring more than $900M in new tax revenue to the city annually.

When the transfer tax went into effect in Los Angeles last year, the city’s chief fiscal officer downsized the estimated revenue stream to $672M. Then transaction volume in L.A., including residential and commercial sales, dropped off a cliff.

As of March 2024, the city’s official tally for Measure ULA tax revenue was about $174M.

Meanwhile, the California Supreme Court is preparing to decide whether state voters will get another chance to weigh in on Measure ULA.

Opponents of the property transfer tax, spearheaded by Kilroy Realty and the California Business Roundtable, collected the required 1M signatures and put a referendum on the November 2024 ballot labeled the Taxpayer Protection and Government Accountability Act.

The ballot question doesn’t mention Measure ULA, but if passed it would nullify the transfer tax retroactively: a “yes” vote on the 2024 referendum will create a new requirement for two-thirds approval of state referendums that impose any new local special tax increases-and it will grandfather the rule in so that it can be used to invalidate Measure ULA.

The 2024 referendum will specify that any local special tax imposed “after January 2022 but before November 2024″ that was approved by less than two-thirds of voters (a 66.7% “yes” vote) “was not adopted in compliance” and will be voided.

Gov. Gavin Newsom petitioned the state Supreme Court to strip the measure from the ballot. The top court has agreed to hear arguments on the constitutionality of the special tax referendum this month, with a ruling expected in June.