(The Center Square) – Real estate and building industry members warn that the income tax on people earning more than $1 million that passed the legislature this session could undermine the housing market in more ways than one.
“I don’t want to say the sky’s falling, but certainly clouds are forming and they look very dark,” Michael Orbino told The Center Square. Orbino was recently recognized as the “REALTOR® of the Year” by Seattle King County Realtors®. “Its short-sighted (to think) that it could be so narrowly sliced to only affect a handful of people. I don’t think that’s how it going to play out.”
While Howard Schultz announced the day after the income tax was passed by the legislature of his plans to relocate to Florida, some proponents of the income tax have expressed skepticism that it will inspire other wealthy residents to uproot.
However, Orbino said the new millionaire’s tax is “certainly at the top of mind” with his current clients, typically those selling homes worth $5 million or more. “There’s of course people who were going to sell regardless, but we are certainly seeing several unexpected sellers who are selling 100% purely because of this. They have said ‘We want to be listed in the spring market.’ Not because they fell out of love with Seattle or seek warmer weather…it’s purely because of this.”
Orbino stated there’s multiple ways the income tax will affect the housing market in Washington state. One is that high-income jobs and individuals who could afford to buy homes or townhouses typically worth more than $1 million move elsewhere.
“Employment is the most important part of this context,” he said. “The key question is ‘Are they decision makers and entrepreneurs of their company?’ That is what we’re watching most. If an entrepreneur that got laid off from Microsoft but has a really great idea for a new app, are they going to try to start that here…or are they going to go to Idaho? What does this look like for employers that are already there and they decide to pullup stakes and move…or people who maybe thought they were going to put a footprint in the region and decide not to?”
The other aspect are the builders themselves, who might suffer financial losses some years and recoup it one year, but have to pay the income tax on that money. As a result, the number of builders or construction activity in the state could dwindle.
“If they don’t build those houses, it doesn’t magically make them less expensive – they just don’t get built,” he said. “If you don’t build those houses it just puts even more pressure on the market.”
That sentiment is also shared by Jan Himebaugh with the Building Industry Association of Washington. She told The Center Square that the income tax will impact many builders due to how their companies are structured, as well as the cyclical nature of construction costs and cash flow.
“You could lose money on the project and still owe income taxes,” she said. “It’s not great for incentives. It’s not going to help a buyer who is looking to build a house.”
Although the state Legislature enacted legislation such as HB 2418 to lower the regulatory cost of new residential construction, Himebaugh said that the income tax “will undermine a lot of that. It’s (just) hard to put a hard number or percentage. There’s so many different factors that play.”
She added that “I think it’s going to make housing less affordable. There’s going to be people less willing to take that risk here to build housing and those units. Middle housing and multifamily construction is large projects typically, and need a large upfront. Large revenue at the end. All of this calls all of that into question.”
The Center Square reached out to the Washington Realtors Association as well as Seattle-based advisory, tax and assurance firm Baker Tilly to discuss the impacts of the income tax, but were unavailable for comment. The Center Square also reached out to the Florida REALTORS and Florida-based realtor Douglas Eillman, but both were unavailable for comment.
