Seattle Proposes New Tax, “Linkage Fee,” on Housing

Will Seattle mandate affordable housing by taxing new construction based on its perception that new commercial and residential construction increases both the cost of housing and demand for housing?

Seattle King County REALTORS® continues to work with a coalition of Seattle-area builders, land use attorneys, architects, housing advocates, membership-based organizations and urban advocates to defeat a proposal by the Seattle City Council to establish a new tax on development and promote long term solutions to the housing affordability crisis.  The coalition is named the Coalition for Housing Solutions.

The tax proposal is termed a “linkage fee.” Revenue from the tax would serve as new revenue for subsidized housing.

The proposal is based on the specious premise that new construction – both commercial and residential – increase the cost of housing; a premise counter to the law of supply and demand.   Additionally, the proposal appears to conflict with Washington state law.

During the past few months, the coalition has challenged an attempt by the city to create a legal basis for the fee in the city’s comprehensive plan update.  The city characterized the comprehensive plan amendment as “non-significant” with respect to the amendments impacts on the environment.  The coalition argued that the impacts of chilling development are “significant.”  The city hearing examiner agreed and directed the city to address impacts.  This is important because it supports the larger argument that the “so called” linkage fee is harmful to the real estate economy and will result in a chilling effect on new housing supply.

In early June, the coalition released a report by land use economist Matthew Gardner that quantifies the amount of tax revenue generated by new development in the city of Seattle.  While millions of dollars annually in tax revenues are collected from growth and construction, the city of Seattle spends almost none of that on affordable housing.

Mr. Gardner’s report entitled, “Economic and Tax Revenue Benefits to the city of Seattle from Residential and Commercial Real Estate Development,” estimates that the City collects more than $3.5 million in one-time revenue from the construction of a single new high-rise office building and an additional $6.6 million annually from the same building.  A new high-rise apartment building generates $3.9 million in one-time tax revenue to the city of Seattle.

One-time tax revenues from development include the City’s share of sales tax on construction contract services; B&O taxes on construction-related services such as architecture, engineering and finance; and utility taxes.  Ongoing annual tax revenues collected by the city of Seattle from development include the city’s share of sales tax on purchases made by a building’s residents and/or workers; B&O on businesses located in the building; the city’s share of property taxes on the building; and utility taxes.

While the Gardner report demonstrates the revenue benefit to the city of Seattle from new development, it inversely shows the amount of new revenue the city of Seattle stands to lose if policies that curtail development such as the proposed “linkage fee” tax on residential and commercial development are imposed.

“I believe that the biggest consequence to the linkage fee is that fewer buildings will be completed as a result of this tax,” said Matthew Gardner.  “The linkage fees currently being proposed are so expensive that more projects will no longer make financial sense.  The City of Seattle will lose millions in expected tax revenue for each project that no longer pencils.”

The City Council is expected to debate the linkage fee ordinance in early-summer.  Seattle King County REALTORS® and others in the coalition have offered a comprehensive set of strategies to create greater housing affordability in Seattle.  (See Mayor’s Housing Affordability and Livability Advisory Committee.)