REET: The Real Estate Excise Tax made less regressive

Amendments to the Real Estate Excise Tax (REET) were passed by the legislature on April 28. The bill, SB 5998, was focused on amendments to the REET, which is levied on sale of a home. It raises $243.5 million over two years, while creating a small tax cut for some home sellers. The bill changes the state portion of the real-estate excise tax, usually paid by people selling homes, from a flat 1.28% to a graduated rate.

Washington’s Taxes are Regressive

Washington State has the most regressive tax system of the fifty states of the U.S. Low-income taxpayers pay 17% of their income in various taxes, notably sales taxes and property taxes that are passed through as rent increases. By contrast, the very highest-income taxpayers — the top 1% — are paying a mere 3% of their income in state taxes, not at all their fair share.

Property taxes and sales taxes are essentially flat taxes because the rate does not vary by income. Whether you make $10,000 or $10 million, you will pay the same property tax if you live in the same price level of home in the same jurisdiction. Both taxes vary according to where you live, since cities and counties can add “levies” to increase the taxes, but all people living in a given jurisdiction will pay the same rate regardless of income.

The legislature has tried to alleviate some of this regressivity but is hampered by the state constitution and court cases that have declared many forms of wealth as income, which cannot be taxed in a graduated scale. Since the 1950’s the Washington state Supreme Court has found that income is property and that a graduated income tax is unconstitutional. In addition, state law prohibits a local government from imposing a tax on net income.

Washingtons Legislature Passes a REET

The latest effort by the 2019 legislature was focused on amendments to
the REET (Real Estate Excise Tax) which is levied on sale of a home. the sale of a home provides a one-time unique capital gain that would not be captured by a broader capital gains tax. (The changes to the REET are likely to be challenged in court, based on a controversial Depression era WA Supreme Court decision involving the definition of income tax.)

The REET was included in the budget that passed the legislature on April 28, 2019. Here are some of the details:

Senate Bill 5998 raises $243.5 million over two years, while creating a small tax cut for some home sellers. The bill changes the state portion of the real-estate excise tax, usually paid by people selling homes, from a flat 1.28% to a graduated rate. It lowers the state rate to 1.1% for housing sales under $500,000. The current 1.28% would remain for homes sold between $500,000 and $1.5 million. Houses selling between $1.5 million and $3 million would be subject to a 2.75% rate, and houses going for more than $3 million would have a 3% rate. Agricultural and timber lands that are sold would keep the current 1.28% rate.(Source: Seattle Times, April 29, 2019)

What will the revenue be used for?

Most of the money currently collected via the state REET goes to the State General fund, with bits and pieces going to other accounts: A little over 1 percent of the money collected goes to cover counties’ administrative costs, 2 percent goes to the public works assistance account, and a little over 4 percent goes to the education legacy account.

The changes to the REET were proposed by Governor Inslee who proposed to use some of the money to create an ongoing source of funding for the removal of fish passage barriers, or culverts — an effort mandated by federal court injunction (and affirmed by the U.S. Supreme Court).

The bill adopted by the legislature takes a slightly different route. After slightly increasing the contributions to the aforementioned accounts,  it directs 16.7 percent of the contributions to the motor vehicle fund. The motor vehicle fund backs highway-related projects like culvert removal, but isn’t currently a destination for REET revenue. The bill allows but does not require the funds to be used for culvert removal.

The law is effective July 1, 2019.

Current law
Individuals, corporations, and other entities owe real estate excise tax (REET) on their sales of real property, unless the sale qualifies for an exemption from the tax. Taxable sales include transfers of ownership in real property and in controlling interests in entities that own real property in Washington. Real property includes any interest in land or anything attached to land. The state tax rate is 1.28 percent. Local jurisdictions may add additional local rates. The combined state and local rate in most areas is 1.78 percent.a disproportionately low rate, not nearly their fair share.