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Issue Briefs: How States Can Tax Wealth
 

State “Mansion Taxes” on Very Expensive Homes

January 24, 2019

One way states can build more broadly shared prosperity is by adopting a tax on high-value housing, often called a mansion tax, to help fund schools, health care, roads, and other services and infrastructure critical to residents’ long-term future.

A historically large share of the nation’s wealth is concentrated in the hands of a few. As a result, millions of American families have less wealth, and therefore fewer opportunities, than they otherwise would. Further, since wealthy people are overwhelmingly white, this extreme wealth concentration reinforces barriers that make it harder for people of color to make gains. One way states can build more broadly shared prosperity is by adopting a tax on high-value housing, often called a mansion tax, to help fund schools, health care, roads, and other services and infrastructure critical to residents’ long-term future. Mansion taxes would also make state and local tax systems — which now are tilted in favor of the wealthy — fairer.

State and Local Tax Systems Worsen Wealth Inequities

The top 1 percent of households own roughly 40 percent of the nation’s wealth, while the bottom 90 percent own just 21 percent. This top-heavy structure reduces opportunity for millions of families, particularly families of color, who face great barriers to building wealth due to the legacy of historical racism and the ongoing damage from racial bias and discrimination.

Nearly all state and local tax systems worsen these inequities by asking less (as a share of income) of the very highest-income families than of the poorest families — often much less. Further, much of the value of assets that extremely wealthy people hold is shielded from federal, state, and local taxes, such as stocks and bonds, real estate, and personal possessions like boats, jewelry, and artwork.

By shifting some of the responsibility for funding critical public services and investments from low- and moderate-income taxpayers to those best able to pay, states could not only make their tax systems fairer but also generate additional revenue.

Mansion Taxes Are One Way to Improve State Taxation of Wealth

Property taxes typically are levied as a flat percentage of a property’s assessed value, regardless of how high the value is. Most state income taxes, in contrast, have a graduated rate structure, under which the rate rises as income rises. Some states and localities have begun to consider adopting this approach for their property taxes by setting a higher rate for high-value properties.

In addition to reducing inequality generally and making state and local tax systems fairer, mansion taxes can help states overcome racial inequities rooted in past racist policies and sustained by ongoing discrimination and bias. Historically, an extensive array of public policies held back people of color, including government practices that segregated them in low-value neighborhoods, combined with widespread racism in private interactions and in business transactions such as obtaining mortgages. Despite the considerable progress in overcoming these barriers, people of color own much less housing wealth than they otherwise would.[1] Further, numerous studies have documented that racial discrimination and bias continue to limit housing and job opportunities for people of color.[2] States can use the added revenue from graduated property taxes on high-value property to increase opportunities in lower-income communities of color (as well as other areas with relatively few opportunities), helping people of color to overcome these barriers to the betterment of the country as a whole.

States will also need to take other steps to better tax wealth so that the very wealthy do not receive special privileges, but mansion taxes are a good place to start. Home values are easier to measure than other forms of wealth: recent sales of similar properties in the same locality can often be identified, and housing ownership is usually publicly available information. In contrast, the value of an ownership interest in a closely held business can be very difficult to estimate accurately. In addition, houses can’t be easily moved across borders to avoid taxation, unlike other types of wealth such as stocks, bonds, or bank accounts.[3]

Designing Mansion Taxes

States and localities can tax mansions in a variety of ways. One way is to create or build upon taxes or fees levied when ownership of real property is transferred between parties, such as when a home is bought or sold. Typically known as real estate transfer taxes, these are also called documentary stamp taxes or property transfer taxes, among other terms. [4] Thirty-five states have such taxes. (See Figure 1.) Six of them — Connecticut, the District of Columbia, Hawaii, New Jersey, New York, and Vermont — levy a surcharge on the highest-value homes or have a progressive bracket structure through their real estate transfer tax system:

  • New York levies a flat real estate transfer tax plus an additional tax of 1 percent of the property’s sale value for residences of $1 million or more.
  • The District of Columbia levies a transfer tax that is based on a property’s sale value, with a higher rate for properties exceeding $400,000.
  • Connecticut’s and Vermont’s transfer taxes also have higher rates for higher-value homes, but the higher rate only applies to the portion of the property’s value above $800,000 in Connecticut and the value above $100,000 in Vermont.
  • Hawaii’s transfer tax has 7 brackets that are applied to the property’s sale value, with increases concentrated between properties valued between $600,000 and $10 million.
  • New Jersey’s transfer tax applies higher marginal rates to homes sold, with different rate schedules for homes under and over $350,000, plus a 1 percent tax on homes sold over $1 million like New York’s. (See Figure 2.)
Figure 1
39 States Plus D.C. Have Real Estate Transfer Taxes or Statewide Property Taxes

 

While real estate transfer taxes are usually levied at the state level, some localities also levy them and thus could add a mansion tax to their transfer tax. In November 2018, for example, Oakland voters approved a measure to change their real estate transfer tax from a flat rate of 1.5 percent per home sold to four brackets with increasing rates between 1 and 3 percent. The measure also reduces the rate for first-time homebuyers with low or moderate incomes.[5] In 2017, New York City Mayor Bill de Blasio proposed creating a 2.5 percent transfer tax on residential sales over $2 million in order to fund affordable housing for seniors.[6]

Another way to tax high-value homes is to add a mansion tax onto a state or local property tax system. Taxes on the values of homes are levied at the local level in all states; 16 states also have state property taxes. No state has a mansion tax for residential property, though the District of Columbia has a higher marginal rate for commercial and industrial property valued over $3 million. Since property taxes are typically levied annually, this form of tax would produce revenue from the owners of expensive homes each year; real estate transfer taxes produce revenue only when homes are sold.

Some states have considered increasing property taxes on high-value homes in the past several years. For instance, in 2015 Rhode Island Governor Gina Raimondo proposed a surcharge on secondary homes worth more than $1 million, and in 2017 Connecticut lawmakers proposed a state property tax on secondary and vacation homes for nonresidents.[7] And in 2018, Hawaii lawmakers referred to the ballot a constitutional amendment creating a surcharge on investment property to support public education, but the state supreme court ruled it unconstitutional prior to the vote.[8]

Figure 2
State Taxes on High-Value Property

 

Estimating Mansion Tax Revenue

A nationwide tax of 1 percent on homes over $1 million could generate about $47 billion per year, according to an economist with Moody’s Analytics.[9] Some states limit lawmakers’ ability to enact mansion taxes, however: five states ban new transfer taxes, seven don’t allow statewide property taxes, and others require all property to be taxed at the same rate.[10] If just those states with the legal ability to impose a mansion tax did so, the total would be substantially less.

Nevertheless, a mansion tax could raise meaningful revenue for a state. The Urban Institute estimated the revenue potential of a property tax surcharge of 1 percent on homes worth $2 million or more and 2 percent on homes worth $5 million or more in seven states plus the District of Columbia. In all states estimated, such a tax would fall on fewer than 2 percent of all homes, yet it would raise amounts ranging from $29 million (in Maine) to $4.3 billion (in California).[11] (See Table 1.)

TABLE 1  
Potential Revenue in Selected States from Property Tax Surcharge 1 percent surcharge for homes worth $2 million or more; 2 percent surcharge for homes worth $5 million or more, 2016  
State Total residential properties Total homes ≥ $2 million Total home values ≥ $2 million (millions) Total homes ≥ $5 million (millions) Total home values ≥ $5 million (millions) Property tax surcharge revenue (millions) Percent of homes subject to surcharge Property tax surcharge revenue per capita
California 8,284,512 90,601 $324,292 11,597 $100,904 $4,252 1.1% $108
Colorado 1,683,139 17,142 $70,837 3,820 $31,487 $1,023 1.0% $185
District of Columbia 147,448 2,004 $6,232 163 $1,201 $74 1.4% $109
Maine 495,320 873 $2,599 57 $341 $29 0.2% $22
Massachusetts 1,846,552 15,320 $50,244 1,456 $11,614 $619 0.8% $91
Michigan 3,939,491 2,235 $6,417 94 $550 $70 0.1% $7
Nevada 973,380 1,756 $6,372 222 $2,076 $84 0.2% $29
New York 4,543,196 34,223 $126,148 3,644 $36,208 $1,624 0.8% $82

Notes: Calculations restricted to single-family residential properties, including condos but excluding co-ops and luxury rentals. California and Colorado would need to pass legislation to change existing revenue limits to implement a property tax surcharge.

Source: Urban Institute, “Exploring the Viability of Mansion Tax Approaches,” 2018.

Estimating surtax revenues in additional states would require information such as the total value of residential properties above a threshold, or the total value of property sold above a certain value within a certain time period. This may be available from state governments in some cases. The U.S. Census Bureau collects data on housing values across the states but limits publicly available information about high-value homes.

Policy Design Choices

Policymakers must make several decisions in designing a tax on high-value housing. The tax should take into account how many mansions are in a state, where they are concentrated, and how quickly they sell, as well as any applicable state laws. Choices include:

  • Whether to choose a real estate transfer tax or a statewide property tax. Some states have restrictions on either type of tax. In that case, using the type of tax permitted under current state law would be the easiest path. But changing the law is also an option. Property tax limits,[12] tax uniformity clauses, and revenue and expenditure limits may also affect which tax can be chosen and how much revenue it could raise.
  • How to set the threshold for a surcharge or the rate structure for a progressive tax. States could consider flat dollar thresholds, so homes valued above that amount would pay the higher tax. Or they could consider a threshold aimed at taxing a certain share of houses, for example the most expensive 5 percent of houses in the state. (In this case, the threshold amount would still be a dollar figure but would shift based on a regularly updated analysis of housing values in the state.) Other factors to consider are the amount of revenue that would be raised and the number of homes above the threshold.[13]
  • Which types of property to include in the tax. The tax could include all homes or second or vacation homes only, and could include or exclude commercial property.
  • Whether to index thresholds for inflation, if based on dollar thresholds. Indexing is a sensible feature, as it would ensure the tax remains focused on the highest-value homes.

Appendix

State and local tax systems overall are upside down — that is, they ask low- and middle-income households to pay a larger share of their income in taxes than the very highest-income households do, as Appendix Figure 1 shows. Property taxes, which are typically assessed as a flat rate on a property’s assessed value, contribute to this regressivity (see Appendix Figure 2). By contrast, state and local income taxes overall are based on ability to pay, as Appendix Figure 3 shows, in large part because most state income tax systems use graduated rates that rise as income rises.

APPENDIX TABLE 1
Real Estate Transfer Taxes and Statewide Property Taxes
State Transfer Tax Transfer Tax Ban Statewide Property Tax Statewide Property Tax Ban
Alabama X   X  
Alaska     Limited  
Arizona   X Limited  
Arkansas X     X
California     Limited  
Colorado   X   X
Connecticut X      
Delaware X      
District of Columbia X   X  
Florida X     X
Georgia X      
Hawaii X     X
Idaho        
Illinois X      
Indiana        
Iowa X   Limited  
Kansas X   X  
Kentucky X   X  
Louisiana   X    
Maine X   Limited  
Maryland X   X  
Massachusetts X      
Michigan X   X  
Minnesota X   Limited  
Mississippi        
Missouri   X X  
Montana     X  
Nebraska X     X
Nevada X   X  
New Hampshire X   Limited  
New Jersey X      
New Mexico     X  
New York X      
North Carolina X      
North Dakota     X  
Ohio X      
Oklahoma X     X
Oregon   X Limited  
Pennsylvania X      
Rhode Island X      
South Carolina X   Limited  
South Dakota X      
Tennessee X      
Texas       X
Utah        
Vermont X   X  
Virginia X   Limited  
Washington X   X  
West Virginia X   X  
Wisconsin X   X  
Wyoming     X  
Total 35 5 16 7

Note: States marked “Limited” levy statewide property taxes only on certain properties, only on specialized industries, or under limited circumstances as defined by law. State-required taxes that are collected locally and stay with localities are not counted as statewide property taxes.

Source: National Conference of State Legislatures, Lincoln Land Institute, and CBPP analysis of state tax laws

Appendix Figure 1

Lowest-Income Households Pay Highest Overall State and Local Taxes

Appendix Figure 2

Property Taxes Make State and Local Tax Systems Less Fair

Appendix Figure 3

State and Local Income Taxes Based on Ability to Pay

End Notes

[1] Michael Leachman et al., “Advancing Racial Equity With State Tax Policy,” Center on Budget and Policy Priorities, November 15, 2018, https://www.cbpp.org/research/state-budget-and-tax/advancing-racial-equity-with-state-tax-policy.

[2] Lincoln Quillian et al., “Meta-analysis of field experiments shows no change in racial discrimination in hiring over time,” Proceedings of the National Academy of Sciences of the United States of America,” October 10, 2017, http://www.pnas.org/content/114/41/10870.full.

[3] Intangible assets can easily be moved across national and state borders, which has long facilitated both illegal tax evasion and legal tax avoidance. See Eric Lipton and Julie Creswell, “Panama Papers Show How Rich United States Clients Hid Millions Abroad,” New York Times, June 5, 2016, and Richard Rubin, “Wealthy N.Y. Residents Escape Tax with Trusts in Nevada,” Bloomberg News, December 18, 2013.

[4] “Significant Features of the Property Tax: Real Estate Transfer Charges,” Lincoln Institute of Land Policy and George Washington Institute of Public Policy, https://www.lincolninst.edu/research-data/data-toolkits/significant-features-property-tax/topics/real-estate-transfer-charges

[5] “City of Oakland Measure X,” https://www.acvote.org/acvote-assets/02_election_information/PDFs/20181106/en/Measures/20%20-%20Measure%20X%20-%20City%20of%20Oakland.pdf; Robert Gammon, “Updated: Oakland Mayor Libby Schaaf Wins Reelection,” East Bay Express, November 6, 2018, https://www.eastbayexpress.com/SevenDays/archives/2018/11/06/oakland-mayor-libby-schaaf-jumps-out-to-big-lead.

[6] “De Blasio Proposes ‘Mansion Tax’ on Homes That Sell for $2M or More,” DNAinfo New York, January 30, 2017, https://www.dnainfo.com/new-york/20170130/upper-east-side/de-blasio-mansion-mansion-tax-millionaire/.

[7] “Raimondo’s second-home tax targets properties worth more than $1M + Poll,” Katherine Gregg, Providence Journal, updated March 18, 2018, http://www.providencejournal.com/article/20150317/NEWS/150319308; Russell Blair, “A Look At The Tax Ideas Proposed In The New Budget,” Hartford Courant, September 14, 2017, http://www.courant.com/politics/hc-pol-budget-vote-overview-20170913-story.html.

[8] Janis L. Magin, “Hawaii Supreme Court invalidates constitutional amendment ballot question on property tax,” Pacific Business News, October 19, 2018, https://www.bizjournals.com/pacific/news/2018/10/19/hawaii-supreme-court-invalidates-constitutional.html.

[9] Adam Ozimek, “A Tax on Luxury Homes,” Moody’s Analytics Economy, December 14, 2016, https://www.economy.com/dismal/analysis/datapoints/292072/A-Tax-on-Luxury-Homes/.

[10] It is not clear how many states would be barred from implementing a mansion tax or could face legal challenges if they did so. Seven states have clauses in their constitution stipulating that taxes must be uniform across the same class of property. Whether additional states effectively restrict mansion taxes will become clearer if more states pursue the policy.

[11] CBPP calculation of data from Jung Choi et al., “Exploring the Viability of Mansion Tax Approaches,” Urban Institute, May 2018, https://www.urban.org/sites/default/files/publication/98423/exploring_the_viability_of_mansion_tax_approaches_19.pdf. A transfer tax surcharge with the same criteria would affect fewer than 3 percent of all homes.

[12] Iris J. Lav and Michael Leachman, “State Limits on Property Taxes Hamstring Local Services and Should Be Relaxed or Repealed,” Center on Budget and Policy Priorities, July 18, 2018, https://www.cbpp.org/research/state-budget-and-tax/state-limits-on-property-taxes-hamstring-local-services-and-should-be.

[13] Choi et al.

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