Levy Excise Tax on Homes Sold to Higher-Income Buyers
Require home buyers to pay a fee based on the difference between their income and that of the seller in order to prevent mass buy-outs.
Single family home in Denver (photo by authors)
What's the issue?
A defining aspect of gentrification is the replacement of low-income homes with houses and apartment buildings for higher-income ones. For households entering the city, low-income neighborhoods may be the last place they can afford to buy property. For developers and real estate investors, it makes business sense to buy cheap and build for the well-to-do as a strategy to increase profit margins.
How does an excise tax help?
One way a city can reduce the incentive to "upgrade" housing is to charge an excise tax on home purchase transactions in gentrifying neighborhoods. The buyer of the home pays a tax based on the percent change in income between the original owner and new owner. In addition, a higher flat tax should also applied to homes being sold to investors. Should property be transferred from a low-income homeowner to an investor or a higher income household, the low-income seller can benefit from the property sale and the tax generated from the sale could be used to benefit housing for low-income people.
A taxes of this kind have multiple benefits. In the first place, it makes buying out low-income residents somewhat less attractive. Since it applies only to homes, it encourages brownfield redevelopment and infill. Secondly, the tax extracts value from the many transactions that may be occurring in high-growth areas, without preventing development that may benefit all residents. A city can use the revenue captured to deliver renter assistance or build more affordable housing.
"State by State Property Tax at a Glance," "Local General Revenues by Source," Lincoln Institute of Land Policy, 2013.
When and where does this policy work best?
This policy works best when a neighborhood or city is experiencing high levels of new construction. New construction can be a signal of increased neighborhood value. Many times, rising home values create increased cost burdened for lower-income homeowners. These circumstances create a breeding ground for predatory buying practices. This policy would discourage the buying-out of lower-income residents by creating a disincentive for investors and high-income people. This policy also works best for areas that are experiencing characteristics of the middle stages of gentrification, when there are still enough lower income homeowners in the community that want to stay there.
If implemented, this policy can be considered successful if more low-income residents can resist involuntary moves and if the city extracts significant funding for other anti-gentrification measures.
Works best for neighborhoods in mid-stage gentrification
Works best when neighborhoods are/have...
What are some possible problems and how can they be addressed?
There is likely to be resistance to this policy from landlords and developers. However, as there are already many transaction costs included in the purchase of a home, an additional and socially progressive tax may prove politically feasible. In addition, the policy can be targeted to neighborhoods that are currently experiencing or on the cusp of gentrification - where the risk of displacement is high, but potential profits are also large.