Funding Local Affordable Housing Efforts
August 24, 2022
Category: Housing , Revenues
Here at MRSC, we receive questions frequently asking about the types of funding sources available to local governments that might help them address a lack of affordable housing in their jurisdiction.
Recently, I received inquiries from a couple of jurisdictions wondering if they could impose their own special tax or fee. These jurisdictions proposed using the revenues generated from the taxes or fees to help them fund affordable housing. Can they do that? Generally speaking, they cannot, but local governments do have other options, which I will explore in this blog.
Taxes for Affordable Housing
Local governments may only impose taxes that are authorized by the state constitution and/or statutes adopted by the state legislature. Taxes that are not authorized by the state constitution or state law cannot be imposed by local governments.
MRSC has two publications, Revenue Guide for Cities and Towns in Washington State and Revenue Guide for Counties in Washington State, which discuss the types of taxes that may be imposed by counties, cities, and towns. The publications also discuss any restrictions on tax revenue, whether or not voter approval is required, and any limits on how long a tax may be imposed.
Currently there are only two taxing options available to cities, towns, and counties that are aimed at raising revenue for affordable housing: the affordable housing levy and housing and related services sales tax. Lodging taxes are another funding option, albeit more restrictive.
Housing and Related Services Sales Tax
The housing and related services sales tax (RCW 82.14.530) is a sales tax of up to 0.1% and originally required voter approval but can now be imposed councilmanically. It has become more popular in recent years, especially once a councilmanic option was available. According to our Tax and Population Data webpage, this sales tax is currently imposed by 19 cities and 9 counties.
Cities, towns, and counties are allowed to impose the housing and related services sales tax, but cities and towns may only impose the tax if the corresponding county has not already imposed the sales tax.
At least 60% of the revenue from this tax must be used for:
- Constructing or acquiring affordable housing,
- Constructing or acquiring behavioral health-related facilities,
- Acquiring land for these purposes, or
- Funding the operations and maintenance costs of new affordable housing units and facilities within which housing-related programs are provided.
The affordable housing and facilities may only be provided to people within specified population groups whose income is 60% or less of the county median income, per RCW 82.14.530(2)(b).
Affordable Housing Levy
The affordable housing levy (RCW 84.52.105) is a property tax that can be imposed by cities, towns, and counties and which requires voter approval by a simple majority.
The property tax can be imposed for up to 10 consecutive years and is an additional levy of up to $0.50 per $1,000 of assessed valuation. Note that revenues from an affordable housing levy can only be used for programs that:
- Promote affordable homeownership,
- Assist with owner-occupied home repair, or
- Prevent foreclosure for low-income households.
The local government must adopt an affordable finance plan for how the levy funds will be spent and the plan must be consistent with a locally adopted or the state-adopted comprehensive housing affordability strategy required under the National Affordable Housing Act.
The property tax levy has been less popular than the sales tax authority. Only one Washington county, Jefferson, has attempted to pass an affordable housing levy, but this effort was not successful. However, the cities of Bellingham and Vancouver have both successfully passed affordable housing levies.
Lodging tax revenues (see RCW 67.28.150 and RCW 67.28.160) may be used to repay general obligation bonds and revenue bonds issued to finance loans or grants to nonprofit organizations or housing authorities for affordable workforce housing located near transit. While the requirement is that the affordable housing be located near a 'transit station', this term is defined broadly in RCW 9.91.025 as “all passenger facilities” and includes bus stops, bus zones, shelters, properties, and "rights-of-way of all kinds that are owned, leased, held, or used by a transit authority for the purpose of providing public transportation services."
Temporary Affordable Housing Funding Sources
In addition to the sources listed above, there are two additional sources of affordable housing funding worthy of consideration that are currently available but may not be at a future date: real estate excise taxes 2 (REET 2) and American Rescue Plan Act (ARPA) funds
REET 2 is a 0.25% tax on real estate sales that may voluntarily be imposed by any city, town, or county fully planning under the Growth Management Act (GMA). Eligible jurisdictions may use REET 2 revenues for affordable housing until December 31, 2026.
REET2 funds may be used for planning, acquisition, construction, reconstruction, repair, replacement, rehabilitation, or improvement of facilities for those experiencing homelessness and for affordable housing projects. Cities, towns, and counties can use the greater of $100,000 or 25% of the available REET 2 fund — up to a maximum of $1 million — for such capital projects.
Additionally, only San Juan County is authorized to impose an additional 0.5% affordable housing real estate excise tax under RCW 82.46.075.
ARPA State and Local Fiscal Recovery Funds
ARPA’s State and Local Fiscal Recovery Funds (LFRF) provides federal funding for projects in response to the COVID-19 pandemic and its aftermath.
At first glance, affordable housing might not seem to be one of the eligible uses of ARPA funds, which were designed to help local governments counter the negative economic impacts of the COVID-19 pandemic on their communities. However, the U.S. Treasury Department (Treasury) has interpreted the “negative economic impacts” provisions broadly to include expenses such as affordable housing and childcare, subject to certain conditions.
Treasury, in partnership with the U.S. Department of Housing and Urban Development has developed an Affordable Housing How-To Guide that shows local governments how they can use LFRF for the development, repair, and operation of affordable housing and services or for programs to increase long-term housing security. These funds must be obligated by December 31, 2024, and expended by December 31, 2026.
Affordable Housing Sales Tax Credit
In 2019, SHB 1406 allowed cities, towns, and counties to enact an ordinance to receive a credit against the state sales tax for 20 years, but in order to receive credit, cities, towns and counties had to have enacted this ordinance by July 27, 2020.
Since the deadline has already passed, cities, towns, and counties that do not have this tax credit are unable to get it. However, those jurisdictions that approved this funding mechanism before the deadline should continue to receive affordable housing sales tax credit funds until approximately 2039-2040.
In addition to these revenues, jurisdictions have the ability to use general fund revenues as well as pass a levy lid lift specifically for affordable housing. According to our Local Ballot Measure Database, only Seattle and Bellingham have successfully passed a levy lid lift for affordable housing.
For more discussion of affordable housing-related taxes as well as incentives and grants related to affordable housing, check out the Affordable Housing Funding Sources webpage.
MRSC is a private nonprofit organization serving local governments in Washington State. Eligible government agencies in Washington State may use our free, one-on-one Ask MRSC service to get answers to legal, policy, or financial questions.