In December 2016, Pittsburgh City Council approved the Housing Opportunity Fund (HOF) to support the creation and preservation of affordable housing. Like most every city in the nation, Pittsburgh’s shortage of affordable housing options has reached crisis proportions. The HOF was passed without a dedicated funding source to raise the $10 million needed annually to support it.
Nearly a year later, there are two viable options: a 1% increase to the city’s realty transfer tax or a $100 million dollar bond. The former has the most traction, but because it remains confusing to much of the public, I sat down with Mark Masterson of the Northside Community Development Fund to discuss what the tax increase would mean for Pittsburgh.
Downstream has lent its unequivocal support for the HOF, while respecting a difference of opinion on how to pay for it. There is no basis for the argument that the general public should not shoulder any of the financial burden. Property owners, especially those with higher incomes, enjoy enormous tax breaks through the Mortgage Interest Deduction, an annual multi-billion dollar giveaway that dwarfs federal expenditures towards affordable housing.
How this tax would be used, who pays it and how often are just a few of the subjects we covered.
Downstream: What is the Realty Transfer Tax and what is it used for?
Masterson: The Realty Transfer Tax, or RTT, is also known in Pittsburgh as the “Deed Transfer Tax.” Every time a piece of property is sold, whether it’s a house or a commercial building, there’s currently a 4% tax. 2% of the revenue goes to the city, 1% to the school district, and 1% to the state.
The revenues from the tax go into the general fund, just like the local wage tax or state income tax. Allegheny County and the state use a portion of the proceeds to support various housing initiatives. It’s not a whole lot of money statewide, and the bulk of the money ends up in the eastern part of the state; but it still helps this region, especially with rural communities.
Downstream: How much revenue does the transfer tax generate, and how much will the proposed 1% increase add?
Masterson: At the current rate of 4%, the transfer tax generates approximately $41 million. We calculated last year that a 1% increase would generate an additional $10.6 to $10.8 million.
Downstream: Who pays the tax and when is it paid?
Masterson: At the closing of a real estate sale there are closing costs, such as a realtor’s commission of 7% and prorated real estate taxes. There’s also a realty transfer tax. The 4% transfer tax is evenly split, so the buyer and seller each pay 2% of the sale amount. Increasing the tax by 1% means a half of one percent increase to each. Instead of 2% each, it would be 2.5%.
Downstream: I was under the impression that the tax was paid entirely by the buyer.
Masterson: Well, opponents have spun this different ways. When they’re talking to an elderly audience of homeowners, for example, they might say that the seller has to pay the whole 4%. If they’re talking to young folks trying to buy their first home, they might say that the buyer has to pay the whole thing. But that’s not the case—it’s split evenly between buyer and seller, unless both agree to something else.
“It came down to, Do you increase property taxes—which everybody pays every year—or do you increase the transfer tax?”
Downstream: How does half of a percent increase translate into real dollars?
Masterson: Last year we calculated the average sales price for a residence in the City of Pittsburgh using Zillow data to be about $113,000. On that average transaction, an increase would amount to an additional $565, approximately, for both buyer and seller.
Downstream: Can buyers spread that increase over the life of a mortgage?
Masterson: It depends on the bank and the type of financing. With some you can, but most you probably can’t. Where you can, it works out to be in the $2-$4 range per month over the life of a 15-year mortgage.
Downstream: What are the other ideas for funding the Housing Opportunity Fund (HOF) and why do you think increasing the transfer tax is the best mechanism?
Masterson: The Affordable Housing Task Force looked at a lot of other options. We looked at increasing the hotel tax by a dollar per room per night, or increasing the local services tax or the restaurant tax. If the zoning code were amended you could do something called a commercial linkage fee. You could try to do a document recording fee—every time you filed a deed or a lien, a certain amount would come back to the Housing Opportunity Fund. You could do a surcharge on anti-speculation—if someone buys a house and flips it in 6 or 12 months or something like that, there could be a surcharge that goes with that.
All of those sounded like wonderful ideas, especially because you’d be taxing a lot of the activities that are contributing to affordability issues. But for a second class city like Pittsburgh, all of those things require changes to state law and require enabling legislation. The practical reality is that none of that stuff will get passed in Harrisburg, in the opinion of a lot of people on the task force. It’s not something we should give up on, as it might be a way to augment this in the future, but in the short term it’s not going to happen.
We also looked at expiring TIFs (Tax Increment Financing – Ed.). The city and school district can grant tax increment financing districts to finance bonds for public improvements. When the TIF expires and the bond is paid off, the revenue comes back into the general fund and can be used for paving roads, buying fire trucks, paying police officers, etc. That was what we were initially focused on. It’s not a tax increase but something that can be done as a budgetary maneuver. But the city’s counting on that revenue as part of Act 47, and folks in the administration felt that that wasn’t the best way to proceed.
Similar with LERTA’s (Local Economic Revitalization Tax Assistance – Ed.) and other tax abatement programs. When they expire there’s a bump in revenue to the city. That would’ve generated the $10 million we need for the HOF over the next four or five years. We spent a lot of time looking at that and analyzing the impacts, but the city was counting on those revenues, probably to shore up the pension plan, and it was considered off-limits.
Generating the revenue for the Housing Opportunity Fund came down to two real sources. The city is maxed out on other taxes. The wage tax can’t go any higher by state law, the local services tax can’t be more than $52 per year. It came down to, Do you increase property taxes—which everybody pays every year—or do you increase the transfer tax? I’ve lived in my house for 30 years, so I paid it one time, and I or my estate will pay it on the back end when I’m leaving. The average tenure of a Pittsburgh homeowner is a little more than eight years, so it’s something most people pay every 8 or 9 years. Half the people in the city have lived in their homes more than 25 years.
People aren’t going to pay this every year, and that’s been distorted in some of the news coverage, where the real estate transfer tax gets confused with the property tax. We probably should stop using the term “Realty Transfer Tax” and call it the “Deed Transfer Tax.”
“There’s all sorts of things we can do with this money that will help people stay in their homes.”
Downstream: Is that the common perception? That this is a property tax increase that everybody will have to pay every year?
Masterson: Yes, and I think that’s the biggest issue for the layperson who doesn’t follow this stuff closely. My wife thinks I’m advocating for raising everyone’s annual property taxes by 1% but that isn’t what we’re talking about. With the transfer tax, the bulk of the tax revenue will come from commercial properties. The majority of real estate transactions in the city are residential, but the bulk of the funds will come from commercial property because they’re assessed higher. Fewer transactions but a higher overall dollar volume.
The other thing about the transfer tax is that folks felt there was fairness because some of this would be levied on the higher end residential sales that are creating some of the affordability issues. To be honest, there are fourteen or fifteen neighborhoods that are affected by affordability right now. That’s growing and probably will continue to grow. There’s not a lot happening in many of the other neighborhoods in terms of real estate, and that’s what I don’t understand about some of the opposition on city council. What do you have to lose? You’re going to have a source of money that can not only be used to build affordable housing but to rebuild your neighborhood. That’s one of the things I fought for on the task force. We need to have some component of this that’s for affordable home ownership that can work in places like the West End, Perry Hilltop or the South Hilltop communities that haven’t seen a whole lot of reinvestment.
Downstream: Let’s talk about what these funds could be used for. You mentioned home ownership, but most of the discussion around the HOF seems to relate to rental housing.
Masterson: That’s why we changed the name from the Affordable Housing Trust Fund to the Housing Opportunity Fund. A lot of people hear “affordable housing” and think it’s public housing. But there’s all sorts of things we can do with this money that will help people stay in their homes, and can help neighborhoods build new houses that are affordable to young families. That’s how you change neighborhoods and get things moving. You get more stakeholders. And wouldn’t it be great to not have to wait until the house is falling down? Seniors and other long time residents will benefit too. They can get money to replace a furnace or fix a roof.
Downstream: The HOF could be used to finance new construction and, say, provide loans for rehab and repair?
Masterson: Yes, and that doesn’t play through in a lot of the news coverage. Look at what Philadelphia has done. They have a $10 million fund for the whole city and that’s a very small drop in a very large bucket. But a lot of their success has come from programs that help folks that own their homes but can’t afford to make repairs when something catastrophic happens. They’ve been proactive with weatherization, furnace repair, and other things that keep people in their homes and that’s a way to keep the neighborhood fabric together.
Downstream: Can you elaborate on how that would work?
Masterson: The legislation states that 25% of the funds will be reserved for people earning up to 80% of the Area Median Income. For a family of four, that’s about $58,000 per year. Those funds are something the city could roll into a purchase-rehab program, for example, where individuals could buy houses that need renovation work.
We’ve done this stuff in the past and it works, but the money we had for those programs went away because of state cuts to the Department of Community and Economic Development. There once was $7 million per year that went to the Pittsburgh Home Rehabilitation Program. Ten years ago the city got about $21 million dollars in block grant money from the federal government, but we’re budgeted to get $12 million this year. And now the feds are talking about zeroing out Community Development Block Grants entirely. So if all that goes away, we have to have some local funds to do these things.
The other benefit of this is that if we can put $25 million dollars over ten years into vacant houses, you can save a lot of houses that we’d otherwise have to tear down. We’ll get families living in neighborhoods and paying taxes and sending their kids to public school. All sorts of things happen when you create stakeholders and can get people to own houses instead of renting at eternally unaffordable rates, or renting substandard stuff because the landlord won’t fix it up.
HOF funds can also help people with down payments and make it easier for some families to afford houses.
Downstream: But this will also provide affordable rental housing. How will the increased tax and the HOF impact that?
Masterson: Any cost that gets added to a project is a cost you have to cover. Typically, what someone pays for acquisition is small, relative to the total development costs, so the transfer tax is a small component of the total project costs. Of course, any cost increase doesn’t make it easier, especially if you’re developing affordable housing where every penny does count. But, if the HOF funds are available, developers could access these funds to help out with those kinds of projects. If I were developing affordable housing, I would pay this tax in a heartbeat if it made my LIHTC (Low Income Housing Tax Credit – Ed.) deal more competitive.
We currently average about three or four LIHTC projects each year in Pittsburgh, and a fully operational HOF might get us one or two extra awards each year. LIHTC funds are very competitive and they have to be spread out across the state, but most of the HOF funds will likely be used for programs the URA is already operating. Loan and grants programs that help existing homeowners and tenants stay in their homes.
“We need a vibrant real estate market, but that shouldn’t come at the cost of people having to leave the neighborhood they’ve lived in all this time.”
Downstream: Would you say this is a progressive tax?
Masterson: Increasing the transfer tax is the least worst choice. Property tax is much more regressive. It hits everybody regardless of income and hits them every year. You can pretty much guarantee that low-income folks aren’t living in million dollar houses. When you peg the transfer tax to the sales price of a home, it’s pretty much aligned with their income. The more expensive the home, the bigger the income the owner probably has. You could make the same argument with the property tax every year, except that the property tax is not based on a market transaction—it’s an assessor’s opinion of what your house is worth. If you’ve lived there 30 years, my guess is your house is way undervalued. If you just bought your house, it’s probably over-valued.
With the transfer tax, you have an actual sales price that the buyer and seller have agreed on. If I could pick one of these other things to fund the HOF, I would. But of the two real choices we have, the transfer tax is more progressive than the property tax.
Pittsburgh is a heavily taxed city. If you could wave a magic wand, we wouldn’t have lost half our population, we wouldn’t have all this infrastructure we have to carry. There are lots of things that Pittsburgh has carried since the decimation of the steel industry. As Pittsburgh starts to turn the corner, we need a vibrant real estate market, but that shouldn’t come at the cost of people having to leave the neighborhood they’ve lived in all this time.
When we were doing the task force meetings I met a guy who was a retired postal worker from East Liberty. He said “I have a pension. I did all this volunteer work. I shouldn’t have to leave but I can’t afford to live there anymore.” And I agree.
Downstream: What is the relationship between the transfer tax and the $100 million bond proposed by Councilmen Burgess and Lavelle?
Masterson: They’ve gotten mixed up. The bond issue is not a great idea. It might make sense to some people because there’s a backlog of projects that community groups are looking to do but are just sitting there because of a lack of funding. I think Councilman Burgess proposed the $100 million bond to say, “Look what we can do with a $100 million.” It’s kind of a counterargument to, “What are you going to do with only $10 million given the demand.”
Downstream: You’d still need the transfer tax increase to pay for that bond, right?
Masterson: Yes, and a lot of the tax revenue would go to paying the interest to the bondholders. Now, one of the arguments for the bond is that money would be dedicated for affordable housing and couldn’t possibly be used for anything else. With the transfer tax, $10 million will be allocated to the HOF each year from the general fund, so we’ll have to have this budget argument every year. But I don’t see anyone trying to pull this money and use it for something else. Across the country these funds have been very popular. They fill a need. In Seattle and San Francisco, but also places like Michigan, they’re popular and people vote for them.
Downstream: Is inclusionary zoning a viable alternative to the Housing Opportunity Fund?
Masterson: No. Inclusionary zoning, by itself, has not worked anywhere in the country. I’m not an attorney but I’m not sure inclusionary zoning will hold up under Pennsylvania case law. Inclusionary zoning was one of the recommendations from the task force, but even if it’s adopted it’s not going to solve the problem. At best it might ameliorate some of the impact from 100% market rate developments. It would take a long time to get inclusionary zoning passed.
But it’s still a good idea and should be pursued. But zoning is tough in Pittsburgh—there’s a whole sub-cult of folks who specialize in zoning that aren’t even attorneys. It would be tough vetting process to get inclusionary zoning passed, and a lot of the folks opposed to the transfer tax, like the Realtors Association of Metropolitan Pittsburgh, would be even more opposed.
Downstream: If the tax increase is approved by council, what are the next steps?
Masterson: If council approves the 1% increase it will go to the mayor to sign. Some of it will be available in 2018 and will go immediately into things like the URA’s emergency home repair program. That program’s had a $15,000 cap since I came here in 1988. You can’t do much with $15,000 anymore. Maybe you can replace the furnace, but you can’t also do the windows. The URA could augment their existing program and get the money out the door immediately.
Downstream: Pittsburgh is currently short about 20,000 affordable units. Will the HOF chip away at that number or just keep it from getting worse?
Masterson: The optimistic part of me says that we could get that down to 10,000. But if trends continue and more neighborhoods become unaffordable, I worry we’re not going to be able to keep pace. If we really wanted to solve the problem we’d need twice as much money.
Downstream: According the National Low Income Housing Coalition Out of Reach report, the average wage needed to afford the average apartment in San Francisco is about $51/hour, and for this region it’s about $18/hour. Generally, how does this tax and the HOF fit into the bigger picture of Pittsburgh’s current affordable housing situation?
Masterson: I got yelled at at one of those task force meetings by someone who said I should’ve been building affordable housing twenty years ago. I tried to explain that affordability wasn’t the problem we were trying to solve back then. We were just trying to get people to live here and they wouldn’t have bought houses if there was permanent affordability attached to them. Even despite these problems, would you rather be here or in San Francisco? Pretty much no one can afford to live there.
People should look at the affordability issues in Seattle and San Francisco because that’s what’s heading here. Fifteen years ago the problem was that no one wanted to live in the city. Now, affordability is a huge issue. In some ways this a good problem to have, but not if you’re getting kicked out of Penn Plaza or other places because we supposedly need another Whole Foods, or the soup du jour for this new upscale market. That stuff is part of a natural evolution of cities, but you have to protect folks that are there. You don’t need to do it at their expense.
Mark Masterson is the Executive Director of the Northside Community Development Fund. He served as a member of the Affordable Housing Task Force. He has a Master’s in City and Regional Planning and has worked in neighborhood development organizations and as a private home builder. In his free time, Mark likes to kayak and ride bikes with his wife and daughters. He also is president of a youth soccer association. Passionate about Pittsburgh and its neighborhoods, Mark volunteers with his local neighborhood organization, Observatory Hill Inc.