William Hillis, Broker & Research Editor at Realogics Sotheby’s International Realty breaks down what this means for the future of Seattle and its surroundings.
Perhaps it’s living together in a place of such abundant beauty and economic opportunity that brings out so many competing ideas about what our city and the region should look like, how people should live and commute, and what powers government should exert. Together with ever-greater diversity, attitudes on these matters in Seattle and the Puget Sound are increasingly in conflict.
The region’s employers are drawing in more urbanites—many of them renting with hopes to own, commuting to work on foot or pedal in increasing numbers; some of them immigrant technicians, many others service industry workers and aspiring entry-level through middle-management high-tech employees. Culturally diverse, yet ideologically similar, they are inspired by local politicians with visions of a city that reflects their values.
On the other hand, many of them harbor diminishing concern for taxes paid by property owners and the wealthy, which they regard as just, given the societal privileges enjoyed by those taxpayers. Theirs is a world of imperatives where environmental conditions and shared quality of life, marred by inequitable distribution of the benefits of society, demand change. Such attitudes put them at odds with some businesses and longtime residents who want to maximize the value of their investments and minimize costs.
The FutureCast Forum looked at how the competition among these perspectives might play out locally on select emergent issues.
1. The City of Seattle’s Income Tax on Higher Brackets
Recent decades have brought cultural shifts to the Puget Sound region, attributable to the transition from a heavy industrial and resource-based economy to software and services; increasing immigration, domestic as well as international; and the same growing income disparities seen throughout the Western world. Despite its colorful early 20th century flirtations with the socialist Wobblies, Puget Sound remained a centrist liberal bastion for nearly a century. Now the gap appears to be widening between Seattle’s neoliberal set and high-profile activists on the left who are committed to redistribution. The Council’s vote was a victory for the latter group. Their influence is strongest in the city; elsewhere, self-interest is likely to prevail among King County’s many current and aspiring high wage-earners.
Canada is not immune to the war on wealth: in September 2017, a Vancouver city council candidate proposed a “mansion tax” of an extra one percent from homes assessed at or above Can$5 million, and two percent from homes assessed at or above Can$10 million.
The 2.25-percent income tax unanimously enacted by the Seattle City Council to be levied on top income earners needs first to survive several lawsuits, including one brought on behalf of five residents by former State AG Rob McKenna. According to a brief by the City of Olympia in the face of last year’s Initiative 1 enacting a local income tax there, the Council’s act conflicts with a state law prohibition against local governments taxing net income. (Nearly 55 percent of Olympia voters rejected Initiative 1.) In another case last May, the Washington Division I Court of Appeals said, “Municipalities must have express legislative authority to levy taxes.” That the Legislature has not repealed its prohibition against income taxes implies that the Council’s tax cannot stand.
The Take-Away: Self-interest is likely to prevail among King County’s many current and aspiring high wage-earners.
The Impact: Seattle’s income tax will be voided by the courts. No change to the State’s reliance on sales and property tax is on the horizon.
2. Seattle’s Housing Affordability and Livability Agenda
In August 2017, the City of Seattle extended its Mandatory Housing Affordability (MHA) ordinances to two more areas: Central Seattle, at three key intersections along 23rd Avenue; and in the Chinatown-International District. MHA is integral to the City’s Housing Affordability and Livability Agenda, billed as a “multi-pronged strategy for addressing housing affordability.”
Strategizing affordable housing is nothing new, but in past decades, the focus was on targets and voluntary incentives. These early strategies were subordinated to the design review process, which usually added costs through delays and was occasionally coopted to thwart affordable housing efforts. The MHA is a more aggressive approach designed to coax developers into providing affordable housing units. They must either design such units into their plans, or pay a fixed fee per square foot into a fund held by the City Office of Housing. The MHA is aiming to “provide at least 6,300 … new rent-restricted homes for households with incomes no higher than 60 percent of the area median income,” an ambitious goal in a city with escalating rents and home prices rising by more than one percent per month, according to Case-Shiller’s home price index.
Affordable housing is a worthy goal, and some developers will prefer to expedite their projects by meeting the MHA’s performance thresholds. However, prices are rising so quickly that the MHA payment option schedules may be insufficient to divert developers to the performance option. For example, within two blocks east and west of 23rd Avenue, one of the targeted areas, the median selling price year-to-date has been $440 per square foot. Yet the highest payment option charge scheduled by the MHA is $32.75 per square foot—less than 7.5 percent of the median selling price in that area, and less than seven months of price inflation at current rates.
The Take-Away: Prices are rising so quickly that the MHA payment option schedules may be insufficient to divert developers to the performance option.
The Impact: Developers in Seattle will generally prefer to maximize profits by opting for the payment option rather than the performance option.
3. Proposed New Tax and Restrictions on Short-Term Rentals
Over the past two years, as Seattle rents have continued to rise, short-term rental platforms like AirBnB and VRBO have found a new enemy: home affordability advocates. Earlier this month (September 2017), the Seattle City Council floated new rules to prevent residential investors from operating homes as hotels, imposing new tax and licensing requirements and limiting the number of rental properties to two per host.
The first opponents of short-term rental platforms were hotels operating in Seattle, San Francisco and other cities popular with tourists. They complained that hosts of these homes-for-rent were not subject to overnight lodging taxes and thus were undercutting their business. These concerns were allayed by local government action to subject operators to taxes: a 14-percent hotel tax in San Francisco starting in October 2014; and effective a year later in Washington State, a battery of taxes including special hotel/motel taxes, and convention and trade center taxes, in addition to the state and local sales tax paid by all retail businesses in the state.
Since then, hosts on the platforms have been marked as impeding affordable housing by buying up available homes for short-term rentals, removing them from the tenants’ market. Moved by these fears, the Seattle City Council plans to impose effective October 2018 an additional tax of $10 per overnight stay, the aforementioned limit of two dwellings per operator, and require purchase of a short-term rental operator’s license. Noncompliance will invite onerous penalties of $500 per day and $1,000 per day after ten days.
These disincentives will raise the risk of hosting short-term rentals, but will not necessarily leave these homes on the low-income housing market. The Council cannot prevent investors from buying properties for lease to higher-end tenants, or for that matter, keeping the properties vacant.
The Take-Away: These disincentives will raise the risk of hosting short-term rentals, but will not necessarily leave these homes on the low-income housing market.
The Impact: The short-term rental market in Seattle will be seriously damaged by the regulations. Hosts will prefer to invest in properties outside city boundaries.
4. China Common Reporting Standards Against Tax Evasion
[Disclaimer: the author is not a certified public accountant, and none of the following should be regarded as financial advice. Any reliance on this article is accordingly disclaimed. Consult a qualified professional before making any investment decision.]
In recent years, the U.S. has made enormous strides in tracing overseas tax evasion by U.S. citizens through enforcement of its Foreign Account Tax Compliance Act (FATCA). Not so with China; until now, the Middle Kingdom has been scarcely equipped to trace the foreign deposits and transactions of their own countrymen. China Common Reporting Standards (“China CRS”), intended to be interoperable with the equivalent OECD standards, are aimed at correcting this. Like the U.S.’s FATCA, the standards direct financial institutions in China to comply with due diligence procedures “to identify the tax residency of financial account holders, collect and record reportable information.”
U.S. citizens living in China will be aware that Chinese financial institutions have been complying with FATCA under an “agreement in substance” with effect from June 2014, due to an IRS threat to withhold payments to foreign financial institutions with U.S. account holders. In contrast, the U.S. has not honored its promises to partner countries to comply with CRS. What does this mean for foreign investors in the U.S.?
Some advisors have suggested to their clients that despite the extension of China CRS to progressively more countries, the lack of reciprocity with the U.S. makes this country a tax haven for Chinese nationals. This is not a scheme in which those investors should have confidence. The trend toward international monitoring of transactions and tax enforcement is inexorable, and involves governments worldwide. As Jinghua Liu, senior tax counsel at FenXun Partners in Beijing advises, “[I]t is not realistic for high-net-[worth] Mainland Chinese people to transfer assets to countries that have not joined the CRS, in order to circumvent the automatic information exchange.”
The Take-Away: The trend toward international monitoring of transactions and tax enforcement is inexorable, and involves governments worldwide.
The Impact: In the short term, Chinese authorities will remain unable to effectively monitor financial activity of Chinese citizens inside the U.S., but technology and international relations are likely to shape the longer-term outcome. Some Chinese investors in Washington State are at risk.
5. What’s Next for China’s Capital Controls
Last year, China’s State Administration of Foreign Exchange (SAFE) was prompted by a weakening yuan to “introduce” capital controls. Actually, what they did effective December 31, 2016 was to resume enforcement of existing prohibitions on forex transactions for the stated purpose of buying property overseas, and to prohibit the bundling of forex transactions for that purpose through the practice of mayi banjia (蚂蚁搬家, or “ants moving”). A recent twist has been the emergence of cryptocurrencies like Bitcoin for dodging the controls. This may well have been a factor in China’s September 2017 closure of their domestic Bitcoin exchanges.
China’s policy on foreign exchange and overseas transactions, like so much about China itself, is complex and multifaceted, the product of multiple aims and concerns. Most commonly stated is the need to maintain the value of the renminbi. There is also the essential political matter of social cohesion to be minded, which has resulted in President Xi’s anticorruption campaign. Inhibiting conversions of ill-gotten gains into overseas property is certainly an objective of this campaign.
There is also the wider aim of channeling investment into state priorities—China is still a planned economy with an industrial policy, as explained by Andrew Polk of Trivium/China, “First, China is not shutting down deals altogether—they are just trying to rein in what they see as ‘irrational investment’ … Secondly, [a]uthorities are zeroing in on areas like real estate, hotels, luxury, entertainment and sports teams for greater restrictions. They deem such deals as having no ‘national benefit.'”
In August, SAFE declared that “China’s economy has been performing well,” and that the stable renminbi exchange rate had made “domestic market participants more sensible in foreign-related transactions.” Yet be cautious. Such remarks by Chinese officials are characteristically opaque and need not portend change.
The Take-Away: China’s policy on foreign exchange and overseas transactions, like so much about China itself, is complex and multifaceted, the product of multiple aims and concerns.
The Impact: China will continue to restrict investment in overseas properties for the duration of the Xi Presidency, although Chinese investors in Washington State and elsewhere will continue to find workarounds.
6. The EB-5 Visa Program
Popularity of the EB-5 investor visa program was boosted by the onset of the financial crisis in 2008. The program grants visas to investors at a threshold level: $500,000 for investors in a targeted employment area (TEA), either a rural or economically distressed area with high unemployment; or $1,000,000 outside of such areas. In either case, the investment must be into a new commercial enterprise that adds ten new jobs to the economy. Submission of petitions through “regional centers” authorized by the USCIS allow indirect as well as direct employment to be counted in the application. There are currently 63 authorized regional centers in Washington State.
Though it attracts qualified immigrants and their capital to the U.S., critics have branded the EB-5 program as a kind of citizenship for sale. This is inaccurate in respect of the U.S. program, which is centered on job creation and requires far more engagement from petitioners than investor visas in Canada or Australia, which only required commitment of funds. The program once again has been renewed until December 8, 2017, but support in Congress is not as vocal as for the high-profile DACA program benefiting undocumented immigrants. The hesitance is described by Suzanne Lazicki at her EB-5 blog:
EB-5 has an awkward position, politically. When the right likes investment but is queasy about immigrants, and the left is just the opposite, what’s the future of immigrant investment?
Even implementation details are held hostage to this uncertainty. The applicability of indirect job creation through regional center filings depends on occasional extension of the sunset date for those provisions. Despite the emotional cliffhanging upon each extension (when coincidentally, petitions tend to surge), those provisions have been regularly extended. Against all these worries, the EB-5 program has prevailed year after year, and should continue to do so.
The Take-Away: Despite the emotional cliffhanging upon each extension [of regional center provisions] (when coincidentally, petitions tend to surge), those provisions have been regularly extended.
The Impact: Not only will the EB-5 program survive, it will become increasingly relied upon for capital infusions into rural and distressed areas of the U.S., including areas of Washington State.
7. The H-1B Visa Slowdown
Controversy has bedeviled the H1-B visa program for decades. It especially draws the ire of native-born U.S. tech workers, who—not without cause—believe their jobs to be at risk to virtual workers from overseas.
Lately, this issue has gotten caught up in the brewing war between politically entrenched high-tech employers like Microsoft and Google, and economic nationalists. Since the November 2016 election, the Executive Branch has been challenging visa applications, notably H-1B petitions. The President has called for the program to benefit only the highest-paid workers, though he hasn’t yet introduced any reforms.
From January through August 2017, the USCIS challenged 85,000 petitions through “requests for evidence,” a year-over-year increase of 45 percent. These challenges can delay visa issuance by months. Moreover, the number of H-1Bs issued grew by less than three percent.
U.S. Rep. Pramila Jayapal of Washington’s 7th Congressional District is an ideal example of the path to citizenship preferred by some H-1B visa holders. In an August 2017 interview with The Hindu, she observed that “not all of the H-1Bs, but a small portion of people who come to the U.S on H-1B … decide to stay. In fact, that was my situation. I went on a student visa, then I was on H-1B, and then I became a permanent resident.”
For Washington’s high-tech employers and others from the center to the postmodern left, the H-1B program enlarges the labor pool and is ideologically satisfying. For high-tech labor and economic nationalists, the program introduces unneeded competition that dilutes wages and opportunities for local workers. This is a contest of perspectives in which H-1B employers have steadily held the field, until now.
The Take-Away: This is a contest of perspectives in which H-1B employers have steadily held the field.
The Impact: The H-1B program is likely to be sustained in the short run, but with delays. The long-run result (i.e., post-2020) depends on national political outcomes. The impact on individuals is greater than the impact on Puget Sound employers, who can attract replacements from among U.S. citizens nationwide.
8. Chinese and Other Foreign Students in the U.S.
The University of Washington is among the world’s most successful in attracting foreign students. However, UW was one of the six out of twenty colleges and universities surveyed by VOA Student Union to report declines in foreign student applications earlier this year (2017). In 2014, the last year for which statistics were reported, 3,845 (52.7 percent) of the UW’s 7,299 foreign students were from China.
As for high schools, an August 2017 report by the Institute of International Education (IIE) shows that “Chinese students make up 42 percent of all international secondary students and increased 48 percent from 2013 to 2016.” Parents sending children to U.S. secondary schools aim to avoid the gaokao and obtain their admission to Western universities, hoping to guarantee their success in China or abroad.
In a published counterpoint to John Pomfret’s alarm-raising report about Chinese students at U.S. colleges, Lawrence Kuok of Microsoft disputes Pomfret’s thesis. Kuok advises, “Admitting more Chinese students to American universities means that many great minds will try to stay in the U.S. and work at American firms with American direction, and not go back to China to work at Chinese firms. This strengthens American companies and, in turn, America.”
More of them are choosing to opt out of the American dream. Chinese government sources report that over 82 percent of students abroad returned to China in 2016, up from 72 percent in 2012. A Chinese state researcher said that “returning students had more resources and better networks in China to find a job, while Chinese students in the U.S. were dependent on 20,000 H-1B visas for tens of thousands of students.” Yet even if only 10 or 15 percent of students in such numbers remain annually, ample benefits of their employment transfer to the U.S. domestic and state economies.
The Take-Away: Parents sending children to U.S. secondary schools aim to avoid the gaokao and obtain their admission to Western universities, hoping to guarantee their success in China or abroad.
The Impact: The University of Washington and many leading Puget Sound area high schools will continue to draw foreign students from China and other countries of origin. The student visa program is not under the same threat as the H-1B program.
9. The City of Mercer Island’s September 2017 Code Amendments
Prompted by complaints from residents, the City Council of Mercer Island acted on September 19, 2017 to preserve views and the character of Island neighborhoods. Among other provisions, their code amendments restrict the buildable footprint to 40 percent of each lot, reduce allowable height from 35’ to 30’, increase side setbacks to 17 percent for wider lots, and require that 30 percent of large trees be preserved on developed lots.
As the Seattle Times reported, Mayor Bruce Bassett and City Planning Manager Evan Maxim “said the city tried to strike a balance between critics of the changes and those who wanted to limit home sizes even more. Officials will be reviewing the effects of the changes every few months … Carolyn Boatsman, one resident pushing for the changes, said she was glad the house sizes were reduced, but did not think the council went far enough, particularly on height limits.”
Concern remains that the more urbanized cities on the Eastside, such as Bellevue, lack any comparable restrictions; and that luxury buyers will be turned away from Mercer Island by these new rules. However, in other municipalities that still offer abundant waterfront access and a small-town vibe, residents may find in the new code provisions a model to be imitated. Those prospects may be highest in areas farthest from the urban centers.
The same approach to development need not apply in every community, though residents in most urbanizing neighborhoods may find that the Chinese idiom applies: the tree may prefer calm, but the wind will not stop (i.e., change is relentless).
In the council decision’s wake, Marc Rousso, co-owner of homebuilder JayMarc, sounded a conciliatory note: “Big houses, small houses, lifers and newcomers, together our opportunity is to come together as one to keep the door open to growth and vibrancy.”
The Take-Away: The same approach to development need not apply in every community.
The Impact: Local ordinances favoring preservation of views, foliage, and open space will spread among the outlying communities (e.g., the San Juan Islands, Kitsap County), but Mercer Island will remain an outlier in the Central Puget Sound corridor.
10. Taxes on Non-Resident Homebuyers and Investors
It has been 14 months since the BC government imposed a 15 percent transfer tax on purchases of property by foreign buyers in the Lower Mainland. The initial result was a plunge in purchasing contracts, although it was noted at the time that sales had already slipped in the four months before the tax was imposed. Within a few months more, Vancouver’s market rallied, and sales were above the ten-year monthly sales average by July 2017.
Real estate finance professor Andrey Pavlov at Simon Fraser University said that “in all likelihood [prices] would have been even higher without the tax.” Yet he and other experts agreed the tax was politically driven and a principal cause of high prices in Vancouver—the lack of supply in the region—remains unaddressed.
This is an important lesson to be learned by officials who are tempted to try this scheme elsewhere. Observers note that in Washington or any other state of the U.S., “even if authorized, a foreign buyer tax could be susceptible to federal constitutional challenges related to either the 14th Amendment Equal Protection doctrine or right-to-travel and the Commerce Clause.”
Other means might still be employed to tax purchases by non-resident buyers. These could include taxes imposed generally with exemptions for proof of occupancy, such as the vacancy tax imposed by Vancouver last November. The idea of a vacancy tax appeared to be a point of agreement between mayoral candidates Jenny Durkan and Cary Moon in their first debate on September 12, 2017.
However, public officials in Puget Sound and statewide are well aware that focusing on a foreign source of funds, a lack of citizenship, or certainly a buyer’s national origin is a nonstarter here or anywhere else in the country for controlling the trajectory of home prices.
The Take-Away: Other means might still be employed to tax purchases by non-resident buyers.
The Impact: There is no political will, nor any legal basis, for a tax on foreign buyers in Washington State or anywhere in the U.S.
About William Hillis:
An Anacortes-based broker and research editor with Realogics Sotheby’s International Realty, William Hillis specializes in assisting transition buyers, using his firm understanding of nuanced markets to work as a true advocate for his clients. He is regarded by industry professionals as a team player with impressive research skills and the ability to successfully analyze situations.
Over a decade of experience in market due-diligence and local government, combined with William’s insight into data analytics and strategic use of social media, are strong assets for his clientele. William’s clients further benefit from his background in local government housing policy, university coursework in land use and preservation, in addition to advanced professional training in appraisal including the income approach.