As the Ocean State’s so-called “Taylor Swift tax” is poised to go into effect this July, observers agree that for Rhode Island’s wealthiest homeowners, the levy doesn’t exactly break the bank.
But beyond that, they’re split on whether the legislation, which is intended to ameliorate the state’s affordable housing crisis, will significantly impact Rhode Island’s luxury real estate market.
The law, officially called the Non-Owner-Occupied Property Tax Act, imposes an additional $2.50 surcharge for every $500 of a home valued at least $1 million that is not occupied year-round.
To put it into Swift terms: the megastar performer purchased a waterfront Westerly mansion for $17.75 million in 2013. Under the tax, Swift, whose net worth is valued at more than $2 billion, would pay an additional $136,400 per year on the property.
Tax revenue will be allocated to the state’s Housing Resources and Homelessness restricted receipt account.
Issa Ramaji, director of the Cummings Institute for Real Estate at Roger Williams University, anticipates that it’s a cost that wealthy homeowners will absorb without too much fuss. He says the effects on real estate sales will be minimal.
“In the short-term, you might see a little bit of a dip in the high-end, luxury real estate,” Ramaji said. “But in the long term, [the market] will just follow the normal curve.”
While Ramaji sees pros and cons to the legislation, he says that tax contributions to housing affordability ultimately tip it into a positive for the state.
High-end real estate agents say they aren’t convinced.
Paul Leys, broker and co-owner at Gustave White Sotheby’s International Realty in Newport, says the tax could have broader financial impact on the state if it deters wealthier homeowners from buying Ocean State properties.
“I certainly don’t see it helping the luxury real estate market, or even the regular real estate market,” Leys said. “We talk about houses over $1 million, and that’s a lot of houses in Rhode Island these days” with rising values across the board.
During a weekly office meeting, an agent recently reported that a buyer had disclosed “they’re not looking in Rhode Island anymore because of this tax,” Leys said.
“I was pretty amazed,” he said. “I wasn’t expecting to hear that from one of my agents, but I did. It’s rather telling.”
“Those investors, they’re really savvy” and may be conscious of even a non-substantial cost increase if they can save money buying in another state, Leys said.
But amid a hot real estate market, Leys doesn’t anticipate the tax will push established property owners out of the Ocean State.
“Theoretically, you might see [home] values going down a little bit,” Leys said. “But if cost of living is going up, and right now we’re still experiencing a lack of inventory, that’s keeping the prices higher in Rhode Island and Newport County.”
Michael Pereira, a real estate agent and president of the Rhode Island Association of Realtors, also harbors concerns.
“I understand that we do have some wealthy people who have vacation homes in Rhode Island,” Pereira said. “But in Rhode Island, $1 million ... could be a three-bedroom ranch in Narragansett that’s been passed down for generations.”
Pereira says he wouldn’t necessarily support the legislation even if it did have a higher cut-off. Instead, he says, he’d like to see legislators focus on simplifying the permitting process to ease in the creation of new housing.
“We appreciate the efforts our legislators are making to try to curb the housing affordability crisis, but I don’t think this is it,” he said.
Pereira does see potential for long-term effects on value, but he doubts listing prices will shift much in the foreseeable future. Wealthy property owners also have resources to contribute significantly to the state’s economy, he says.
And some observers say that even if the tax isn’t a dent in wealthy residents’ wallets, the concept alone is enough to irk property owners, potentially discouraging them from buying property in the Ocean State.
“It’s not that they can’t afford the fee,” said Maura Dowling, a senior lecturer of finance at Bryant University. “But everyone feels ‘nickel and dimed,’ and they hate it. There’s a psychological component.”
Ramaji says that while some may be upset, he doesn’t expect most property owners will take dramatic actions based on the tax.
“There are definitely going to be some owners reacting negatively to this, but I don’t think that will be a higher percentage of luxury property owners in the state,” Ramaji said.
Conversely, Ramaji says, the legislation could encourage more luxury homeowners to establish a full-time presence in the Ocean State, ultimately spending more of their money in Rhode Island.
Dowling said the state needs to acknowledge and address its affordable housing crisis as a humanitarian issue, but she called the tax “a Band-Aid.”
Housing advocates say that any and all financial resources are needed to close the glaring affordability gap.
“A dedicated funding stream that regularly goes to producing more units – especially affordable units – is a good use of dollars,” said Brenda Clement, director of HousingWorks RI at Roger Williams University. “The people who are cleaning their houses, mowing their lawns, or providing services, working in local retail places and coffee shops in their communities – where are those people going to live?”
Ramaji says that while the additional revenue can aid in the affordable housing crisis, state leaders need to see the effort through in the details.
“The key is execution,” Ramaji said. “Once the revenue is made, what will be the structure of spending this money on affordable housing, and how will the money be directed towards that?”
