The City of Olympia is considering expanding the 8-year Multifamily Tax Exemption (MFTE) program. This optional program offers developers a pass on paying property taxes for eight years. Disturbingly, it wasn’t until recently that the City Council realized that the city didn’t lose a single dime in revenue from this gift to developers.
It is now clear that the City replaces the revenue not charged to the developers with checks drawn to your bank account. How does that happen? The city can raise everyone else’s property tax rate to make up for the gift to the developers. The Commerce Department calls it a “Tax Shift.”
Due to this shift, an Olympia homeowner with a $560,000 house pays about $93 more each year on their property tax. In total, almost $2 million a year will be shifted to the non-exempt properties (i.e., the rest of us) in 2023.
While the 12- and 20-year MFTE options provide some public benefit of affordable housing, the eight-year MFTE is explicitly designed to have no requirement for affordability.
If the Council proceeds on its current trajectory to expand the 8-year MFTE, that $2 million a year could be greatly expanded, allowing the tax shift to grow many times over. The City is looking to expand the MFTE to larger areas in East and West Olympia (especially in the Capital Triangle region) and to six proposed Neighborhood Centers.
Olympia’s use of the eight-year market rate MFTE program is the exception for local governments in Thurston County. Up to 2022, only Olympia offered any MFTE and all but one of the 11 were for the eight-year market rate program. Only one developer used the 12-year MFTE: That was for an 80%-affordable housing project along Martin Way, miles from downtown.
In 2023, Tumwater granted two exemptions but only for the 12-year MFTE program that requires 20% of units to be affordable (between 80% and 115% of the Area Median Income $83,358). Lacey granted its first exemption this year.
Unlike the 12-year program, the eight-year exemption is for market-rate housing (charging rents as high as the market will bear) with no affordability requirement. Recently, the legislature created a new option for government entities and non-profit developers. They can get a 20-year exemption if they comply with more stringent affordability requirements.
The City does not forgo any revenue by giving developers/investors the exemption. Rather, the way tax rates are calculated, the revenue loss from the gift to the developer is automatically made up by a shift to property owners and businesses through an increase in the tax rate to be paid by everyone else.
The current $2 million tax break for developers translates into a $0.17 increase in the tax rate (property taxes are usually displayed as an amount per $1,000 of assessed value). Realtor.com shows the average listing price for homes in Olympia in 2023 is $560,000. Using that number, at 17 cents per thousand dollars of assessed value for a $560,000 home results in an increase in taxes of about $93.00 due to the city’s MFTE program.
Again, the developers pay less, you pay more, and the city is held harmless.
The City apparently has begun to recognize the warning given to them by the Department of Commerce’s Fact Sheet (“Short Guide for Councils and Stakeholders, What is a Tax Shift?”) that “Communities may be less likely to support incentives for market-rate development that use property tax increases, especially for high-end projects that do not seem to provide public benefits”.
To provide a hint of public benefit, the city is considering requiring any new recipients of the 8-year MFTE in the Downtown and East Olympia areas to retain only 95% of the tax exemption. The nickel back on each dollar of the value of the gifted property taxes and donated to help fund affordable housing (though the developer may get federal tax credits as a charitable donation). If the developer is part of the Westside Mall “Triangle” area, the fee would be 25%.
This is a City/Developer collaboration in “Social Washing.” Could there be a better example of our unfair tax system than a program for rich developers to get 95 cents on the dollar while tossing a nickel back to those who truly need the break?
Clearly, if Olympians knew how this giveaway worked, they would want every penny to go to improving housing affordability.
Last year the City shifted nearly $2 million in taxes from MFTEs beneficiaries to the public. That is approximately the same amount of money collected by the voter-approved Home Fund of which 100% goes to housing affordability. With the expansion of the MFTE, homeowners might be on the hook for a much larger amount. No estimate has been made but the city is projecting that there might be 1,500 to 3,000 units alone in the Capital Mall Triangle area. If so, the total tax shift to you may be many times the current $2 million.
The City has paid for a consultant to do an unreal-world analysis demonstrating that without the tax break no developer would ever build here. In turn, the city subscribes to the failed “trickle-down” economic theory of supply-siders that more housing at any price point will force down housing and rental costs. That’s right, under the Council’s logic, a gilded tower built for the rich should get 8-tax free years at the public’s expense because it will, based on their consultants' circular reasoning, lower the cost of housing for everyone.
The analysis done by the city-hired economists is unconvincing. Relying on a theoretical modeling and questionable application of “Residual Land Value,” they never even looked at the facts on the ground here in Olympia and concluded that but for the MFTE, investors would not build in Olympia’s downtown.
The real-world facts contradict their “findings.” According to the Thurston County Tax Assessor, the eight market-rate MFTE buildings in place since at least 2021 increased their market value by $97.4 million. In just three years, the value of these tax-subsidized private sector market rate investment buildings increased from $78.7 million to $176.1 million. That is a 129% increase in the asset value of these properties!
In the above example (see photo), the assessed value of 500 Columbia Place LLC's Harbor Heights building increased by $39 million from 2021 to 2023.
Had the MFTE not been in place, their gain would have been 116%. What investor would reject more than doubling the value of their asset? The consultants’ recommendations required ignoring what actually happened to the properties granted exemptions and, instead, they chose to use theoretical models of prototypical developments along with logical fallacies and tenuous assumptions. Like the RFA consultants, they came up with arguments that seem to be designed to forestall questions rather than engage and educate.
The Department of Commerce’s Fact Sheet also states: “Shifted tax obligations are not usually calculated, meaning that the full impacts of this program may not be transparent, especially to affected property owners”.
The Commerce Department flyer is saying to Councils and stakeholders that the public is not likely to want to pay higher taxes to benefit market-rate housing but don’t worry too much -- the property owners are unlikely to know they have been stuck paying the bill.
But now, having read this, you do know.
Tell the City Council whether this eight-year, market rate program reflects the values you wish to subsidize.
Larry Dzieza is a former budget director and budget analyst for multiple state agencies. For several years he also served as an adjunct professor teaching budget and finance and “digital government” at The Evergreen State College Master of Public Administration graduate program. He teaches budgeting and strategic planning at the University of Washington Tacoma’s Certified Public Manager Program.
The opinions expressed above are those of the writer and not necessarily those of The JOLT's staff or board of directors. Got something to say about a topic of interest to Thurston County residents? Send it to us, and we’ll most likely publish it. See the Contribute your news button at the top of every page.
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OlympiaUsedToBeANicePlaceToLive
Alas, all the Olympia council seems to want to do is funnel taxpayer money to special interests, especially developers. Don't see that changing soon - it has been the same for 25 years.
Monday, June 26, 2023 Report this
sunshine39
Another great informative column
Helpful, and Thank you
Tuesday, June 27, 2023 Report this
zingZap33x
Kind of a Robin Hood in Reverse robbing from the public, many of whom are just making ends meet or are on fixed incomes, to give to wealthy developers. Every incremental tax increase puts more people on lower or fixed incomes closer to not being able to stay in their homes because property taxes are too high. Higher property taxes also get shifted to renters in higher rents. The City of Olympia says it is concerned about affordable housing, but actions speak louder than words. And they always give breaks to developers. Additionally, in the works the City plans to spend million to defend Downtown from sea level rise. It looks as if they will make the public foot the bill to defend all those fancy Downtown apartments that just got the MFTE.
Tuesday, June 27, 2023 Report this
jhender
Great, well written, well reasoned article! This is what I subscribe and donate to The JOLT for.
Tuesday, June 27, 2023 Report this
Larry Dzieza
Good point Jhender. Yes, renters, including low-income renters, will be paying more thanks to the city's gifts to wealthy developers.
It is kind of a reverse targeting of social benefits in that it zeros in on giving undeserved benefits to those who do not need it and while taking from everyone else.
Tuesday, June 27, 2023 Report this
Southsoundguy
Larry, what does supply side economics have to do with this? That is a canard. This isn’t about generating more tax it’s about driving development to get more housing product to deal with an alleged housing shortage. The more people whine about “rich developers,” the less effect anyone will have in eliminating these tax programs. The real problem with these is that they lead to over building and ugly buildings.
Wednesday, June 28, 2023 Report this
Larry Dzieza
Dear Southsoundguy,
Your point, as best as I can discern it, is that you agree with supply side economics generating more housing and that when the market becomes distorted by the government subsidy, over supply will occur. That is exactly what the city believes too. The over supply will drive prices down is their theory.
I framed it as: "The city subscribes to the failed “trickle-down” economic theory of supply-siders that more housing at any price point will force down housing and rental costs."
I don't subscribe to that theory. The City's purely theoretical snow globe view of supply and demand doesn't survive contact with reality.
The incremental incentive from the tax subsidy applied to the VERY small market of Olympia is absurd. We live in a big housing market cachement. There are people moving here from California, Oregon and many more from Tacoma and Seattle looking for high-end multi-family units and single family homes that Olympia's "lower cost" housing costs looks like in comparison to the housing markets they come from. They are driving up costs for housing here and this was accelerated when COVID made remote work more common.
The tax breaks will make no meaningful contribution to lower housing costs due to the small incentive's effects on inducing more construction. Especially for the higher-end market which is what the 8-year MFTE is all about. They will make the current residents pay more for the taxes on their homes and indirectly, the rentals to cover the costs from the gift from the city.
I can't really comment on the ugly buildings but I get that some can be seen that way. But from the inside looking out, I will say that the building i used as an example looks fabulous. You can check out around 60 pictures here: https://www.zillow.com/apartments/olympia-wa/harbor-heights-55%2b-community/9VdPq3/
Thanks!
Wednesday, June 28, 2023 Report this
Tom_Hyde
This is the clearest summation of the issue I’ve seen.
It would be great if JOLT did an expanded in-depth news story, or series, on this with an expanded range of viewpoints from multiple stakeholders (including taxpayers of course). While I appreciate such a clear Opinion piece, I think an actual news article with an investigative bent and objective analysis would be just as valuable, if not more.
That takes resources, of course, but I would donate to specific coverage of topics (in addition to general support of JOLT) that delve deep into some of the more debated and complicated civic issues in the community (MFTE, Port of Olympia marine terminal, etc) that cannot be sufficiently illuminated by coverage of meetings or opinion pieces. I believe this approach has been taken by other similar news outlets across the country in recent years. Might be worth a look.
Wednesday, July 5, 2023 Report this
Southsoundguy
Larry,
My issue is using trickle down economic as a bogey man. You are mischaracterizing it. Read Thomas Sowell’s short essay on the topic.
Wednesday, July 19, 2023 Report this