Taxes are an effective tool for public policy to incentivize desired actions and disincentivize undesirable ones. From an affordable housing point of view, properties sold for high prices generally increase nearby values, driving up annual tax burdens; properties sold as non-primary residences reduce the supply of homes for ownership and thus increase prices for those desiring to live in an area; properties held for short-term speculative gain hurt affordability efforts; and high annual taxation rates raise ownership costs. Taxes and fees can be charged on both transfers and annual ownership in ways that make long-term ownership of modest homes easier to afford. Making costs lower for needed affordable homes necessarily has to be offset by increases on some other tax or fee (assuming government budgets are stable).
Both Vermont and New Hampshire tax property annually as well as at time of sale, but they do so differently. Annual property taxes affect affordability and can be constructed to provide relief to lower income property holders or on property with affordability restrictions. Similarly, transfer taxes can be lowered for affordable development meant for longer-term primary ownership, and raised for non-primary or speculative ownership. Such transfer taxes may deter some sales, but mostly this is a revenue source that can be used to address affordability.
Property transfer taxes are paid at time of sale. In New Hampshire the buyer and seller equally split the flat 1.5% transfer tax on the purchase price (assuming fair market value). In Vermont, the buyer pays the tax, and it is paid differently whether it is a primary residence and whether a VHFA/USDA loan is involved. A primary residence in Vermont pays at a varying rate – 0.5% on the first $100,000 in value and then 1.45% (really 1.25% transfer tax and 0.2% clean water fee) on the remaining value. Properties other than a primary residence pay the 1.45% on all value. The tax in Vermont can be lowered for those using VHFA/USDA financing to no tax on the first $110,000 in value, 1.25% on the value between $110,000 to $200,000 and then the standard 1.45% for any value over $200,000.
Tax rates in Vermont differ based on whether the property is a residential ‘homestead’ or not. Neither state makes a distinction for developed property in terms of transfer tax rates as to how long the property has been held. However, for undeveloped land, Vermont does have a land gains tax that applies to land held less than 6 years and subdivided, except in more dense areas, including land transferred in a ‘downtown development district’, a ‘village center’, ‘growth center’, or ‘new town center development’.
Both states also have tax relief programs for undeveloped lands meant to incentivize long-term use for farming and forestry. Vermont’s Current Use program requires at least 25 acres of undeveloped land and does not change land valuation, but essentially subsidizes owners of such parcels by paying most of their property taxes from state funds. New Hampshire’s Current Use program requires 10 acres of undeveloped land and actually assesses the land at a lower value. Both states have penalties for removing land from these tax programs, 10% of the market value in New Hampshire and the same in Vermont, except 20% for land held less than ten years. In areas where land prices have risen substantially, these penalties are marginal compared to the gains that can be made from land sales and the tax savings over time.
Vermont also provides property tax relief based on income, in the form of a tax rebate, for ‘homesteads’, primary residences and the surrounding land of 2 acres or less.
Changes to both states’ taxing structure to advance affordability are recommended, but due to the complex nature of such programs, only general recommendations are made below.
Make transfer tax progressive and direct to the housing problem
- Vermont’s transfer tax is already progressive, in that it taxes higher value sales at higher rates, but it could be more so by adding an even higher rate for residential sales above some value (for example $500,000).
- New Hampshire’s transfer tax has no progressive component, and so could be structured like Vermont’s to have different tiers and different rates for primary and non-primary residential sales.
- Both states could offer better transfer tax rates on ownership and rental properties that have affordability covenants.
- Use Transfer tax proceeds to address housing needs. Vermont does direct some transfer taxes to affordable programs and planning, but this is typically adjusted in each year’s budget.
Make annual property tax more progressive
- Annual property taxes could be lowered based on income in New Hampshire along the lines of Vermont’s property tax rebate program.
- Vermont could simply move to more income taxes and less property taxes (since that is what it effectively does now).
Incent safe housing through a staggered tax on improvements
- Both owned and rental properties could benefit from investment that improves accessibility, creates accessory dwelling units, reduces mold and lead, provides modest improvements in quality of condition, and reduces energy costs. However, these improvements can immediately increase the value of the structure and thus increase annual property taxes, at the same time when the owner has just spent funds on the improvements. Rather, taxes on the increase in value could be staggered so that their full value is not taxed right away but ramps up over time (5-10 years). This could be done at the state level or enabled as an opt-out local option for municipalities that provide other affordability incentives and rely on increased property tax from such improvements to fund them. Care also has to be taken to structure such relief so that incentives do not simply subsidize creation of short-term rentals and ‘flipping’ properties.
Make conversion of land more expensive
- Much of the needed housing can be built inside existing structures or on previously developed land. Developing raw land has a variety of negative impacts (poor use of infrastructure, habitat loss, increased road budgets, impervious surfaces, etc.) However, there does exist some raw land adjacent to or inside developed areas. Creating a fee for developing undeveloped land outside of core areas can incent better reuse of existing land and be a revenue source for infrastructure in core areas. Core areas could be defined by local zoning, comprehensive plans, or other measures, provided they do not simply define the entire town as a core area. Using infrastructure such as public sewer and water service to define core areas is problematic as it would leave out most small villages that lack these.
Restrict conversion to non-primary residential
- Both states have large vacation property segments of their housing stock, but conversion of existing primary stock (owner-occupied or long-term rental) to second homes or short-term rentals is eating away at the supply of affordable homes. Annual property tax rates could be adjusted so that converted sites pay a higher rate as well as transfer tax rates could be increased. Vermont has the beginnings of this for transfer rates, but this could be much more progressive. Municipalities could also be clearly enabled to restrict the conversion to non-primary in zoning and to limit location and total number of short-term rentals.