San Jose officials propose new property transfer tax for affordable housing

San Jose lawmakers next week could approve drafting an affordable housing tax ballot measure for the March 2020 ballot, another step to help raise revenue to tackle Silicon Valley’s growing housing and homeless crises.

According to a new memo, the city manager’s office is recommending a real property transfer tax, which would apply to the sale of properties valued at $2 million or more. The decision to pursue a real property tax comes after city polling earlier this year revealed waning support among voters for any more tax increases from general obligation bonds.

City officials estimate that only 5 percent of all single-family homes, condominiums, and townhomes in San Jose will be affected, primarily the sale of commercial and industrial buildings.

The revenue generated by the tax will go into the city’s general fund, which can be used for any purpose the City Council sees fit, but will primarily be used to increase the city’s affordable housing stock and fund city-led programs that provide crucial social services to the unhoused community.

“In addition to increasing housing production, meeting the needs of more than 5,000 individuals who are unsheltered by scaling services such as shelter, case management and street-based connections to services is critically important,” wrote Lee Wilcox, chief of staff to the city manager, in the memo. “The goal is to obtain additional funding that is able to address the need for affordable housing and the high rate of homelessness and be flexible enough to address emerging needs. ”

Michael Lane, deputy director at Silicon Valley at Home, said the proposed real property tax is a “progressive” solution that wouldn’t be a strain to taxpayers, considering its purpose is to tax the wealthiest residents and corporations — unlike sales tax increases which affect everyone and usually hurt lower-income residents more.

“Most of the voters would never pay this because it is progressive, so the most expensive properties will pay a higher tax,” said Lane. “It’s very targeted and I think it’s addressing the concerns of voters and the council to bring the best policy proposal forward that will generate the sufficient revenue, without being a tax burden to our residents.

“It’s also making sure that the corporate sector is paying its fair share and participating in the solutions,” he added.

In a split vote back in June, lawmakers approved moving forward with researching the potential real property transfer tax for the ballot measure after studying three other measures, two of which were general obligation bonds — a popular option in Silicon Valley — while the other was a real property transfer tax. The city surveyed 1,251 registered voters and found that the real property transfer tax fared best, as it was the only option that reached a voter threshold needed to pass.

But not everyone is on board, particularly Councilmember Johnny Khamis, an outspoken critic of piling more taxes on the city’s residents. In an interview with San José Spotlight, Khamis staunchly opposed supporting the potential ballot measure, calling it a “punishment” to those who consider selling their homes. The councilman confirmed he would vote against it again.

“In the end, people are going to be paying these exorbitant exit fees for leaving the area, making it more difficult to go from one house to another,” Khamis said. “It will make people think twice about selling their homes. This is not the way — we’re already being taxed too much and this is just a punishment for considering leaving.”

According to information from Khamis’ office, voters in recent years have approved 17 measures to raise taxes in one form or another, including Measure A in 2016, a $950 million affordable housing bond.

But advocates of the tax, including Mayor Sam Liccardo, have said the city needs to be open to exploring all options in order to meet the mayor’s ambitious housing production goal of 10,000 new affordable units by 2022. As an analysis from this news organization recently found, the city is woefully behind on that goal.

“What I’m concerned about is forgoing options and tying our hands and closing off options when we should be asking questions and gathering information,” Liccardo said at June’s City Council meeting.

Lane said the potential ballot measure is a surefire way to provide funding for the city’s housing goals and to help restore much-needed funds to the city for constructing affordable housing. After redevelopment agencies were eliminated in 2011, Lane said the city hasn’t recovered from the loss of state funds for affordable housing.

“In the 2000s, San Jose produced around 1,200 affordable homes a year for a decade. And then in 2011 the state of California eliminated redevelopment agencies at the local level, which was really the key source of funding for the city of San Jose and allowed them to be productive and produce so much affordable housing,” Lane said. “Since that time there’s been no replacement of those funds, and that’s really the kind of funding that you need year over year to be able to develop a robust pipeline.”

But Councilmember Sergio Jimenez, despite his progressive stance on most issues, also raised concerns about raising taxes — perhaps one of the few policy issues that both he and Khamis agree on — saying residents have been hit “time after time” with new taxes.

But, Jimenez added, he’d be open to supporting the measure knowing that it would only affect a small percentage of people.

“I don’t want the full burden to be on the residents. I think we would all agree that they’ve been hit time after time with taxes — I’m sensitive to that,” Jimenez told San José Spotlight. “But if it only impacts a smaller number of people and generates money, I’m open to exploring that.”

City leaders worried another bond initiative wouldn’t be well received by voters after the defeat of Measure V, a $450 million general obligation bond to fund affordable housing and renovate existing low-income units, failed last year by a slim 2 percent of the two-thirds majority needed.

The potential tax to be discussed next week only needs a simple majority to pass. San Jose would join many other Bay Area cities in implementing such a tax, including San Francisco, which passed their tiered transfer tax in 2016. Oakland, Berkeley, and Richmond followed suit in 2018, but only Berkeley uses the tax revenue for homeless services – the remaining cities did not specify a purpose for the funds.

But unlike those cities, San Jose’s tax would be much lower, starting at $3.75 per $500 of transfer value from $2 to $5 million, 5 per $500 of transfer value from $5 to $10 million and $7.50 per $500 of transfer value for transfers more than $10 million.

Oakland and San Francisco’s tiered rates begin at $10 per $1,000 for up to $300,000 and $5 per $1,000 for up to $250,000, all of which increase incrementally.

The tax can be either split by the buyer or seller, or paid in full by one party when a property is sold or transferred. Certain sales, such as those due to divorce, inheritance, gifts and specific government transactions, would be exempt from the tax.

The tax increase would raise about $70 million each year, according to city officials.

Jimenez said the decision ultimately is in the hands of voters.

“We’re just voting to put this in front of the voters — we’re not imposing taxes on anyone,” Jimenez said. “We’re putting it on the voters so they can decide if they want to put taxes on themselves.”

The City Council will vote on moving the potential measure forward for the March 2020 ballot at its Nov. 19 meeting. If approved, staff will return to the council by Dec. 3 with a draft for approval.

Contact Nadia Lopez at [email protected] or follow @n_llopez on Twitter.