Government and Industry Affairs Update - February 2024

On Wednesday, January24th several BOMA Members traveled to Olympia to meet with lawmakers about proposed legislation that would impact commercial real estate should they pass into law.

center: Secretary of State, Steve Hobbs

Below is information about these proposals and their current status in this year’s 60-day legislation session which is scheduled to end March 7th.

Key BOMA Issues in the 2024 Legislative Session:

4 key tax issues:

1. Real Estate Excise Tax (REET/RETT) H 2276/SB 6191- a bill that would raise the transfer tax from 3% to 4% for sales above $3 million and lower it for sales below $500k. [BOMA continues to advocate against this ill and since it has been designated as “essential to implement the budget” means it can be active until the last day.]

2. B & O tax on rent and Leases (SB 6136) – a bill that would unconstitutionally (state of Washington) require all property owners to decide between paying B&O tax (1.5-1.8% of gross receipts) or agreeing to rent control. The rental control portion was dropped in favor of just the B & O tax proposal. The tax on residential rental property would if passed, begin January 1, 2025. The tax on commercial rental property would begin January 1, 2027 [We believe our advocacy and testimony at hearings in Olympia on behalf of BOMA Members and the CRE industry has contributed to the likelihood that this bill will not survive, but it is technically alive to end of session]

3. Property Tax (SB 5770) – a bill that would raise the annual limit on state and local portion of the property tax from 1% to 3% based on CPI. [This bill has stalled and will not go forward this session]

4. Capital Gains Tax (SB 5335) – a bill that would raise the Capital Gains tax from 7% to 8.5% and would add real estate gains to the tax. [Dead – bill did not advance]

Further detail:

HB 2276/SB 6191 – Increasing Taxes on Real Estate Sales (REET/RETT)

Increases the tax on the sale of property over $3M by adding a 1% Real Estate Transfer Tax (RETT) to the existing 3% Real Estate Excise Tax (REET).

• Beginning January 1, 2025, the rate of the tax imposed is as this follows: 1.1% of the portion of the selling price that is less than or equal to $750,000;
• 1.28% of the portion of the selling price that is greater than $750,000 and equal to or less than $1,525,000;
• 2.75% of the portion of the selling price that is greater than $1,525,000 and equal to or less than $3,025,000; and
• 3.0% of the portion of the selling price over $3,025,000, PLUS 1.0% RETT tax
• 7% of REET and RETT revenues shall go as follows:
  • 25% to the Washington State Housing Trust Fund
  • 25% to the Apple Health and Homes Account
  • 15% to a new Developmental Disabilities Trust Account
  • 25% to the Affordable Housing for All account
  • 10% to the new Housing Stability Account.

Notes:

• WA State already has one of the highest REET tax in the nation, adding RETT to REET would make WA State 33% higher tax than any other state on the sale of property.
• Increasing taxes on the sale of property will increase rents and housing costs for residential and commercial tenants.
• At a time when commercial real estate is already hurting because interest rates have increased dramatically and many companies are working from home, this would cause damage to the industry.

SB 6136 – B&O Tax or Rent Control on Commercial & Residential Rents

•  Unconstitutionally requires all property owners to decide between paying B&O tax or agreeing to rent control.
• Adds business and occupation tax (B&O) to rent for all residential and commercial property. The tax on residential rental property begins January 1, 2025. The tax on commercial rental property begins January 1, 2027.
• Directs Commerce to develop and administer residential rent control program that requires 5% rent control.
• Directs Commerce, AG, DOR, and others to develop recommendations for a rent stabilization program for commercial rental property.
• Creates a B&O tax deduction for landlords participating in the rent control programs.

Notes:

• Tax on rents is Unconstitutional according to a WA Supreme Court ruling (Schumacher 1960).
• Taxing rents would ultimately increase rents and housing costs for residential and commercial tenants.
• At a time when commercial real estate is already down because of employees working from home and high interest rates, this would cause damage to the industry.

Substitute Bill:

• Removed the Rent Control provision.
• Makes the privilege of providing all commercial & residential property for rent subject to the business and occupation tax.

SB 5770 – Property Tax

• Increases the property tax revenue limit for local property taxes. Currently property tax increases are limited to 1% increases (limiting factor) annually.
• This bill would increase the property tax limit from 1% to 1% plus population change and CPI, up to 3% annually.
• CPI is based on the CPI(U) for the Western region as of July 25th each year, provided by DOR to the County Assessor for use.
• Applies to 2024 tax collection and thereafter

Notes:

• This will increase the cost of providing housing.
• Property tax increases often drive necessary increases in residential and commercial lease rates for tenants.
• The general public does not support increases in property taxes.
• Technical corrections made in Senate Ways and Means Committee still to come.

Energy Bill:

HB 1589/SB 5562 - Banning Natural Gas through Gas Companies

 Original Bill

• Prohibits gas companies serving more than 500,000 retail natural gas customers in Washington from extending gas service after June 30, 2023.
• Requires a large gas company to file a gas decarbonization plan as part of a multiyear rate plan on or after January 1, 2026, and every four years thereafter, with the aim to achieve the company's proportional share of greenhouse gas emission reductions required under state law.
• Requires a combination utility to file an electrification plan as part of a gas decarbonization plan on or after January 1, 2026.
• Directs the Utilities and Transportation Commission to establish cost targets for gas decarbonization and electrification plans, approve plans that are in the public interest, and adopt depreciation schedules, and a single energy rate base in certain instances.
• Encourages electric utilities to work with large gas companies providing gas service within their service areas to identify opportunities for electrification and providing energy peaking service.

Amended Bill

Modifies the definition of "electrification" to "the installation by a combination utility of electric end-use equipment provided that installation: o Will result in a net reduction in statewide greenhouse gas emissions over the life of the equipment as energy resource alternative; and Reduces the sales of natural gas by the large gas company. Electrification programs of a combination utility may include, but are not limited to, programs that facilitate deep energy retrofits or the installation of electric air-source heat pumps with gas backups in existing buildings. However, electric air-source heat pumps with gas backups may not be part of any plan filed pursuant to section 4 of this act [electrification plans]."

• Modifies the definition of "emissions reduction period" to mean "one of four periods of five calendar years each, with the four periods beginning on January 1st of calendar years 2030, 2035, 2040, 2045, and 2050, respectively."
• Adds language to provide that the terms of a gas decarbonization plan filed by a large gas company shall be binding on any entity that subsequently acquires an ownership interest in all or part of the large gas company's gas storage, transmission, or distribution network.
• Requires that an electrification plan be filed by a large gas company, rather than a combination utility, as part of a gas decarbonization plan.
• Provides that the Utilities and Transportation Commission (UTC) may, rather than must, require a large gas company to achieve the maximum level of greenhouse gas emissions reductions practicable using alternative energy resources at or below the applicable cost target.

Amended Bill in Senate Environment Committee

•  Directs that until January 1, 2035, the prohibition to extend gas service in section 2 does not apply to residential facilities that use natural gas solely to supply generators for the purpose of providing emergency power during an energy supply emergency declared by the governor or during a loss of electrical service. Requires the natural gas company to include this limitation on use in its tariff.
• Authorizes the utilities and transportation commission (UTC) to extend the deadline by an additional two months for a decision in the first multiyear rate plan proposed by a combination utility, following approval or approval with conditions from the UTC of an initial integrated system plan.

Notes:

• Recent action of the State Building Code Council did not include an outright ban on national gas.
• Prohibiting new natural gas for housing will increase the cost of new middle housing between $6,200 to $13,100 more per unit. This doesn't include the annual operating costs of using natural gas which is one third of the cost of electricity.
• This bill negatively impacts independent grocers and convenience stores. These stores often rely on natural gas to run refrigeration systems to comply with the health code. The costs for running new grocery stores may exceed what people are willing to pay for food, increasing the possibility of food deserts in Washington State
  • In some areas where there is not adequate electrical infrastructure to serve new construction a requirement exists for natural gas to be provided in the land deeds for the undeveloped lots. If this bill were to pass the families who have purchased these lots will not be able to build a home, and their investment could be lost.
  • If new natural gas connections are prohibited, it will result in significant cost impacts for struggling hospitality businesses, as the demand for rent for the spaces with existing natural gas service will skyrocket. Rents may become unaffordable for small, locally owned family businesses.
  • Many Washington homeowners in the Puget Sound region need access to natural gas in order to have fireplaces and other supplemental heating devices during power outages. They may not have the ability to have woodstoves or woodburning fireplaces because of air quality ordinances.

Rent Control:

All three of these tax proposals (HB 2276/SB 6191, SB 5770, SB 6136) are going to be alive until the very last day of session because they could be considered Necessary to Implement the Budget (NTIB) and therefore survive all cutoffs.

HB 2276/SB 6191 – Increasing REET Tax
The REET Bill is still very much in consideration in both the House and the Senate even though it appears not to have been moved before the cutoff. This bill could be NTB, and therefore alive until the end of session.

SB 5770 – Property Tax Increase to 3% based on CPI
Property Tax Increase - the property tax bill SB 5770 was voted out of the Senate Ways & Means committee yesterday on a party line vote. The bill is now in the Senate Rules Committee for further action.

SB 6136 – B&O Tax or Rent Control on Commercial & Residential Rents
SB 6136 was voted out of the Senate Housing committee and was sent to Ways & Means where it did not have a hearing before yesterday’s deadline. But this bill could be NTIB and therefore alive until the end of session.