Updated: Builders Say ‘No’ to New Taxes on Replacement Homes

Updated: Builders Say ‘No’ to New Taxes on Replacement Homes

Residents testify on proposal for ‘teardown’ construction

| Published:
Susanna Parker

Silver Spring resident Susanna Parker spoke in opposition of a proposed bill that would levy new taxes on replacement homes

This story was updated on Dec. 5, 2019 at 11 a.m. to add data from the Montgomery County Planning Department.

A public hearing for a controversial new housing bill drew dozens of speakers on Tuesday. Nearly all agreed that housing affordability was a massive concern in Montgomery County.

But many wondered whether a bill from Council Member Evan Glass — which would impose impact taxes on new homes that replace existing construction on residential lots — was the best way to address the issue.

The bill would levy new taxes in two ways. One section would apply existing school impact taxes to homes that replace dwellings built before March 1, 2004, when the county began implementing those fees on new development.

The second section would add an affordable housing tax for homes that exceed the total square footage of the previous residence. The legislation suggests a tax rate of $9 for each square foot that the floor area of the new home exceeds the floor area of the old one.

Proceeds would go to the Housing Initiative Fund, a reserve dedicated to financing affordable housing projects. Glass has said the bill would raise $100 million for schools and affordable housing over 10 years, based on the number of residential demolition permits issued over the past decade. 

“This legislation is all about fairness and equity within our growth policy,” he said in an October interview. “Newly rebuilt homes are not affordable, they have some of the highest student generation rates among all housing types in the county, and yet they contribute nothing to our infrastructure. This has a real impact on our communities, and I think it’s time to address it.”

Glass and his supporters have championed the legislation as vital support for affordable housing in Montgomery County. But opponents at the hearing argued it would significantly increase costs and drive away potential homebuyers.

“This bill purports to address affordable housing while making new homes significantly more expensive,” said Melena Kaplan, a Montgomery County resident for 23 years. “Some will be able to afford these new fees. But others won’t be able to pay higher fees just to make their homes more livable.”

Glass has said the bill is aimed at significantly larger homes that often replace more modest dwellings in single-family neighborhoods. Several residents complained of the same problem at the hearing, citing mansions that sprang up next to two- and three-bedroom homes in their communities.

But the bill would also impose fees on major renovations that require demolition of at least 50% of the existing structure.

The broad application drew criticism from the building industry and individual homeowners. Susanna Parker, a Silver Spring resident at the hearing with a “No Double Housing Tax” pin, said it felt like the bill was penalizing her family for wanting to expand their home.

She and her husband bought their roughly 1,000-square-foot house in 2014, struggling to stay within their $350,000 budget. It was “perfect” for the two of them, Parker said, but she knew they’d need more space to accommodate a growing family, including their first son, born this year.

“I’d like to stay in our neighborhood,” she said. “But in the next few years, we’ll have to decide between moving and doing major improvements, like a big addition or even a complete rebuild. And adding an additional fee of up to $50,000 will almost certainly make it unaffordable for us. It honestly feels like we’re being punished for wanting to grow our family and stay in our home.”

Representatives from the building industry oppose the bill, arguing that it would hurt small businesses and trickle down to consumers. At Tuesday’s hearing, several opponents also criticized basic logic behind the legislation.

Glass has described the current lack of impact taxes on teardown construction as a “loophole” in county code. But real estate agent Koki Adasi, representing the Greater Capital Area Association of Realtors, said teardown homes were deliberately left untaxed because they didn’t require additional infrastructure.

“What this goal seems to miss is that the playing field was tiered specifically to address each type of housing and its impact, then tax them appropriately,” Adasi said.

He objected to claims that teardown homes significantly added to the student population, arguing that the effect was negligible over the last 10 years.

An analysis by county planning employees found that the the 848 replacement homes built in Montgomery County between 2014 and 2018 generated 20.6% more students that the average single-family homes.

Staff members did not believe it was a “relevant comparison,” however, because recently sold or constructed homes generally resulted in more students. Replacement homes actually generated fewer students in the short term than other new homes or homes that were recently sold, according to the report.

“There is also no reason to suspect that these replacement homes, over the course of their entire life, will not fall to the average student generation rate like all other homes in the county,” the analysis reads.

Other builders complained that Glass ignored the market when he projected how much the bill would raise.

“His proclamation that it will generate $100 million in revenue — it’s just not true,” said Carter Wilson, a custom-home builder in Rockville. “It’s purely speculative, with no understanding of how a tax increase like this would affect the market of new infill homes.”

Others argued the bill would ultimately hurt the county by drastically reducing teardown homes. Several builders pointed out that homeowners pay higher property taxes on larger replacement homes. 

They also require new transfer and recordation taxes, which are already used, in part, to fund affordable housing and schools, said Sylke Knuppel, chair of the Montgomery County Building Association.

“With these homes, you see tax revenues increase in perpetuity without any impact on existing resources,” added Rob Gilroy, another local builder. “They are a golden egg for this county.”

But supporters of the bill argued that major new actions were needed to add money to the Housing Initiative Fund. 

Others pointed to record-setting enrollment in Montgomery County Public Schools and the need for more funding to alleviate overcrowding.

To meet a 2030 goal, “we need to implement bigger and bolder initiatives,” said Gregory Carr, a member of the grassroots advocacy group Action in Montgomery.

He was referring to recent targets set by the Metropolitan Washington Council of Governments, which projects a rising need for affordable housing in the Washington, D.C., region. The council calls for roughly 41,000 new units in Montgomery County alone.

“Will we be able to look back and say, ‘We did what we promised?’” Carr added. “To reach our goals, we’re going to need new funding streams for affordable housing.”

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