“Taylor Swift Tax” for High-End Vacation Homes is spreading across more states

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The new push by the state to tax the wealthy property has sparked a backlash between brokers and potential buyers.

From the tax cuts on expensive second homes in Rhode Island and Montana, Cape Cod’s proposed transfer tax on homes over $2 million, and La Mansion Tax, state and local governments see gold mines of income on the expensive property of wealthy people.

“We’re looking forward to seeing you in a lot of trouble with our customers,” said Donna Kruger Simmons, a sales agent for Mott & Chase Sotheby’s International in Watchhill, Rhode Island.

Tax hikes are driven by populist rage over tougher state budgets and housing costs. The state is considering offsetting expected budget cuts from Washington’s new tax and spending bill. At the same time, the housing market became the story of two buyers. Middle class and young families struggle to buy a home, but the luxury housing market thrives from all wealthy cash buyers.

Many state solutions: taxing rich homes.

The new Rhode Island levies, known as the “Taylor Swift Tax,” are one of the most extremes. The pop star bought a beach house in 2013 at the state’s elite watchhill community.

The measure will charge a new additional fee on a second home worth more than $1 million. For non-primary homes, or homes not occupied for more than 182 days a year, the state charges $2.50 for every $500 in valuation above the initial $1 million. That fee is in addition to existing property taxes, and is a significant increase in luxury homes in Newport, Watchhill and other wealthy summer communities in the state.

For example, the Swift home is valued at around $28 million, according to local property records. Her current property tax is estimated at around $201,000 a year. The new fee adds an additional $136,442 to her annual tax, bringing her annual total to $337,442 despite locals saying they rarely visit.

Real estate brokers say the increase is targeting taxpayers who are already contributing the most. Wealthy House members pay large property taxes, but don’t use many local services as their main residence is in New York. Boston; Palm Beach, Florida. Or other areas. Their children usually do not attend local schools. They are rare users of police, fire, water and other municipal services, as most stay only 10-12 weeks a year.

“These are people who come here in the summer and spend their money and pay a lot of taxes,” Kruger Simmons said. “They’re punished because they live somewhere else.”

Brokers and longtime residents say summer residents of Newport, Watchhill and other seasonal beach towns are the economic engines of local businesses, restaurants and hotels.

“You’re just hurting people who support small businesses,” said Lorijoyal of Watchhill’s Liladelman Compass office. “You’re driving away people who spend most of their money in these towns.”

Rhode Island is also hiking transportation taxes on luxury properties that begin in October. Taxes on real estate sales amount to an additional $3.75 for every $500, over $800,000 on property purchases. At the same time, the state’s sudden real estate taxes stop many of the very wealthy people from living there full time.

Brokers say some homeowners are considering selling, and many buyers have suspended their purchases. While tax hikes are not expected to lead to important wealth flights, Joyal said potential buyers in Rhode Island are already seeing coastal towns in Connecticut as an alternative.

“It’s always about choices,” she said. “After all, it’s about how they can choose to spend their discretionary dollars. Connecticut has some beautiful coastal towns with none of these other high taxes.”

Montana passed a similar tax. The influx of Californians and other wealthy newcomers poured into the state during Covid has led to a rise in home prices and an increase in responsiveness towards gentlemanship. Meanwhile, the state’s low income tax rate and lack of sales tax has left little room for revenue growth to handle the required increases in services.

In May, the state passed a two-tier property tax plan, lowering fees for full-time residents and increasing taxes on second homes and short-term rentals. For major residential and long-term rentals assessed below the median state home prices, the tax rate is 0.76%. A home worth more than that will face a tiered system of up to 1.9% at any value spanning four times the median.

The Montana Department of Revenue expects changes that begin next year to raise the second operating tax at an average of 68%. Brokers say some buyers are waiting to see the tax bill next year before making a decision on whether to buy or sell.

“I’ve heard of buyers who put the brakes on to see what happens when the dust settles and they put the brakes on to see what happens,” said Valerie Johnson along with Pure West Christie’s International Real Estate in Bozeman, Montana.

Johnson said the tax has been advertised by legislators for hitting wealthy tax homeowners, but it will also be attacked by longtime locals who own investors and rent for income.

“These are small businesses for a lot of people,” she said.

Manish Bhatt, senior policy analyst at the Tax Foundation, said tax hikes for wealthy second home owners may be politically popular, but they rarely create successful or efficient tax policies. Real estate tax reform should be on a broad basis, rather than focusing on taxpayers who are chosen simply because they don’t live in the community full-time, he said.

“We’re getting hands on finding income now,” he said. “However, second home owners who levie taxes can have the opposite effect. They either discourage people from owning a second home or continue to own it in those communities.”

While new taxes may not just drive out wealthy people, “I know that taxes are important to businesses and individuals and that they may make the decision to buy in another nearby state,” Batt said.

Projected revenue from new taxes can also be disappointing. When Los Angeles passed the so-called “Mansion Tax” in 2022, supporters promoted revenue forecasts of between $600 million and $1.1 billion a year. According to the Los Angeles Housing Division, taxes over $5 million on property sales have only raised $785 million more than two years later.

Higher interest rates have played a role that hurts the housing market, experts say. But Michael Manville, a professor of urban planning at UCLA’s Ruskin School of Public Relations, said wealthy buyers and sellers also reduced their transactions in tax ways.

“The decline in revenue is a reason to be concerned because it suggests that taxes may actually reduce transactions.