Washington Legislature approves tax break for affordable housing built on state land

Washington’s Department of Natural Resources wants to build more affordable housing on state lands. 

A bill that passed the Legislature on Thursday may help them do just that by providing new tax exemptions. House Bill 2003 passed the state House of Representatives 95-2 and the Senate unanimously. It now heads to Gov. Jay Inslee’s desk. 

“This bill will increase the affordable housing inventory,” Sen. Patty Kuderer, D-Bellevue, said on the floor. “It targets the demographics that we really need to target.”  

The proposal is part of a broader push by the department to build more housing on its “transition lands.” In general, this is land that is unsuitable for logging, which is how the department generates revenue from most of the land it manages. 

The department oversees about 7,000 acres of transition land, of which about 3,000 acres can be used for housing, bill sponsor Rep. April Connors, R-Kennewick, told the Senate Housing Committee last month.

“This is really ground that is sitting vacant waiting to do something,” Connors said. 

Under her proposal, housing built on state lands and deemed 100% affordable for low- and moderate-income households would be exempt from paying a leasehold excise tax, which is levied instead of a property tax on private owners who use public property. 

For example, if a nonprofit organization wants to build affordable housing on public land, it would have to pay the leasehold excise tax of 12.84% of its rent. Current exemptions from the tax include some military housing and facilities or those used by a school or university to provide housing for students. 

In order to receive the exemption, the housing must be affordable for at least 20 years, and the Department of Natural Resources must prioritize housing for low-income households, or those whose household income is at or below 80% of the median family income. 

Sen. Phil Fortunato, R-Auburn, said the proposal is distinctly different from other tax exemptions for affordable housing because it requires that 100% of the units be affordable to receive the break. 

Jonathan Thomas, of the South Puget Sound Habitat for Humanity, told the Senate Housing Committee that the proposal could offer a great incentive for affordable housing organizations that often struggle to acquire land for their projects.

The Department of Natural Resources is also pressing for funding for infrastructure on state lands that would make the property easier to build on for developers. Their budget request asked for almost $3 million to be used through 2026 to build roads, water, sewer or power connections. 

It would have funded pilot projects in Bothell, Lacey, Lake Stevens and other places.

But that funding is not included in House or the Senate budget proposals. 

“While I understand that we’re facing a budget shortfall, I am disappointed the Legislature chose not to include funding for affordable housing on public lands – because families struggling to afford housing can’t wait,” Commissioner of Public Lands Hilary Franz said in a statement. “Using our public lands is a scalable solution to the housing crisis we all agree we’re facing.”

Lawmakers are still finalizing their budgets, and a final version will likely be released early next week. They must pass it by the end of the session on March 7.