To Fund Affordable Housing, Oregon Cities Turn to Construction Excise Tax

Medford, Oregon, is the latest Oregon city to implement such a tax.

Since 2016, at least eight Oregon cities have adopted construction excise taxes to fund affordable housing.

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Housing is so tight in the city of Medford, Oregon, that the municipal government sometimes has trouble recruiting employees.

Residential vacancy is low, says Matt Brinkley, planning director for the city of 80,000, which is nestled along Interstate 5 about halfway between Portland and Sacramento. Local construction industry reports put the rate somewhere between 1 and 2 percent, he says. There’s just not that much room for people to live, let alone at rates that civil servants can afford.

So last week, Medford did what a growing number of Oregon cities have been doing over the last two years: It adopted an excise tax on new construction to help fund new affordable housing. In Medford, the tax will be equal to one third of 1 percent of building permit fees on major residential, commercial, and industrial development projects. Brinkley says the city estimates it could generate around $500,000 a year to be reinvested in affordable housing.

In 2016, the Oregon state legislature passed a series of bills aimed at chipping away at the affordable housing crunch that has engulfed much of the west coast. At the time, the biggest headline item was a provision that lifted a state ban on inclusionary zoning, which cities use to mandate or incentivize the inclusion of affordable units in new housing construction. But in the same law, the state also lifted a ban on construction excise taxes (CETs) that had been in place since 2007. Since then, CETs have been adopted in at least eight cities and are under consideration in a number of other municipalities.

The excise tax in Medford is modeled after one that Bend has been using for the last dozen years. (Because it was adopted before the state ban, the Bend tax was grandfathered in.) Lynne McConnell, the affordable housing manager for Bend, says that the tax has generated around $7 million since it was adopted. That money is then reinvested in nonprofit and for-profit affordable housing development through a competitive RFP process. The excise tax has leveraged nearly $80 million in additional funding since its adoption, and helped create 770 units of new affordable housing, according to McConnell. It’s also helped the city, which is growing about as fast as any in the United States, keep building during economic downturns. During the recession, McConnell says, the city’s affordable housing fund, which operates on the proceeds from the excise tax, was among the biggest construction lenders in the area.

“It’s all about how to bring in small developers, mom-and-pop type shops, who aren’t building a ton of units every year but are increasing the supply overall,” McConnell says. “If we can help them pull just a couple of units into the affordable realm, that’s a win-win for everybody.”

Portland was among the first cities to pass both a construction excise tax and a mandatory inclusionary zoning policy after the state legislature lifted the ban. There, the tax is 1 percent of building permit valuations, the highest amount allowed by state law. It applies only to projects valued at more than $100,000. It’s used to pay for affordable housing for families earning less than 60 percent of the median income and incentives for the city’s inclusionary zoning policy.

One-percent taxes were also adopted in Hood River City, Cannon Beach, and Corvallis. Eugene, the third-biggest city in Oregon, is considering adopting a tax as well.

“This is absolutely a statewide problem and local jurisdictions are looking for tools to solve that problem,” says Alison McIntosh, deputy director for policy and communications at Neighborhood Partnerships, a nonprofit that coordinates the 80-member Oregon Housing Alliance.

The Oregon Housing Alliance has advocated for both construction excise taxes and inclusionary zoning, among a range of other affordable housing policies. McIntosh says that at the moment, the CET is one of the only tools that Oregon cities have to generate dedicated funds to support affordable housing construction. (They could also consider selling bonds or allocating general funds to the cause, she noted.) But the Alliance doesn’t have any prescriptive solutions for cities that are considering adopting excise taxes, preferring instead to let local communities negotiate the policy.

Lynne McConnell, of Bend, says that other cities shouldn’t necessarily copy what someone else has done either. The political debate is bound to be different in a city like Portland than smaller cities in more rural parts of the state.

“Frankly, to be strong, it has to be a compromise solution that a lot of different people buy into, and that’s why ours has stayed in play for as long as it has,” McConnell says.

Matt Brinkley says that in Medford, a one-percent tax might have raised between $1 million and $2 million a year. But a tax at that rate couldn’t gain the necessary political support to pass. And inclusionary zoning doesn’t seem to be feasible there either, he says. But $500,000 a year is a start, and Brinkley says the city is open to the funds being used for anything that helps create more available housing at more affordable rates. It plans to put out an annual call to developers, who will then pitch the city on what they plan to do with the funds, from investing in infrastructure to offsetting Systems Development Charges, fees developers pay in Oregon to cover homes’ impact on sewer systems, parks infrastructure and more. Brinkley says he’d also like to create a program that encourages homeowners to develop accessory dwelling units, to increase the supply of low-cost housing.

“We want to implement this program as flexibly as possible,” Brinkley says.

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Jared Brey is Next City's housing correspondent, based in Philadelphia. He is a former staff writer at Philadelphia magazine and PlanPhilly, and his work has appeared in Columbia Journalism Review, Landscape Architecture Magazine, U.S. News & World Report, Philadelphia Weekly, and other publications.

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