The city of Sisters could hike taxes on new homes and commercial buildings to pay for affordable housing, but it doesn’t yet have a plan for using that money.

The Sisters City Council is considering imposing a new excise tax — likely 1 percent of the permit value — on both residential and commercial development. The revenue could be used for grants, loans or fee waivers for affordable-housing developers or down-payment assistance for low-income homebuyers, but the City Council has yet to decide how it wants to use the revenue.

On Wednesday, the council directed City Manager Brant Kucera and other city employees to come up with options for using the funds and alternatives to a 1 percent tax. Kucera did not return voicemails or an email with additional questions.

“This is one of the few means that the state gives municipalities to raise revenue, and in Oregon you need to take advantage of those if you want to accomplish goals,” he said during the council work session.

A 2016 law that also allowed cities including Portland to require new apartments to dedicate some units to affordable housing cleared the way for Sisters and other cities to impose these taxes.

Seven other Oregon cities — Hood River, Newport, Portland, Corvallis, Cannon Beach, Milwaukie and Medford — have adopted their own versions of the tax. Bend has a similar program in its affordable-housing fee, which collects one-third of 1 percent of the total valuation on all building permits submitted to the city. Bend’s first-in-the-state fee has collected more than $6.4 million since it started in 2006, and the money collected through the fee is loaned at low interest to developers who then use those loans to leverage additional grants, loans and tax credits from other public agencies and private groups.

The 2016 law limits excise taxes to 1 percent on residential buildings but has no cap on charges for commercial buildings. After subtracting up to 4 percent of the total revenue for administrative fees, cities are supposed to use 50 percent of the proceeds from the residential tax for developer incentives, allocate 35 percent to city programs and incentives related to affordable housing and send 15 percent to the state’s Housing and Community Services Department. A commercial tax requires that at least 50 percent of the revenue be used for city affordable-housing programs.

“You could fund a lot of things with this,” Kucera said.

The city now has a dedicated funding source for affordable housing through a transient room tax paid by customers at hotels and vacation rentals. But that tax only provides about $20,000 a year, Mayor Chuck Ryan said at the meeting.

“That’s chump change,” he said.

Local builders, though, are opposed to the possible tax. Geoff Harris, regional director of Hayden Homes, said the company will delay its application for McKenzie Meadow Village, a housing project that could bring nearly 200 homes near Sisters High School, because of uncertainty over whether the City Council will institute a tax. A 1 percent tax could add close to $500,000 to the project cost, he said.

Curt Kallberg, owner of Kallberg Construction, LLC, specializes in custom homes. He said the business makes about a 5 percent profit on each house, and a 1 percent tax would work out to about 20 percent of his income. That’s not feasible or fair, he said.

“We employ the people you’re trying to help, and as soon as we’re gone they won’t need a house,” Kallberg said. “They’ll be trying to leave.”

In an email sent to the City Council on Wednesday, Central Oregon Builders Association Vice President of Government Affairs Karna Gustafson criticized the proposed tax and how it would be implemented. Gustafson said she was invited to a meeting to talk about the proposed tax early in June and was surprised to find that city staff had prepared a draft ordinance without asking for input from stakeholders including the builders association.

A 1 percent tax will make middle-market housing more expensive, Gustafson said. It adds $2,500 to the purchase price on a $250,000 home, but most buyers would end up paying far more than $252,500 over the course of a 30-year mortgage.

“We currently have no idea on what the city is trying to accomplish, other than a reference to ‘affordable housing’ with this money the city will be charging buyers of homes in Sisters,” she wrote.

Gustafson said the builders association has been able to work with Redmond, Bend and La Pine on housing affordability programs and she hopes Sisters will have similar discussions before implementing a tax.

The argument persuaded one city councilor, David Asson, who said during Wednesday’s meeting he’d like to delay the tax decision.

“I’m thinking that the 1 percent is too high and it might in fact cause some unintended consequence where it’s going to cost us as a community more than it’s going to help,” he said.

—  Reporter: 541-633-2160; jshumway@bendbulletin.com

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