Are Dedicated ‘Sin Taxes’ a Useful Path for Affordable Housing Funding?

During uncertain budget times, new revenue sources can be appealing, especially as they can be allocated to policy priorities without the usual political concerns of taking from one bucket to fill another. As political pressure to find sources of tax revenue for affordable housing increases, many communities are turning to so-called sin taxes: a subset of excise taxes designed to raise revenue and, in theory, discourage the use of harmful substances (or harmful conduct) by taxing it more heavily.

Despite the obvious appeal, sin taxes also have disadvantages. For one, the more the tax succeeds in reducing the “sinful” activity, the less tax revenue it raises.

Sin taxes, like sales taxes more generally, are also taxes on consumption. This means that, except for taxes on luxury goods, most sin taxes are regressive, costing people of modest means a greater share of their income than they cost the wealthy. In other words, funding affordable housing through sin taxes burdens a similar population as those who need that housing.

Nonetheless, the need for new housing funds and the advent of new technologies that could be taxed have led many communities to explore this path, and they have some lessons to teach other places that might be looking to do the same. The examples below include three new types of sin taxes—on data centers, on Airbnb-type rental income, and on recreational marijuana—as well as a redirection of existing gaming revenues to affordable housing.

A County in Virginia Directs Big Tech Taxes to Boost Affordable Housing

Henrico County, Virigina, is located to the north, west, and east of the capital city of Richmond, with a population of roughly 339,000 people.

Between 2020 and 2024, the household income required to afford a home in Virginia increased by 76 percent. To address this gap, county leaders have turned to tax revenues from data centers.

Data centers sit at the white-hot center of land-use debates in communities across the country. Local boards are debating—and sometimes rejecting—proposed data centers that are said to raise utility costs and deplete water supplies. In Henrico County, however, data centers are practically old news. The county is home to nearly 40 data centers, including one operated by Meta (formerly Facebook), thanks in large part to the convergence there of multiple major undersea cables stretching to Europe and Brazil. These data centers have been part of the landscape since 2017 and have traditionally not been subject to strict land-use regulations. 

The revenue mechanism supporting affordable housing in Henrico County is a business personal property tax rate of $2.60 per $100 of the assessed value of computers and peripherals used in a data center with at least one megawatt of electrical power capacity. While this rate recently increased from 40 cents, it is still lower than the standard $3.35 for other types of personal business property, indicating the county is still looking to incentivize data center growth.

By drawing on reserves from the taxes paid by data centers since 2017, which the county had set aside in a separate fund, county officials were able to seed a new housing fund with $60 million in 2024. So far, the organization overseeing the new fund, the Partnership for Housing Affordability (PHA), has awarded $25 million to developers to build 271 homes that will be sold to buyers earning 60 percent to 120 percent of area median income (AMI), with deed restrictions to keep the homes affordable at that level for at least 10 years.

“A big selling point is the staff at PHA and their responsiveness during the process,” says Emily Hurley, a revitalization specialist with the Henrico County Department of Community Revitalization. “We designed it to be pretty agile, where funds are delivered at the closing table. There’s not a point you pass in the predevelopment or development stage where you can’t apply.”

Direct appropriations for housing can also be combined with other policy incentives. PHA also expedites reviews and waives various fees, such as utility hookups, for its qualifying projects. 

However, “we try not to get involved in the rezoning process, because it is political,” says Eric Leabough, director of the Department of Community Revitalization. “We ask people to wait until they’ve got their site entitled. It’s either a good development or not—it should stand on its own merits.” 

Henrico County might not pursue the same aggressive growth in data centers moving forward, which could affect the chances of getting another infusion of revenue from data center taxes for the housing fund. Last summer, the county tightened its requirements for data center approvals, and late last year, a developer withdrew a proposed 195-acre data center following resident opposition and a negative recommendation from the local planning commission. 

Leabough and PHA aim to steward the funds they already have to create as many housing units as possible. 

“We need to think long term,” Leabough says. “I hope that the Board [of Commissioners] will give us more money and capitalize the fund again. But to the extent that they don’t, we have to think long term about what that looks like. We may look at shared equity models or ways to recycle money back into the fund.”

In Music City, City Leaders Tax Short-Term Rentals to Promote Affordable Housing

Tennessee’s capital city, Nashville, is home to about 705,000 people. In Nashville, or “Music City,” tourism is big business, and in 2024, tourists spent a record $11.2 billion in the city.  But that tourism revenue has also led to pressure on the housing market. 

Nashville’s rental and home prices are higher than those in Henrico County, even though its median household income is lower.

Placing fees on short-term rentals like Airbnb and Vrbo to fund affordable housing could be considered a direct line from housing problem to housing solution—at least, that has been the reasoning in Nashville. “It’s easier to draw that line, and people logically have the argument in their minds that some of our housing need is because of STRs,” says Angela Hubbard, director of Nashville’s Housing Division. 

As part of short-term rental regulations passed in 2015, Nashville directed a portion of taxes generated by short-term rentals to its Barnes Affordable Housing Trust Fund (named after housing advocate Rev. Bill Barnes).

When the city studied the matter in 2024 as part of its Unified Housing Strategy, Hubbard says, it found that while short-term rentals reduce housing supply, they are hardly the only factor driving housing costs. Nonetheless, short-term rental taxes have generated around $4 million a year for the Barnes Fund for the last three years. This is enough money to build roughly 13 units each year, based on the fund’s average unit cost, says Hubbard. Short-term rental taxes generate only a small portion of the fund’s total budget, which is primarily funded from the city’s general fund. 

“Because so much of our revenue [is] derived from tourism, people consider it great to capture any revenue from our tourism economy to go to housing, because it has grown so much,” Hubbard says. 

Of course, if tourism takes a downturn, as it did during the early years of the COVID-19 pandemic, revenues can plummet. During the COVID shutdown from March to June 2020, short-term rental revenues were down nearly 70 percent from the previous year’s comparable period. Those gaps were filled primarily through federal funds like the American Rescue Plan Act funds. Otherwise, the Barnes Fund relies on general fund dollars, whose allocation has fluctuated over different mayoral administrations. 

Nashville’s Unified Housing Strategy proposes that the city add a variety of additional revenue sources for affordable housing. However, these potential revenue sources all require some form of state legislative approval, which is never guaranteed due to political differences between the city and state. (Typically, Nashville has a Democratic political majority, while the state has a Republican majority—a “blue island in a sea of red” as The Guardian put it). 

To make existing dollars stretch further, Nashville has been considering changing its housing trust fund model from only grants to a combination of grants and loans. 

In the ‘Mile High City,’ a Marijuana Tax Supports Affordable Housing

Of the four cities discussed in this article, Denver—home to about 729,000 people—has the highest prices, both for homeownership and rental housing.  While Denver’s median household income is higher than that of Nashville or Henrico County, the affordability gap in Denver is large, with one study finding that from 2015 to 2025, the number of hours a household had to work at the average wage to afford a mortgage on an average priced home increased from 50 to 97 hours per month.  

As the first state in the nation to legalize recreational cannabis, it is perhaps unsurprising that Denver has used marijuana sales taxes to generate more than $45.5 million for affordable housing during the first five years of the program (2018 through 2023). This revenue stream was established as part of an effort by then–Mayor Michael B. Hancock to double the city’s Affordable Housing Fund annually—from $15 million to $30 million. While the bulk of the funding increase was to come from development fees, a portion of recreational marijuana taxes was chosen to supplement the effort, generating over $10 million a year for the fund during the peak revenue years of 2020 and 2021.

The decision to use marijuana taxes as a source of funding “followed extensive public discussion during the development of Denver’s five-year housing plan and was supported by the marijuana industry, which publicly endorsed the tax increase as a way to contribute to community solutions,” says Julia Marvin, marketing and communications manager for Denver’s Department of Housing Stability. 

Those funds, in turn, helped enable the Denver Housing Authority (DHA) to issue $130 million in bonds for affordable housing, including housing for households at or below 30 percent of AMI. Bond revenues were then leveraged into private development dollars and paired with a $30 million Choice Neighborhoods Implementation grant from the U.S. Department of Housing and Urban Development, resulting in over $500 million in new development in the Sun Valley neighborhood. There, DHA replaced 333 aging outdated public housing units with 965 units for households earning between 20 percent and 100 percent of AMI.

Affordable housing projects often take years to plan and build, and having a reliable funding source allows the city to make multiyear commitments to leverage additional financing.”

Julia Marvin, marketing and communications manager for Denver’s Department of Housing Stability

“Dedicated revenues provide stability and predictability for long-term housing investments. Affordable housing projects often take years to plan and build, and having a reliable funding source allows the city to make multiyear commitments and leverage additional financing,” Marvin says. “While flexibility in the general fund is important, dedicated revenues ensure housing remains a priority even as other needs compete for resources.” Local marijuana tax revenues have declined sharply since their peak in 2021, when the city received nearly $73 million in such revenues. In 2025, local marijuana tax revenues amounted to less than half that amount: $33.5 million, with $5 million allocated to the Affordable Housing Fund. 

Even with the decline, Marvin says, the fund remains resilient because it receives revenues from various sources, including property taxes, general funds, and “linkage fees.” Denver hasn’t ruled out additional dedicated revenue sources, Marvin says, although none have recently been implemented.  

Aurora, Illinois, Redirects Gaming Revenues to Affordable Housing Fund 

With a 2024 census count of nearly 181,000 people, Aurora, Illinois, is the second-largest city in the state. As with many cities of its size, Aurora’s HOME and CDBG allocations total less than $2 million annually—not enough to meaningfully fund housing preservation and creation, says Chris Ragona, Aurora’s director of community services. 

In Aurora, over 60 percent of households making less than $75,000 per year are cost-burdened, meaning they spend more than 30 percent of their income on housing costs. For those making less than $50,000, that figure jumps to nearly 80 percent.

In 2023, Aurora participated in a set of public hearings to update its affordable housing plan. The result was O.N.E. Aurora. O.N.E. stands for the three main housing strategies outlined in the plan: optimize, navigate, and empower. The first recommendation in the empower section was to establish an affordable housing fund; the source of that fund, however, wasn’t established until later. 

“We were certainly floating different ideas of how we can expand affordable housing … but we didn’t designate where the money would be coming from,” Ragona says. 

That source was eventually established: gaming taxes from the city’s casino, which had been around for more than 30 years. It has proven to be a relatively steady revenue source, hovering at or around $6 million annually, according to city data, though this is a significant decrease from the casino’s heyday. The revenues also fund other Quality of Life Grants for community initiatives. 

City officials say they have designated roughly one-sixth of gaming funds—about $1 million a year or $5 million over the course of the plan—for Aurora’s affordable housing fund, though the funds still require approval in each year’s budget. If county leaders follow through, this would represent a 50 percent increase over the $2 million provided annually by the federal Community Development Block Grant and HOME programs. 

This year, Aurora will use the funds to partner with a nonprofit organization to create infill housing, ideally for homeownership, says Adam Grubbs, community development management assistant for the city of Aurora. 

It’s uncertain whether such funding will remain steady given the rise of online gambling (not just sports betting). Aurora officials seem to be betting that, despite the competition, gaming revenues will increase when a new casino, along with an adjacent convention center and hotel, opens this year. 

It’s surprising, given Illinois’s longstanding legalization and expansion of gambling, that more localities in the state haven’t followed Aurora’s example. 

What has been more important than focusing on where the money is coming from, Ragona says, is educating the community on the front end about the importance of affordable housing to the city’s economy and communities. That education continues with current funding, which includes tenants rights education and eviction and foreclosure prevention. 

“Having a plan or set of policies and procedures is needed,” Ragona says. “That way, you’re falling back on something.” 

What Is the Field Learning? 

While dedicated revenues are becoming more appealing to localities looking to fill gaps left by federal uncertainties, the question remains: Are these revenues sustainable? Often, the answer is no. A legalized, expanded, or redirected use might produce outsized revenue gains for a few budget years but is then likely to level off—or, more likely, to decline if tax rates are not adjusted to keep up with rising costs. 

These are not new considerations. However, at this moment, local governments sit at the intersection of a worsening housing crisis and a federal unwillingness to increase—or even maintain—funding for creating and preserving affordable housing. 

If the previous year serves as precedent, dedicating local funds to housing from specific revenue streams might become less a luxury and more a necessity. 

About the Author

Colby Sledge

Colby Sledge is the regional policy director for Grounded Solutions Network, a national nonprofit organization committed to the creation and preservation of housing with lasting affordability. Sledge previously served as a two-term Metropolitan councilmember in Nashville and Davidson County.

Tags

• Airbnb
• tax policy
• short-term rentals

Comments

One thought on “Are Dedicated ‘Sin Taxes’ a Useful Path for Affordable Housing Funding?”

1. I loved these updates on hud n affordable housing revenues, simply brilliant! As a survivor of sexual physical n mental abuse, after being granted permanent Housing, our local office in Houston was then audited, found guilty of misappropriations of funds. After never receiving the voucher! I’m still homeless n Houston TX. The navigating agency “Career & Recovery” refuses to help us we were bypassed like we didn’t exist!

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