Taxing The American Dream — Real Estate Transfer Taxes

Fifteen Democrats — and one Republican — have attached their names to several bills that could raise taxes by an estimated $777 million. This time, they are going after a slice of the American dream — home ownership.

Being proposed is a real estate transfer tax, which forces the seller of a home or commercial property to pay a share of the proceeds to the government. Most of the bills would tax the seller at a rate of 1 percent. For example, a person selling a $200,000 home would owe $2,000 to the government. This would be in addition to the 0.2 percent excise tax already imposed on sellers of real estate, resulting in a total tax penalty of $2,400 on the sale of a $200,000 home.

Lawmakers claim the tax is needed to pay for government services and infrastructure to accommodate the state’s continued population growth.

North Carolina’s population is one of the fastest-growing in the nation. The number of residents increased by 18 percent from 1996 to 2006 — compared to the U.S. rate of 11 percent — according to the state demographer’s data.The growth is concentrated primarily in counties in the Research Triangle, Charlotte, Wilmington and northern Outer Banks areas.

Currently, four bills in the General Assembly would authorize counties statewide to levy some form of this tax. Additionally, officials from eight counties (Wake, Avery, Pamlico, Chatham, Moore, Granville, Hoke and Tyrrell) are sponsoring bills currently in the committee on finance asking for permission to levy a transfer tax of one percent on real estate.

Costly Options

With this added tax penalty introduced into real estate transactions, sellers face two options — both would hurt hard-working North Carolina families.

• Sellers can increase the selling price in order to recoup the tax they will owe — passing the burden on to home buyers. This makes homes more expensive, putting the dream of home ownership out of reach for more North Carolinians.Seven counties already issue a one percent transfer tax — Camden, Chowan, Currituck, Dare, Pasquotank, Perquimans and Washington. The tax has contributed to raising prices in an already expensive housing market in that region.“The one issue that we’re dealing with now is a lack of affordable housing. The extra one percent does have an effect on that,” said David Clawson, Dare County Finance Director.
• If sellers are unable to pass along the cost of the tax in the sale price, they will lose one percent of the money they would otherwise have to invest in a new home. Less money to put towards that new home forces people into a higher interest rate, or into less desirable types of mortgages.

Eating Away at Equity

Upon closer examination, the proposed transfer tax takes a much larger bite out of the equity of homeowners than just 1 percent.Take a family living in an average-priced home in the Triangle area. Suppose this family decides to sell the home — which they bought in 2000 — for $237,000. After paying fees to the real estate agent and the balance of the loan, the sellers realize a profit of just under $70,000.¹ The one percent transfer tax is then applied to the full sale price, resulting in a tax bill of $2,370. This adds up to a 3.4 percent tax on their profit.

Transfer Taxes are an Unfair and Inequitable Method to Pay for Growing Communities

For most Americans, owning a home is the largest investment they will ever make. By taxing the sale of their home, government takes away part of the equity families have acquired in that property. This is money they could use to purchase another home, finance their retirement or help pay for their children’s education. Worse yet, sellers are forced to pay this tax even if they sell the home at a loss. The transfer tax also unfairly targets a small share of the community, some of whom are not even adding to the population growth:

• The transfer tax targets one specific group — those selling real estate — pushing the burden onto a small percentage of residents of a jurisdiction to help pay for infrastructure enjoyed by all.
• Proponents sell the tax as a means to “pay for growth,” but it taxes everyone selling real estate — even longtime residents.

Negative Effects on the Economy

The transfer tax will hurt North Carolina’s economy in other ways as well:

• According to estimates by the North Carolina Association of County Commissioners, a 1 percent land transfer tax would have taken nearly $777 million dollars out of the hands of North Carolina residents in 2006 alone. By taking this money out of the private marketplace, jobs will be lost, savings reduced, and investment will decrease.
• Affordable housing is an important factor for business recruitment; the transfer tax will make the area less attractive for business.
• North Carolina is already a net population loser to area states Georgia, Tennessee and South Carolina. Making the tax climate even more punitive will exacerbate this problem, chasing more citizens and businesses out of our state.

Are More Taxes Needed for Growth?

Supporters of the transfer tax say it would be a fair way to “pay for growth.” This argument implies that more revenues need to be raised to supply the additional infrastructure needs of new residents. This sentiment overlooks the economic reality that growth can in fact “pay for itself.”Dr. Don Judd, an economics professor at UNC-Greensboro, recently conducted in-depth studies in Mecklenburg and Union counties. In both counties, Judd found that new residential developments “yield a net fiscal surplus” on local government finances. In short, the additional economic activity from the growing local population “generates surplus tax revenues.”

Unstable Revenue Source

Because they are directly tied to the cyclical real estate market, transfer taxes are a very unstable source of revenues.

• The National Association of Realtors reports that sales of existing homes fell by 8.4 percent in March compared to February, the largest one month decline since 1989.
• When the real estate market cools, it’s a safe bet local governments will quickly seek another tax increase to feed their spending habits.
• When the market improves again, politicians will not remove the additional taxes levied to make up for the previous shortfall in transfer tax revenues. This will open the door to a rapidly escalating tax burden.
• Dare County, for example, was the first county to levy a one cent transfer tax on real estate. As shown on the graph, the revenues from that tax have been volatile and sporadic over the last 20 years.

Trust Factor

How do we know the counties will put this money to good use? The state made a lot of promises about helping schools with extra money from lottery proceeds — and look how that has turned out.When it comes to “paying for growth,” most politicians’ arguments are disingenuous. They also claim higher taxes are necessary in times of population decline. The arguments typically go like this: slow or declining growth means a smaller tax base — taxes must be raised to maintain government services. Conversely, rapid growth also calls for higher taxes to accommodate the growing need for public services. Either way, taxpayers are forced to reach deeper into their pockets.

Summary

• Transfer taxes being currently proposed will raise taxes once again on North Carolina citizens — to the tune of $777 million.
• The transfer tax will make housing less affordable and take away hard-earned equity from North Carolina families.
• Because of its unstable nature, the transfer tax will open the door to even more taxes.
• More taxes are not necessary to pay for growth; growth pays for itself.

1. Average home prices taken from North Carolina Association of Realtors data. Average sale price for the Triangle area in 2000 was roughly $190,000, in Feb. 2007 it was approximately $237,000. This example assumes the homeowners put down a 10 percent down payment on the house in 2000, and financed the rest with a 30-year mortgage with an interest rate of 5.75 percent. Real estate fee used is 4.8 percent — roughly the current average rate for the Triangle area.