INTRODUCTON All across the nation, cities, counties, and states are scouring the landscape for ways to raise money to fund a variety of offerings, without arousing resistance from a tax-weary public. Increasingly, elected officials are eyeing the realty transfer tax -- a sales tax added to the purchase price of real estate and paid by the seller, the buyer, or split between the two -- as a way to increase public coffers at the state and local level.
The amount of money Pennsylvania collects from this little-noticed tax will amaze anyone. At the close of the fiscal year ending June 30, 2006, Pennsylvania took in more than half a billion dollars -- $552.5 million from this sales tax on the selling price of real estate. <1> So far for this current 2006-2007 fiscal year, the state has collected $521.8 million from the realty transfer tax, with receipts for June still to be gathered. In just this past month of May, the state collected $47.6 million from this sales tax on property.<2>
Like the property tax, the realty transfer tax is based on the value of the real estate, and, when a property sells, that value is the sales price. Unlike the property tax, one must pay the realty transfer tax only when the property changes hands. It targets a narrow base – the buyers and sellers of property at closing – placing the burden for a large amount of revenue on relatively few. But its narrow base also accounts for its success.
Since people are not continually paying this tax, they do not object to it as much as they do property taxes. Its low profile is also why, since the federal government stopped imposing a tax on the transfer of property in 1968, many states began levying it. But Pennsylvania did not even wait for the federal government to end this tax, enacting it as a temporary tax in 1951 and making it permanent in 1961. <3> Perhaps our state’s early start is why our realty transfer tax rate ranks fourth highest in the nation. <4>
Throughout the U.S., state and local leaders have found the realty transfer tax, an apparently splendid way to raise money for a wide variety of state and local projects, from the preservation of open space to affordable housing. Pennsylvania’sKeystone Recreation, Park and Conservation Fund is permanently funded with a portion of the state’s revenues from the realty transfer tax, and the fund uses the money, in part, to acquire and preserve open space and to maintain parks. <5>
But just as often, the money collected is notused for land preservation or housing-related purpose, instead it funds an entirely different sorts of public use.<6> THE REALTY TRANSFER TAX AND MASS TRANSIT:
WHAT IS THE CORRELATION? In Pennsylvania, for example, the state is seeking ways to rescue the deficit-ridden mass transit systems, particularly in Pittsburgh and Philadelphia, and to upgrade aging roads and bridges. This past November, Governor Ed Rendell's nine-member Transportation Funding and Reform Commission concluded the state needs $900 million to replace aging roads and bridges and another $760 million annually to fund the state’s mass transit systems. The Commission’s report suggested the money come from a mix of existing revenue and from increasing the state’s realty transfer tax from 1 to 1.9 percent.
INCREASING THE REALTY TRANSFER TAX WILL MEAN
THAT FEWER PEOPLE CAN BUY HOMES
But, increasing what is a sales tax on property ownership in order to raise funds for mass transit seems flawed, particularly when one considers the lack of correlation between a sales tax on property ownership and the funding of mass transit. What does buying a home in, for example, Lititz, Pennsylvania, have to do with mass transit?
Nothing, according to homebuilder Steve Black of Lititz.
In fact, he is worried another increase in the state’s already high realty transfer tax will mean that fewer people can buy homes here in an already sluggish market. Black, who is president of the Pennsylvania Builders Association, says, "Increasing this tax raises prices and reduces the number of people able to buy because it raises closing costs. Right now in Pennsylvania, you pay $2000 for this state tax on a $200,000 home, and this does not include the $2000 you pay for the local version of this tax. If this increase passes, you would pay $4000 for a $200,000 house, plus the local tax. Some people,” Black continues, “might think this increase is not a significant issue. However, for every $1000 increase in the price of a home, the number of people able to buy that house drops by 240,000. Tinkering,” he says, “with something as delicate as the housing market is a very big deal.”
An article in the September 1993 issue of The Journal of Real Estate, Finance, and Economics agrees with Black. The three authors of “Real Estate Transfer Taxes and Property Values: The Philadelphia Story” found that the 1988 increase in the Philadelphia realty transfer tax decreased the sale prices of homes, because sellers felt forced to drop their prices to compensate for the tax
The government got its money, but the sellers netted less from the sale of their homes.
Black also notes how the building industry has helped keep the state going through times of trouble and transition, from the shrinking of our manufacturing base to September 11th, from the increase in fuel costs to the housing slump. Of course, the housing boom not only fueled Pennsylvania’s economy, it also spurred the national economy. A flood of financial capital into real estate markets in the late 1990s—for both housing and commercial properties—greatly affected property prices and the wealth of U.S. homeowners. Housing prices rose sharply and interest rates fell, increasing homeowners' net equities, and made borrowing against those equities easier. Up until the slowdown last year, millions "cashed in" their increased equities to finance greater consumption and create a long-running economic boom.
“A lot of people look at this tax as an easy way to make the budget work, but they’re forgetting how important this industry is to the state’s economy,” notes Black. “The building industry is one of the top five employment groups in the state. To build the average home requires the skill of 105 different people from masons to electricians, plumbers to carpenters, and all these people are making good money plus benefits at their job.” The average experienced construction worker, according to the Pennsylvania Department of Labor and Industry, makes $45,000 per year.
“When I started in this business 20 years ago,” Black continues, “you didn’t get vacation pay, you didn’t get a 401-K. Today a job in the building trade is a profession with good pay and benefits, just what Pennsylvania needs for its residents.” Of course, anything that would drive up real estate prices, especially in a housing slump, could reduce these jobs.
PENNSYLVANIANS OPPOSE RAISING THE REALTY TRANSFER TAX
Because Black is a homebuilder, one might imagine that he brings a bias to the question of a realty tax increase. However, he is not alone. According to a poll conducted by Susquehanna Polling and Research in March 2007, eight out of ten Pennsylvania residents oppose increasing the realty transfer tax to help fund mass transit. Opposition to the proposed increase comes from all parts of the state including both the Philadelphia and Pittsburgh areas where more people ride mass transit. <8> Opposition ranges from a high of 93 percent in the northwest corner of the state to 70 percent in the Philadelphia region, where a clear majority also opposes the plan to raise the state’s realty transfer tax. (See appendix 1 and 2 for polling results statewide.)
"There is,” says Dominic Cardone, president of the Pennsylvania Association of Realtors®, “no public support to increase this.” He and his association members believe increasing the realty transfer tax crushes the American dream of home ownership. "It makes housing less affordable for everyone, from first- time home buyers struggling to put together a down payment to senior citizens by having to give up a portion of their equity to taxes when they downsize to a smaller home." Owning a home would also get tougher for low-income buyers, too.
“The most beautiful part of being in this business is helping someone who has worked for years to save for a home. When you hand them the keys, they get tears in their eyes, because it’s been their dream for so long. It’s the American dream, and it makes our families, communities, and our nation stronger, because everyone gets invested in their home and in their community. The kids are even healthier. And, believe me, first-time and low-income buyers do not have an extra $2000 at closing.
REALTY TRANSFER TAX: STATE AND LOCAL SHARE
Cardone also notes the realty transfer tax already totals 2 percent in Pennsylvania, because 1 percent is currently levied by the state and at least another 1 percent by the locality. Therefore, the 0.9 percent state realty transfer tax proposed by the Commission would actually bring the total to a 2.9 percent tax on the property’s sale. One’s tax bill at closing gets even higher depending on where one is selling or buying property in the state. The city of Reading, Cardone adds, charges 4 percent, in addition to the state’s 1 percent.
While state law governs most municipalities, exceptions abound. <9> First class cities, first class school districts, and home rule jurisdictions are on their own. Home rule jurisdictions include five counties, 14 cities, 16 boroughs, and 26 townships, and they can and do have higher local realty transfer rates, up to, but not limited to, 4 percent, and imposed on top of the other settlement costs. If buying or selling real estate in Philadelphia and Pittsburgh, one must pay the 3 percent local realty transfer tax plus the 1 percent state tax. <10> In fact, Philadelphia-based real estate developer, Thomas Properties Group Inc. calls the city’s high realty transfer tax “one of the highest in the United States” and “a risk factor.”
In January 2006, according to the Pennsylvania Association of Realtors, the purchase price for a 3-bedroom home in Pennsylvania averaged $222,370. <11> So when one buys this “average” home, one owes $4447 in realty transfer taxes, with half going to the state and half going to one’s locality. If the state succeeds in increasing the realty transfer tax to 1.9 percent, the transfer tax on this “average” 3-bedroom house would total a formidable $6450, with the state getting $4225 and local, $2225. But even more punishing, if one bought or sold property in Pittsburgh or Philadelphia, one’s realty transfer tax total would spiral to $10,896, as one would have to hand over 3 percent for the local realty transfer tax and 1.9 percent for the state.
Of course, Pennsylvania is not alone in its pursuit of money through the realty transfer tax, even though the recent statewide poll shows 80 percent of Pennsylvanians oppose any increase. Even when linked to a public goal, such as increasing funds for mass transit, 69 percent polled opposed it and believed it unfairly targets homebuyers. As worthwhile as mass transit is, most Pennsylvanians do not support increasing the realty transfer tax to subsidize the 6 percent who regularly ride mass transit.
THE REALTY TRANSFER TAX AND OTHER STATES
Interestingly, only three other states – Delaware, New Hampshire, and Washington – pursue this tax with as much vigor as the Keystone State. Pennsylvania already has a higher realty transfer tax rate than six of its neighboring states, and Delaware, the only neighbor on this list, charges 2 percent, but Delaware, unlike Pennsylvania, does not have a sales tax.
According to the National Conference of State Legislators, 37 states plus the District of Columbia impose a statewide realty transfer tax on the transfer of real property. <12> Nearly all impose a lower one than Pennsylvania. Colorado, for example, charges the lowest at 0.01 percent, and most charge less than 0.5 percent. Only four states (Pennsylvania: 1 percent; Washington: 1.28 percent; New Hampshire: 1.5 percent split between buyer and seller; and Delaware; 2 percent) impose a statewide transfer tax at 1 percent and above.
D.C. demands both a 1.1 percent realty transfer tax and a 1.1 percent mortgage recordation tax for a total of 2.2 percent in real estate sales tax. In California, Louisiana and Ohio, realty transfer taxes are only levied at the local level, but in Delaware, Maryland, Michigan, New Jersey, Washington, and West Virginia, as well as Pennsylvania, localities can impose a local realty transfer tax in addition to the state’s transfer tax. <13>
"In most of the country, realty transfer taxes are one-tenth of Pennsylvania's," Cardone says. "Pennsylvania has one of the highest realty transfer tax rates in the nation, and there is no public support to increase it." In fact, according to the Federal Tax Administrators, about two-thirds of the states that levy this tax charge less than 0.5 percent, far less than the 1.9 percent being contemplated by Pennsylvania. <14>
And, like all taxes, once in place, an increase is far more likely than a reduction.
After all the idea of a documentary stamp tax, which is what the realty transfer tax is, as a stamp or a meter impression proving payment is affixed to the deed has endured since its origination in Holland in 1624, out of “dire necessity.” In 1694, England also adapted this way to raise money, and, despite the dislike of the American colonists for the stamp tax imposed on them by England, the U.S. started to levy a stamp tax in 1787. <15>
Therefore, based on history, despite the narrowness of its base and the unreliability of its revenue, the realty transfer tax does not seem destined for extinction. Thirteen states – Alaska, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah, and Wyoming do not have a realty transfer tax, but leaders in at least four of these states -- Oregon, Idaho, Missouri, and New Mexico-- are working to establish one. In other states, from North Carolina to Wisconsin, one can hear proposals to increase the existing realty transfer tax.
During the real estate boom that began in the late 1990s and ended last year, the realty transfer tax caught the attention of many public administrators. Certainly when housing is booming, this tax generates extraordinary amounts of money for states and localities looking for revenue. In just 2004, according to the Census Bureau figures extrapolated by the Federal Tax Administrators, realty transfer taxes produced about $7 billion in state tax revenue.<16>
THE TAX IS NOT COMPLETELY RELIABLE Putting aside the fact that the tax targets a relatively narrow base – this base being only the buyers and sellers of property – the tax is not completely reliable. Since the housing market is cyclical, one cannot always count on this cash machine. Currently in Pennsylvania, the revenue from this tax is down 6 percent, at $32.7 million less than anticipated for the 2006-2007 fiscal year. <17>
In nearby Maryland, according to an April 8, 2007 article in The New York Times, the money collected for its transfer tax is down 22 percent. <18> Similar scenarios are unfolding in Florida, Arizona, California, and Nevada, where the housing markets had been particularly hot. In Nevada, home sales are down a frightening 36 percent and 25 percent of its unemployment claims now come from laid-off construction workers. <19> The cyclical nature of housing makes the revenue collected from the realty transfer tax unpredictable and a poor choice for providing stable funding for dedicated programs like mass transit.
Despite the unpredictability of depending on revenue from a sensitive and volatile market like housing, some believe imposing a realty transfer tax or raising the existing one offers a relatively painless way to replenish the treasure chest. But is it?
THE VALUE OF HOME OWNERSHIP For most Americans, owning a home is the largest investment they will ever make. Those opposed to an increase believe it will further discourage property ownership and the benefits ownership brings individuals, communities, and our nation by encouraging the maintenance and improvement of property, by providing a way to build equity, and by fostering investment in the future. In fact, to the envy of the rest of the world, the U.S. has become a nation composed primarily of homeowners with overall homeownership rate at an all time high of nearly 68 percent. <20>
After all, home ownership benefits individuals, families, communities, and our nation, and expanding homeownership has been longstanding national policy dating back to 1862.
That year, in the midst of the Civil War, President Abraham Lincoln signed the Homestead Act opening millions of government-held acres in the west for purchase at very low cost. <21> Ever since 1862, through a variety of programs, the government has continued to encourage millions of American families to own their homes. However, increasing the realty transfer tax does just the opposite. It discourages home ownership by increasing prices and lowering the percentage of individuals and families able to buy homes.
Buying a home is the biggest financial investment most American families will ever make, and it allows families to build financial security as the equity in its home increases. Moreover, a home is a tangible asset that provides a family with borrowing power to finance important needs, such as the education of children and retirement. Home ownership helps communities because homeowners work to maintain the value of their investment, which translates into a greater concern for neighborhoods and surrounding communities. A family that owns its home is more likely to upgrade the property, to take pride in its neighborhood, and to feel invested in the community. When citizens become homeowners, they become stakeholders as well. By increasing the ranks of stakeholders, communities not only enjoy increased stability but also benefit from a new spirit of revitalization.
CONCLUSION Increasing the realty transfer tax would immediately make the purchase of every property in Pennsylvania more expensive, when our state is already struggling with a slow-growing or even shrinking population, a shortage of high-quality jobs, declining tax bases, and a housing slump. Making the tax climate more punitive chases people and businesses to friendlier climates in nearby states. Certainly, the last thing Pennsylvania wants is to make the costs of doing business here higher than other states.
With news reports almost daily documenting a decrease in the number of homes being sold in the state and the nation, we can ill afford to raise the prices of our homes by increasing the realty transfer tax. Higher-priced homes also means less money can go into the private marketplace, where individuals can choose to invest in everything from property upgrades, to their children’s education, to their retirement plans.
Placing the burden of mass transit on something as sensitive to market changes as real estate and as important to our economy seems both unfair and unwise. Meanwhile, the state needs to pass its budget by June 30.
Governor Rendell wants to impose a 6.17 percent tax on oil company profits as a way to provide $760 million in additional funds for transit and to lease the Pennsylvania Turnpike to find the $900 million for re-building bridges and roads. Unconvinced by the Governor’s proposals, legislators from both parties are looking for other ways to find money for mass transit and bridges and roads. Many citizens hope the legislature does not increase the cost of the American dream by increasing the realty transfer tax.
Above all, they ask why the American dream of home ownership, the dream that built this country, is being singled out for a tax penalty.
<1> Revenue Department Releases Fiscal Year 2005-2006 Collections, www.revenue.state.pa.us/revenue/CWP/view.asp?A=208&QUESTION_ID=260823
<2>Pennsylvania Revenue Department Releases May Collections http://www.earthtimes.org/articles/show/news_press_release,114844.shtml
<3> Pennsylvania Department of Revenue Realty Transfer Tax,
<4>Federation of Tax Administrators, www.taxadmin.org/fta/rate/Realtytransfer.html
<5> Keystone Recreation, Park and Conservation Fund Act, 1993 Pa. Laws 50.
<6> “Prospects for Affordable Housing Trust Fund in Michigan” by Christine Hall, Justin Linker, and Chris Shay, Michigan State University, October 2001, page 3.
<7>“Real Estate Transfer Taxes and Property Values: The Philadelphia Story,” by John D. Benjamin, N. Edward Coulson and Shiawee X. Yang, The Journal of Real Estate, Finance, and Economics, September 1993, pages 151-157.
<8> Realty Transfer Tax Statewide Poll Conducted by James Lee, President, Susquehanna Research and Polling
<9> Local Tax Rate Limits in Pennsylvania,
Pennsylvania State Archive Records of the Municipal Governments,
<10>National Conference of State Legislators, Real Estate Transfer Taxes www.ncsl.org/programs/fiscal/realxfertax.htm
<12>National Conference of State Legislators, Real Estate Transfer Taxes www.ncsl.org/programs/fiscal/realxfertax.htm
<13>Federation of Tax Administrators, www.taxadmin.org/fta/rate/Realtytransfer.html
<15>National Stamp- Tax Laws and State Instrumentalities by Alden L. Powell
The American Political Science Review, Vol. 29, No. 2 (Apr., 1935), pp. 225-246
<16>Federation of Tax Administrators, www.taxadmin.org/fta/rate/Realtytransfer.html
<17>Pennsylvania Revenue Department Releases May Collections http://www.earthtimes.org/articles/show/news_press_release,114844.shtml
<18> “Housing Slump Pinches States in Pocketbook” by Abby Goodnough, The New York Times, April 8, 2007
<19>”Nevada Job Report: Housing slump socks workers” by Jennifer Robison, Las Vegas Review-Journal, May 19, 2007
<21>National Park Service Museum Gazette http://www.nps.gov/jeff/historyculture/upload/homestead.pdf
Nothing contained in this report should be construed as necessarily reflecting the views of The Susquehanna Valley Center for Public Policy or as an attempt to aid or hinder the passage of any legislation before the Legislature.