In recent years, there have been notable increases in real estate transfer taxes, which are levied on the sale of property by local and/or state governments and are typically defined as a percentage of a property’s sales price. In California, for instance, there were 20 ballot initiatives to raise transfer taxes between 2010 and 2020, 13 of which were approved by voters. Sage Policy Group (Sage) was commissioned to examine their economic and fiscal effects in the context of a post-pandemic world.
This report makes no attempt to assail the validity of transfer taxes as instruments of public policy. It also does not seek to diminish the importance of public revenues to support the provision of key services ranging from education and public safety to park and road maintenance. Rather, this report is intended to supply insight for policymakers and other stakeholders regarding the myriad considerations that should enter assessments of appropriate transfer tax rates.
Transfer tax increases have negative economic consequences for both the residential and nonresidential segments. They are regressive and can lead to decreases in population, real incomes, real estate transactions, investment in structures, and quality of the built environment. They are also associated with higher rents, lower property valuations, reduced residential mobility, and diminished homeownership.
The negative impacts of elevated transfer tax rates stand to be exacerbated by the increased prevalence of remote work, lingering weakness in office space net absorption, elevated mall vacancy rates, and diminished hotel occupancy. Many properties will need to be upgraded and/or adaptively reused to remain viable. Excessive transfer tax rates can frustrate the exchange of property that is often required to return to commercial viability.
Communities that support significant adaptive reuse and investment will prosper, while those that do not will experience increasing vacancy and abandonment, declining property values and quality of life, and sagging commercial real estate assessments. This is the context in which transfer tax rate-setting should be considered.
View the full report here.
Source: “The Unintended Consequences of Excessive Transfer Taxes“
