Nothing says “Welcome to Maryland” like the transfer tax. Those new to the area experience a time of disbelief as the sky-high closing costs consume what they thought was a good down payment. Only Delaware, Pennsylvania, and Washington, DC, have transfer and registration taxes in the range of 2-3% found in Maryland. Transfer tax rates in most countries are a tenth higher, and 12 states have none.
In Annapolis, state lawmakers are concerned that transfer taxes may be avoided when selling businesses that own real estate, as there is no change in the tax imposition act. It is argued that closing this “loophole” would increase equity and tax revenue.
Before expanding the scope of the transfer tax, lawmakers should ask themselves more fundamental questions: Why are we imposing this tax? Could there be a good reason why other states are avoiding it?
The Real Estate Transfer Tax is a bad policy that has been compounded by the rapid rise in property values and changes in federal tax policy over the past decade. Consider five reasons why state and local governments should reconsider land transfer and registration taxes.
Justice. If you bought and sold a home in the Baltimore area last year, you probably paid more transfer taxes than you paid in income taxes and state and local property taxes combined. . Thus, people who buy and sell real estate bear a much larger share of the costs of local government than others. Why should someone double the tax burden because he or she moved across town? Moving does not mean that someone has more income than a non-mover, nor that the mover consumes more government services.
The sprawl. This statement may surprise environmentalists, as the state’s 0.5% portion of the transfer tax has historically been spent on the Open Space program. Most other states fund similar programs in other ways, and local environmentalists should reconsider their traditional funding source. Some argue that transfer taxes reduce urban sprawl. However, most transactions involve existing properties and many moves are good for the environment. Rather than slowing development, transfer taxes discourage people from adapting their housing to changing needs. Why should we discourage people from approaching a new job or moving to a smaller house once the children have grown up?
However, it is not the state part of the transfer tax that promotes urban sprawl, but the much higher “piggyback” taxes levied by many local governments. For example, Baltimore adds a 1.5% transfer tax and a 1% registration tax for a total of 3% – $ 9,000 on a $ 300,000 home. Taxes in most adjacent counties total around 2.5%, but many rapidly developing outlying counties, such as Carroll and Frederick, do not have a transfer tax (although all charge a registration tax). The transfer tax differential makes it less expensive to buy a home in remote areas of Maryland.
Affordable housing. Affordability of housing is a huge problem in Maryland. A related problem is the alarming number of people with low or no down payments who are very vulnerable to the slightest downturn in the market. One of the biggest hurdles in buying a home is the upfront cost, which in Maryland includes thousands of transfer taxes before you can make a down payment.
Tax deductions. Unlike most state and local taxes, transfer taxes are not deductible from federal income tax. IRS rules define them as non-deductible for the same reason that they are unfair: Transfer taxes do not apply generally and are only paid by a small portion of the population over a period of time. given year. Transfer taxes were indirectly deductible as they reduced the taxable capital gain on home sales, but disappeared in 1997 when most home sales became tax exempt. Shifting from transfer taxes to income and property taxes (without raising overall taxes) would direct millions of new federal tax refunds to the Marylanders.
Volatile income. In recent years, an unforeseen increase in transfer fee revenues has allowed lawmakers to postpone difficult budget choices. However, unpredictable income streams are undesirable and are also likely to generate unpleasant surprises.
Transfer taxes may be bad policy, but they are good policies. Few voters face this tax in any given election year; the cost is hidden among many other confusing charges when closing real estate; and some mistakenly consider transfer taxes to be good for the environment. The city of Baltimore, while Martin O’Malley was mayor, doubled the city’s registration tax. It is hoped that the statewide perspective will change Gov. O’Malley’s stance on this issue.
Jeffrey Michael is Associate Professor of Economics at Towson University, where he specializes in environmental and natural resource economics and policies. His email is [email protected]