COMMENTARY: Hike in property transfer tax detrimental to Delaware

Shortly before midnight on July 2, after hours of wrangling over the approximately $365 million budget gap and how to fix it, Delaware’s legislature passed a bill increasing by a whopping 33 percent the property transfer tax on all real estate transactions. This means that beginning with contracts written Aug. 1, homebuyers will be faced with bringing additional funds to the settlement transaction.

The need to have additional cash on hand to complete a home purchase will impact the homeownership dreams of many Delawareans, primarily lower-income families and first-time homebuyers.

This significant budget shortfall in the hundreds of millions of dollars put some extremely difficult decisions in front of our legislators — some of those decisions affecting homeowners and potential homebuyers. A bill that would have slashed deductions for items such as mortgage interest, property taxes, and charitable donations was defeated. Good news for all. Not so with House Bill 279 increasing an already extremely high property transfer tax.

Delaware’s real estate transfer tax began as a way to fill a budget deficit in the late 1960s. The tax was supposed to sunset, but it eventually became a permanent revenue stream upon which the state and counties have become dependent to pay for things like open space and public safety initiatives.

The 33 percent raise in the transfer tax passed by the legislature is estimated to bring in $44.7 million this year. We believe, however, this was not in the state’s best interest nor that of its residents. Mortgage interest rates are now considered relatively low, but closing costs, including the transfer tax, require a significant amount of cash on hand — something many buyers don’t have.

Before this steep increase, Delaware’s transfer tax was already the highest in the nation. According to the National Association of Realtors State Issues Tracker, only four other states and Washington D.C. have a rate of 1 percent or more, with the capitol city leading the way at 1.45 percent.

In neighboring Pennsylvania, the state rate is 1 percent, and local governments may add another one percent. In the state of Washington the transfer tax is 1.28 percent, and local governments have the option to add on .25 percent.

Vermont’s state rate is 1.25 percent and in Connecticut it’s 1 percent.

The property transfer tax does more than move money from homebuyers to the government. It stifles economic activity and makes moving less attractive.

In fact, a property transfer tax does more economic damage than a typical property tax. To prove this point, 18.4 percent of Delaware’s gross state product was generated by real estate transactions in 2015. For each median-priced home sold, nearly $19,000 is generated.

The purchase price of a property is only part of the story. Whenever home sales stall, our state’s economy feels the impact. When purchasing a new home, buyers often spend additional monies on appliances, renovations, moving companies, furniture, landscaping, etc. Those purchases add up to an average of about $4,500 per home sale.

Further, when considering the economic multiplier effect resulting from increased area spending, addition construction, and similar factors, total income derived from a single $210,600 median-priced home in Delaware can add over $60,000 to the economy.

The end result of using a property transfer tax to pay for roads, schools, bridges, and other such public benefits is that the community-wide needs of the many are placed on the backs of the few — among these lower-income families and first-time homebuyers. The tax ratio drops for those with higher incomes.

Young couples who have been saving for a home must now prepare to bring more money to the settlement table. Senior citizens depend on the equity in their homes when they sell; that equity is diminished. For many, the opportunity to accumulate savings and build long-term wealth is lost.

Raising the property transfer tax by 33 percent now in Delaware will certainly be just enough to deter some first-time buyers, diminish earned equity, keep current homeowners from trading up, and lower the state’s revenues when the economy is already struggling.

Not only is a property transfer tax unfair, it is an unreliable source of revenue. The amount raised each year is totally dependent on the health of a fluctuating real estate market. It is for these reasons that a number of states have abolished the use of a property transfer tax, and that trend continues.

During the next legislative session, the Delaware Association of Realtors, on behalf of its more than 3,800 members as well as current and prospective Delaware homeowners, will be seeking a first-time homebuyer exemption from the transfer tax.

This, however, will only be a small improvement to the much larger problem of using the unfair and unreliable property transfer tax to fund Delaware’s public expenditures. We look forward to working with the legislature to ensure that a more reliable and fair funding mechanism for Delaware is used in the years ahead, ensuring financial stability and preserving the dream of homeownership in the First State.

EDITOR’S NOTE: Bruce Plummer is the 2017 president of the Delaware Association of Realtors, an organization based in Dover and representing the more than 3,800 Realtors® in the state. The term Realtor is a trademark of the National Association of Realtors and is used to refer to NAR’s more than 1 million members, all of whom subscribe to NAR’s strict code of ethics.