Land Transfer Tax is a Bad Idea

The new state budget for 2007-2008 (HB 1473) allows counties to impose a tripling of the land transfer tax from .2% to .6% if approved by the voters in an advisory referendum. But there has been little discussion about the merits of this tax and why it is a particularly odd choice. I hope you enjoy my reasons for opposing this tax.

William Pitt, the Younger, asked the British parliament to double the stamp tax in 1797. Since then politicians have been intrigued by transfer taxes because the tax is imposed when money is on hand. This puzzles most economists who prefer to tax production, income or value added – rather than transfers.

A .4% land transfer tax on a $200,000 house would be an added tax of $800.00 every time the house is sold.

A land transfer tax is not new. This proposal just increases the existing excise tax on land sales by 200%. The seller of a $200,000 house already pays a tax of $400, even if the seller has no profit in it and even if the entire nominal profit is only inflation.

If the house is new a second tax that is paid is the sales tax on materials. A $200,000 house includes $80,000 worth of materials. At 7% that is $5,600 in sales tax. Approximately $2,000 of this will go to the County and that is used mostly for schools.

There is a third “new house tax.” The builders and laborers must report the sale of a house and their labor as ordinary income which is taxed at varying rates – an average of 20% Federal and 6% State for a combined 26%. A $200,000 house would have labor and profit of about $50,000. That’s $13,000 in income tax. Add all these together and you have a “new house tax” of $19,000.00 on a home selling for $200,000.

In addition there are sewer and water acreage and capacity fees as well as inspection fees, averaging $12,000 which, added to taxes of $19,000, means $31,000 goes to the government from the sale of this $200,000 home.

And I could add the property taxes on the land between the time it left agricultural use and the time that the development process started – all of which goes to the county and cities. And all the laborers pay FICA/Medicare. And the material suppliers pay income tax on the value they add to their products.

To all these taxes and fees totaling $31,000, some want to add an $800 tax each time the house sells!!

But it gets worse: A land transfer tax imposes this new tax on sellers of older houses as well as new houses – even if the new owner has fewer kids or fewer drivers than the selling family. As a way to make “growth pay for itself” this new tax is wildly misaimed. The Smith family (with 3 cars and 3 kids in public school) – sells to the Jones family (with 2 cars and 2 kids who are already in college). That’s another $800 tax even though our “infrastructure” is less burdened. If two identically situated families trade houses so that each can live closer to work, that’s another $1,600 in taxes – even though the burden on the roads is lessened.

Or take two identical houses – one on Elm Street and another on Maple Street. The Elm Street house is owned by the Smiths who have two cars and two kids who mature from birth to age 25 until they are out of the nest. The Smiths die and will the house to their children. No tax. The Maple Street house is owned by the Allens who sell to a succession of 5 owners who each have two cars and two kids at the same ages as the Smith children. This house pays an extra $4,000 in tax – a bizarre difference.

“Don’t tax me, don’t tax thee, tax the fellow behind the tree” is the battle cry of demagogues who want to extract more money out of other people. But we have met the taxpayer and we are it.