Instead, promote incentives to increase economic activity and to create the change we all want to see.
Most states or other governmental subdivisions that we are aware of impose what is known as a conveyance tax, transfer tax, sales tax or fee on the sale of real property. These taxes are generally very low in percentage terms and are like most other taxes or fees—designed to generate revenue.
On top of these taxes, governments occasionally levy additional taxes, fees or surcharges in smaller or incremental amounts, again to raise revenue. But these are targeted to specific towns, districts or counties that may be suffering from specific local problems that require the increased revenue to fund special projects. These taxes are normal, passive and, to a large extent, appropriate.
When these taxes are increased exponentially, however, The American Association of Private Lenders stands firmly against such taxing schemes and takes an active role in opposing their implementation.
Why AAPL Opposes High Transfer Taxes
AAPL opposes significant transfer taxes for several reasons.
First, these taxes directly harm our members by increasing the cost of doing business—whether it’s a lender or broker whose borrowers take fewer loans as their profit margins erode or other service providers whose business depends upon these lender transactions. The result is a decrease in total business.
By making it more expensive to buy or sell real estate, fewer total transactions will take place. This is due in large part to fewer business-related transactions, because business transactions acutely depend upon profit margins large enough to make an investment worth the time and the risk.
Second, they indirectly harm other service providers and industries that depend upon business-related transactions and total transactions. These industries include consumer-level and trade-level renovation service providers, retail and commercial construction materials providers, attorneys, real estate agents and title insurance providers, among others. With fewer transactions, home renovation will decrease, impacting the contractors who provide these services the most. Ultimately, it results in lower income and loss of jobs. Reduced income and job losses are felt across the board, which in turn touch all aspects of a local or regional economy.
Third, these taxes lead to an erosion of the very tax revenue they were designed to produce, harming the states or local communities they support. As overall transactions decrease, there are fewer transactions from which the tax can be generated.
Results like these are a particularly hidden consequence when the transfer tax is increased on only particular subsets of transactions, such as business-related transactions. When business-related transactions decline due a tax, for example, those transactions are not generally replaced by consumer transactions that would make up the tax shortfall. This is because the property is either a commercial property or a blighted, rundown, dilapidated, vacant, residential property that is not move-in or consumer ready.
Consumers will not purchase these types of properties, unless they are first converted or remodeled via a business-related transaction. A decrease in total tax revenue results in fewer funds available for the various initiatives, often laudable, that the revenues were designed to serve. In short, the result is the opposite of what was intended.
Fourth, the increases lead to a decreased rate of housing stock availability, particularly in the lower, affordable end of the market.
As the increased cost of transactions decreases the business-related transactions frequency, there are fewer conversions of commercial property into housing or the rejuvenation of formerly vacant or derelict properties into useful and legal housing. In the limited instances in which these transactions continue to take place, it shifts to the higher end of the market, where the increased transaction costs can be hidden and more easily borne by the end consumer. Transfer taxes are generally regressive in their effect, harming lower-income communities.
Fifth, but certainly not finally, higher transfer taxes are disincentives to homeownership and business-transactions alike.
Homeownership is a universally acknowledged societal good, playing a vital role in helping to build strong, stable communities. Governments keen on promoting this institution should not be disincentivizing its growth and attainability.
Ironically, a decrease in homeownership leads to an increase in rentals, putting pressure on the available rental stock, which results in higher rents. Nearly universally, landlord owners of rental property are business, profit-maximizing entities that are acutely affected by increased transaction costs. Increased costs result in fewer total transactions, fewer units available and, thus, higher rents despite the units being in worse physical conditions. In this way, higher transfer taxes have several significant effects on affordability, directly with respect to homeownership and indirectly in rentals.
Incentives Increase Economic Activity
While AAPL strongly opposes transfer taxes greater than a nominal amount, which disincentivizes the activities needed to develop healthy, thriving, lower-cost communities, we strongly support and advocate for any sort of incentive to directly promote economic activities that lead to these communities.
Incentives could, for example, take the form of a reduction in transfer taxes, either broadly enacted or targeted to specific areas or transaction types. With proper incentives, the result is more economic activity—more transactions that the remaining or reduced transfer tax rate can capture revenue from. It means cheaper access to housing. It means less risky real estate investments and, therefore, more available housing, further pressuring prices downward.
Increased economic activity in housing also results in the removal of blighted properties, which in turn reduces crime and increases property values. When property value increases, it results in increased property tax revenue, further promoting the feedback loop that a reduced transfer tax can help initiate.
AAPL and its members recognize the several struggles that housing in the U.S. faces, from affordable housing to blighted and crime-filled neighborhoods. We are supportive of efforts to address these problems, and our members want to be a part of the solution. Disincentivizing those with the greatest ability to help is not the way forward. Instead of governments attempting to raise revenue through additional taxation, governments should promote incentives to effect the change they want to see.