Realtors: Transfer tax hike will hurt state’s economy

DOVER — With a 1 percent real estate transfer tax increase approved by Gov. John Carney early Monday morning, both buyers and sellers of homes will have to reach deeper into their pockets at closing to seal the deal.

Currently, the state splits the 3 percent transfer tax with counties, but the new revenue from the increase to 4 percent will all be headed for the state’s general fund. The change is estimated to take another $45 million for state coffers this year and a possible $71 million the following year.

Realtors believe this will be to the detriment of the real estate industry, and by extension, to the residents in the state.

Bruce Plummer, president of the Delaware Association of Realtors, said any increase in the real estate transfer tax makes it more difficult for people to buy and sell homes in Delaware.

“We believe that it’s going to have a negative impact on Delaware’s economy,” he said. “Real estate sales accounted for 18.4 percent of the gross state product in 2015 — it’s a major part of the state’s economy. When you do things that harm real estate business, you hurt Delaware’s economy.”

In an example, Mr. Plummer said as of Aug. 1 (when the increase takes effect) a couple scrimping and saving to buy their first home for $300,000 will now have to rustle up an extra $1,500 in new taxes in addition to the $4,500 in existing taxes to close the purchase.

“It takes a young couple a long time to save for a down payment, given the average household income in Delaware,” he said. “Imagine this couple trying to buy a home only to realize that now they have to come up with another .5 percent on top of other closing costs, title searches, surveys, attorney’s fees and recording fees. Young buyers may not be able to swing that $1,500 more. They’ll need more cash, but you can’t borrow transfer tax, you can’t just roll it into the mortgage.”

Feeling the pinch

Home sellers — who will pick up the other 0.5 percent of the new increase at closing — will feel an equal pinch, he said.

“It’ll hurt the seller because they’re going to walk away with less money,” said Mr. Plummer. “A lot of times they don’t have a ton of cushion there, especially in today’s market and economy.”

Maggie Scarborough, a former Kent County Association of Realtors board member and realtor from Burns & Ellis in Dover, agrees.

“A 1 percent increase is putting a heavier burden on home buyers and sellers when they already struggle to come up with cash to close on a new home, or equity to get out of a current home,” she said. “While I appreciate the governor and legislature’s difficult job of coming up with new sources of revenue — I am disheartened that it’s, at least partially, on the back of the real estate industry.”

Mr. Plummer said the lasting damage might be to Delaware’s communities.

“We know for a fact that home ownership builds strong communities,” he said. “Those communities have better school systems, better health, higher volunteerism rates and lower crime rates. We’re not just trying to protect the industry, we’re trying to protect the home owner and Delaware’s private property rights.”

Less buying, more renting

Communities of renters are less likely to transform into communities of home owners under the increased transfer tax, said TJ Redefer, owner of Rehoboth Bay Realty.

“For those people struggling paycheck to paycheck that finally get enough saved up to buy a house, when they look at the costs associated, they may just continue to rent,” he said. “When most buyers are coming to the market, their first question isn’t usually: ‘how much is the transfer tax?’ They usually start looking in their price range and further along in the process find out about all the closing costs and taxes. With this tax increase it just makes those numbers that much less friendly and makes new buyers more likely to say: ‘maybe we’ll just have to wait and keep renting.”

Lower-price homes impacted

As a “beach realtor,” Mr. Redefer believes strongly that the increased taxes actually impact buyers who can only afford lower priced homes more than it does wealthier home buyers.

“In my opinion, it affects the buyers the most at the lowest purchase price levels,” he said. “I don’t think affects the very wealthy much because many of them are buying their second or third homes and Delaware taxes otherwise are still fairly inexpensive. But for first-time home buyers? They are really the ones that are going to be hurt. In the state that’s mostly democrats, it’s surprising that the legislature would hit that demographic.”

Mr. Plummer said that when the association heard that a transfer tax increase was being negotiated, they started advocating with lawmakers on behalf of first-time home buyers — a group that he also believes is particularly impacted by the change.

While the budget was being debated on the Senate floor, Sen. Robert Marshall, D-Wilmington, did propose an amendment to exempt first-time home buyers from the additional taxes.

“When it comes to the first-time home buyers, we should recognize and lend a helping hand,” said Sen. Marshall. “I’m disappointed that no one at the table, when the issue came up, mentioned the fact that first-time home buyers should be exempt.”

Sen. Marshall agreed to table the amendment after Sen. Gregory F. Lavelle, R-Wilmington, objected.

“I don’t think this is a bad idea, it’s just bad timing,” said Sen. Lavelle, who suggested the change get addressed with the help of the Delaware Association of Realtors in January when the legislature resumes.

“If we have agreement, then I will agree to table it and we can get back to it in January with a new bill,” said Sen. Marshall.

Mr. Plummer anticipates aggressively seeking this compromise next year.

“We’ve already gotten a fair amount of support for getting some relief for first-time home buyers when general assembly reconvenes,” he said. “In an ideal world, we’d have the entire rate brought back down to even lower than 3 percent, but at least a little relief for this vulnerable group as soon as possible would be a slight compromise. With this increase we are among the highest rates of transfer tax in the country, if not the highest.”

According to Pennsylvania’s Department of Revenue their realty transfer tax is 1 percent of the purchase price, split between buyer and seller. Maryland has a reduced first-time home buyer’s rate of .25 percent, down from their regular rate of .5 percent in realty transfer tax.

Mixed feelings from county

One would be hard pressed to find anyone in business or government that thinks the increase in transfer tax was an excellent solution to the states budget gap, but some say it was better than the alternatives. Kent County Levy Court 1st District Commissioner P. Brooks Banta is one.

“Unfortunately, the transfer tax will likely have a substantial impact on the housing industry and real estate market,” he said. “But, things could have been much worse. What was being proposed early on for counties in budget negotiations was really serious and drastic — we’re talking millions of dollars that we’d have had no way to come up with. As commissioners, we certainly appreciate what the general assembly has done — we think they prevented hitting us too hard.”

Of course, Mr. Banta doesn’t feel that the county escaped the budget planned entirely unscathed.

On Sunday, the budget committee agreed to restore $37 million in funding for grants to nonprofit organizations, community groups and volunteer fire companies that was on the chopping block earlier in budget negotiations. However, the total grant appropriation, approved unanimously by both chambers, is still 20 percent less than in fiscal 2017.

“I think cutting grant and aid by 20 percent is going to be a minimal disaster, but it will be an issue that will have to be overcome as quickly as possible,” he said. “Paramedic funding, according to my calculations, is going to cost us an additional $379,546 with that 20 percent cut. That’s no small sum for a county. I don’t have a clue where that will come from because there are other pieces of the puzzle, that we as the county, are trying to resolve right now too.”

Staying optimistic, Mr. Banta said the county will lean back on fiscally conservative practices to ensure its service continue to operate well.

“We’ll remain strong and constant,” he said. “As for immediate changes, we have to make sure that we don’t pass any legislation that drains our coffers. We’re very conscientious about spending, and we’ll have to be the same about cutting as well to carefully compensate for this. We have one of the nation’s best paramedic programs. We’re very lucky and we’re going to continue to take care of our people despite the budgetary constraints.”

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