Progressive Transfer Taxes Can Help Fix Housing Inequality

October 06, 2020

Shane Phillips of UCLA’s Lewis Center for Regional Policy Studies has a bold new proposal to raise hundreds of millions of dollars for affordable housing in Los Angeles by taxing real property sales. Key to this proposal is a formula for redressing property tax inequalities by raising transfer taxes on the sale of properties with low effective property tax rates. Such a progressive tax would capture some of the windfall value that California property owners have accrued under Proposition 13. So how does it work?

Key takeaways:

  1. Los Angeles levies remarkably low transfer taxes, while San Francisco has collected $150 million more per year from transfer taxes with just a fraction of the population.
  2. By raising marginal real estate transfer tax rates at a progressive grade, Los Angeles could raise $600 million to $1 billion per year — up to 10% of its annual budget.
  3. By adding a transfer tax multiplier on the difference between assessed value and sale price, properties with low effective property taxes would net even higher taxes at sale.

It’s no secret that California’s reliance on sales and income taxes can be highly volatile, amplifying fiscal problems during times of economic distress. But with home values steadily rising even during a downturn, real estate transfer taxes can provide a relatively stable and generous source of revenue for local public services. Author Shane Phillips observes that San Francisco’s progressive graduated transfer taxes, scaling from 0.5% to 3% of sale price on higher-end homes, yields the city over $350 million per year. Los Angeles has even more potential for transfer tax revenue that is currently squandered.

“Los Angeles’ population is 4.5 times larger than San Francisco’s, and the total assessed value of property in the city is more than 2.3 times higher,” Phillips writes, “yet San Francisco collects significantly more transfer tax revenue each year.” Los Angeles collects just 58% of the transfer tax revenue than San Francisco, despite having 232% higher assessed property values.

Taxes may carry some risk of economic distortion, but Phillips observes that these relatively minor taxes would have a much smaller impact on sellers and the supply of homes than the enormous benefit the revenue itself offers. Since market prices are a function of demand, not taxes, the effect on home prices would be marginal, if any, as a slightly higher transaction cost would be more likely absorbed by the seller when the demand for housing is relatively inelastic. And if the tax exempts new construction sold within a few years of completion, it would have no effect on supply, either. “Given the housing affordability crisis, the social and economic benefits of additional funding for renter and low-income housing programs far exceed the costs to the buyers and sellers of property, who by their nature represent a privileged class in Los Angeles,” Phillips notes.

So a real estate transfer tax is clearly a good source of revenue with virtually no downside. How should it be implemented? 

Phillips recommends “optimal” tax rates scaling from 1.25% on properties sold for below $500,000 up to 3% for properties sold for $25 million and above. This is similar to rates in the Bay Area, but lower than in Berkeley. This can be enacted by a simple majority at the ballot box if revenue is allocated to the general fund. Transfer taxes are increasingly popular, as such measures passed even by a two-thirds majority in Berkeley and Oakland.

In a separate blog post, Phillips also recommends adding a “multiplier” to account for inequities caused by Proposition 13. The transfer tax could in some cases be doubled if the seller has been paying property taxes on an assessed value far lower than the sale price.

“The multiplier would grow as the effective property tax rate fell,” Phillips writes. “ If the effective property tax rate was 0.9% or higher, the multiplier would be 1.0 (no multiplier, in other words). If the effective tax rate was between 0.8% and 0.9%, the multiplier would be 1.2. This would continue all the way down to effective tax rates under 0.1%, which would receive a multiplier of 2.8.”

If we want to fix not just our state’s housing crisis but poverty and inequality at large, these would be reasonable steps to take to ensure that those who profit from the housing shortage pay their fair share toward ending it.