The City of Los Angeles is considering doubling the “Documentary Transfer Tax” from $4.50 per thousand to $9.00 per $1,000 of sale price. Together with the LA County tax, it would total an additional 1.1% of the home sale.
Doesn’t sound like much? Guess again: A $500,000 house – not unheard of in Los Angeles – would cost an additional $5,500 in taxes on top of all the other closing costs. Because transfer taxes in nearby cities are lower, buyers will just go somewhere else when they are priced out of the Los Angeles market.
For the City of Los Angeles trying to close a $222 million budget gap on the backs of a small subset of the population (more on that in a minute), the doubled tax will not bring them close to the $100 million in
new tax dollars that they are expecting.
“We want a stable employer”
At the City Council’s Budget & Finance Committee hearing on April 16, 2012, union representatives pleaded with councilmembers and staff not to cut services and lay off workers. They urged the city to stick to its previous contractual agreements for pensions and staffing levels.
Just for this reason alone, the transfer tax is not a desirable source of funds. It cannot help the city be the “stable employer” providing quality services. Transfer taxes are far more volatile than income taxes or sales taxes. In fact, transfer tax revenues fluctuated a remarkable 50% between 2005 and 2010. There is no good way to create sound public policy on such an unpredictable stream of money.
How do we manage millions in budget deficits?
The proposal to double the transfer was staff-initiated from the City Administrative Officer (CAO) and intended to help close the $222 million budget gap. If upheld by the City Council, it would go to the voters as early as March 2013.
The CAO seeks to justify the tax hike by arguing that some San Francisco Bay Area cities charge even more, or $12.00-15.00 per thousand. This improper comparison ignores that real estate sales in Bay Area cities do not drive the Los Angeles market the way that sales in Los Angeles area cities clearly do – i.e. the City of Los Angeles will lose out as buyers go to other cities next door.
“Increasing the rates of the documentary transfer tax … would burden a smaller subset of individuals and be based solely on voluntary transactions.”
This eye-popping quote from the
CAO’s proposal explains, far better than we could, how excess transfer taxes and mandates at the time of sale are patently unfair: they burden a small and under-represented class of people (buyers and sellers, about 2-4% of all city residents) in order to benefit the population as a whole.
When buying or selling a home, any homeowner and any REALTOR® will tell you that there is plenty of work to do. For cities, this is not the best time to get their attention with taxes and mandates; this is perhaps the worst time ever.
A doubled transfer tax is not the same thing as doubled revenue in the city coffers. And families disqualified from buying that Los Angeles home are families who are keeping their sales tax dollars, employment and consumer spending out of the city as well. In the end, no one wins. If this exercise in through-the-looking-glass math ever makes it to the voters, then the voters should soundly say no.
