Taxes have long been used by policymakers to promote and discourage particular behaviors in both individuals and societies. The use of such taxes touches all aspects of life and spans the political spectrum; from the vice tax on behaviors deemed to be immoral such as alcohol and tobacco consumption to the gas tax designed to promote public transit to tax deductions for gifts to charitable organizations.

The world of urban planning and development is certainly no stranger to incentive-based tax plans. Property taxes are, after all, generally the predominant source of income for local governments and the major source of funding for public schools. Cities and counties create special development zones with differing taxes and assessments to be used for localized infrastructure and development projects. Tax credits and other incentives are applied in areas that may be in need of private investment and rehabilitation.

With the exception of property taxes that mostly go to a general fund, all of the above schemes are designed to achieve specific results. They attempt to encourage developers into participating in the rehabilitation of blighted areas or they collect revenue, generally from commercial entities, that will be spent by the public sector on specific projects. How would this work though if we were to apply the scheme not to corporate or commercial enterprise, but to actual residents?

Characterized by the influx of affluent individuals into urban areas and a dramatic reduction in affordable housing, gentrification is a highly contentious issue in most American cities today. While the creation of safer neighborhoods and dynamic, well-functioning street-scenes that comes with gentrification isn’t inherently bad, the resulting destruction of culture and affordable housing is troubling. We seem to have found policies that will successfully get the ball rolling on neighborhood redevelopment, but we have yet to coalesce around policy that can slow or even stop the ball once it becomes too large and too fast.

East Atlanta Village – One of the Most Gentrified Neighborhoods in Atlanta

A recent report on gentrification done by Governing ranked Atlanta 5th out of the largest 50 cities in America in terms of the number of census tracts experiencing gentrification since 2000. While gentrification has many different meanings to many different people, Governing decided that a tract experienced gentrification if its median household income and median home values fell within the bottom 40th percentile of all tracts in the city in 2000 and then recorded growth in the top third percentile in both home values and percentage of adults with bachelor’s degrees. Of the Atlanta census tracts that met the initial qualification, 46.2 percent experienced gentrification.

Georgia Tech Urban Planning Professor Dan Immergluck found similar data with regards to apartments. Between 2012 and 2014, 95% of the new apartments in Atlanta were considered to be luxury with more than half of the city’s census tracts recording measurable declines in the number of low-cost (under $750 a month) units. The local market is segmented between affordable units in very impoverished neighborhoods and high-end luxury units. Immergluck’s recommendations are consistent with larger thought on the issue: dedicate more resources, many more resources, to providing affordable housing, amend zoning codes to allow greater density and a greater array of living situations, and significantly improve transportation to ease the necessity of residing in particular neighborhoods.

Demand for housing in urban areas is too high and supply is simply too low. Most of our approaches to the problem seem to be centered on providing more housing and increasing that supply side. This is obviously the ideal approach, but we all know that there are few things more controversial than proposing a denser development in an existing neighborhood. People generally support more housing, but few want it their own neighborhoods (see our previous article on whether constructing taller buildings would “solve” gentrification). While we’re dealing with this supply side, should we at least be thinking about the other side of the equation? While stunting demand for housing is likely a less-desirable method of providing affordable housing, perhaps we should at least consider it.

We’re already wading in the waters of controversy by even talking about gentrification so we might as well throw in taxes while we’re at it. Can and should tax policy be used to direct the flow of demand for urban housing in our major cities? In the same way a damper is used to correct sway on tall skyscrapers or the Federal Reserve fluctuates interest rates to control inflation and investment, could taxes on the transfer of property be used to “correct” or steer demand?

The two major taxes associated with the transfer of real property are the aptly named transfer tax and the mortgage or intangible tax. States and jurisdictions may call them by different names, but in the end the government is going to take a cut when you convey or sell an economic interest in the property (though not all states and jurisdictions levy such taxes). The transfer tax applies in a traditional sense when property is being sold from one person to another and the mortgage or intangible tax applies when  interest in property is being conveyed to the entity financing the purchase. Generally, as is the case in Georgia, the seller pays the transfer tax and the buyer pays the mortgage or intangible tax.

Almost universally the taxes are designed to raise revenue in the same manner as a sales tax on most pieces of personal property. Sometimes, though, a sales tax is used to deter choice activities; most notably the activities of drinking and smoking. These are considered safer taxes and thus more likely to be supported across the political spectrum as most people view the two activities, particularly smoking, as undesirable behavior. You hardly notice the sales tax on your candy bar because it represents such a small percentage of the price of the product, but the opposite may be true in many jurisdictions when you buy beer or cigarettes.

While the actual amount being paid for taxes on the transfer of real property is quite high, the tax rate is much lower than the rate on the sale of a food item. The charts below demonstrate the transfer tax and mortgage tax for select jurisdictions. While states and jurisdictions may levy a 5-10% tax on food and other personal items they only levy between .1 and 2% on the sale of real property. While it certainly is no chump change, the $3,000 tax on the sale of a $300,000 home probably isn’t going to impede the transfer of such property.

Clearly the general policy is that we don’t want to deter the transfer of real estate. A bedrock legal principle of ownership in land is the ability to transfer land; generally, any law that handicaps that ability runs the risk of being unconstitutional.  Governments and society in general have placed a heavy emphasis on home ownership and, as we saw in 2007, our economy is greatly effected by the exchange of real estate.

In Georgia, the transfer and intangible taxes are uniform across the state: .1% is levied on the transfer of property from one person to another, based on sales price, and .3% is levied on the loan needed to purchase the property, based on the loan amount. Exceptions are made when the government, a church, or credit union are parties to the transaction, but other than that those are the rates across the board. This isn’t the case though in the other states. California, New York, and Nevada, among others, allow local counties and cities to impose additional taxes while in Maryland the basic tax rate varies widely among the counties. DC, New York, Hawaii, Maryland, Virginia and several other states allow tax rates to change based on sales price.

Even those states that do allow local jurisdictions to formulate their own transfer tax structure, the rates don’t appear to be designed to steer demand. For instance, Los Angeles’s rate of .56% on the sale price of real property (California’s .11% rate plus LA’s .45%) is still dramatically lower than the city’s 9% sales tax and the state’s roughly 7% tax on packs of cigarettes (CA’s $.87 excise tax on packs of cigarettes based on an average price of $6.25 per pack). Oakland, on the other hand, levies a hefty 1.5% (plus California’s .11%) on the sale price of a transfer. This could come close to being enough to make people think twice, but California appears to have no mortgage recording tax and the buyer and seller share the cost of the city’s transfer tax thereby lowering the burden on the seller.

A more dynamic tax policy could manage demand in cities by steering activity on a more real-time basis. The state could allow local jurisdictions to set transfer tax rates and those rates could be tied to increases in housing prices: as prices rapidly increase so too does the transfer tax rate. A high transfer tax rate may suppress out-of-control demand and rapid price escalation in a particular neighborhood and drive demand in surrounding neighborhoods. A system of tax credits could be established to encourage the transfer of property between individuals based on economic and geographic qualities. Tax rates may have to be increased to persuade buyers and sellers to utilize the credit scheme and more formal rules may need to be adopted regarding how the buyer and seller arrange for payment of such taxes.

To be clear, this is more of a thought exercise than a policy proposal; few of us want higher taxes and greater government control over how our property is transferred and many legal hurdles would have to be overcome to implement such a system. With that said, many people would probably appreciate a more stable real estate market where housing prices don’t dramatically rise one year then dramatically depreciate the next. The federal government attempts to stabilize the economy through lending practices and fluctuating interest rates, but this is aimed at the health of the national economy as a whole; there really isn’t a comprehensive plan for stabilizing the local real estate market. The best we have is a patchwork of federal, state, and local programs that promote the rehabilitation of neighborhoods over extended periods of time and help individuals purchase and stay in homes.

If we don’t want to go down the road of a hyper-managed local real estate market then perhaps we should focus much (much) more on increasing the supply of affordable housing in desirable neighborhoods. A recent report by the Wall Street Journal shows that White House economists are doing just that. We wrote in a recent post, as have many others for many years, about the need for relaxed zoning restrictions in certain areas of Atlanta and the White House appears to be attached to this idea. The federal government, though, has little control over local zoning and land use policy when major environmental and other Constitutional concerns aren’t a factor. While the state vests local jurisdictions with the ability to zone and craft land use policy, generally, especially Georgia, it leaves much of the policy decisions to the local jurisdictions. This generally results in zoning rules and land use policy that is hyper-localized and not in-sync with the needs of the larger community.

Ultimately, it appears that the demand side of the housing equation is dominated by thinking about the larger picture and the supply side is dominated by thinking about the smaller picture. A solution to all development issues likely includes giving greater control to regional authorities in the management of housing, development, and transportation issues since, after all, most of us freely move between jurisdictions on a regular basis. Drastically improving transportation options and mandating the creation of more walkable environments on a regional basis could greatly alleviate escalating housing prices in choice neighborhoods. In the end, a solution requires cooperation as well as the understanding and belief that the region functions as one dynamic unit wherein each jurisdiction is dependent on the well-being of other jurisdictions.

Research Links:

http://www.ncsl.org/research/fiscal-policy/real-estate-transfer-taxes.aspx

https://dor.georgia.gov/real-estate-transfer-tax

https://federaltitle.com/purchase/taxes

https://www.elliman.com/reports-and-guides/guides/new-york-city/closing-costs

https://realproperty.mygabar.org/intangible-recording-tax-some-practice-tips/