WHITE PAPER: Understanding the Real Estate Transfer Tax – Why Increasing It is Bad for Homeowners, REALTORS®, and Economic Growth
Introduction
As local governments seek to balance budgets and address fiscal challenges, one approach gaining attention is increasing the real estate transfer tax. While this may seem like a straightforward way to boost revenue, it carries significant drawbacks for homeowners, REALTORS®, and the broader economy. This white paper outlines the reasons why increasing the transfer tax is a problematic policy choice, supported by real-world data, economic analysis, and regional market trends.
What is a Real Estate Transfer Tax?
A real estate transfer tax is a fee imposed by local or state governments on the transfer of property ownership. It is typically calculated as a percentage of the sale price and is paid at closing by either the buyer or seller, depending on local regulations. Transfer taxes vary widely in structure and amount but share one common feature – they add significant costs to real estate transactions.
Why an Increase is Bad for Homeowners, REALTORS®, and Economic Growth
- Transfer Taxes are Regressive and Disproportionately Burden Lower-Income Households
Transfer taxes are inherently regressive, placing a greater financial strain on lower-income households and first-time homebuyers. Data from the National Association of REALTORS® (NAR) demonstrates that lower-income households pay a disproportionately higher percentage of their income in transfer taxes:
- Households earning $10,000-$19,999 may face transfer tax burdens equivalent to 13% of their annual income.
- Households earning $80,000 or more typically pay only 3% of their annual income in transfer taxes.
This disparity means that lower-income buyers are more likely to be priced out of the housing market or forced to compromise on their choice of home, further widening the wealth gap.
- Transfer Taxes Increase Closing Costs and Reduce Housing Affordability
For many first-time buyers, the upfront costs associated with purchasing a home are a significant barrier. Transfer taxes, which are typically due at closing, add to these costs. For example:
- A 2% increase in the transfer tax on a $346,885 starter home could reduce a family’s purchasing power from $393,333 to $330,400, based on typical savings of $41,300 for upfront costs.
This loss in purchasing power not only prevents families from entering the housing market but also reduces the overall demand for homes, potentially leading to lower property values over time.
- Transfer Tax Revenues are Unreliable and Subject to Market Volatility
Unlike more stable revenue sources, transfer tax collections are highly sensitive to real estate market conditions. Historical data from San Francisco, for example, shows that transfer tax revenues fluctuated dramatically over two decades, ranging from $50 million to over $400 million depending on market activity.
This volatility can create significant budget shortfalls during economic downturns, forcing governments to cut services or seek emergency funding. Relying on such an unpredictable revenue source can destabilize local budgets and create long-term financial challenges.
- Transfer Taxes Discourage Investment and Economic Growth
High transfer taxes can drive businesses and residents away, undermining local economic development efforts. Evidence from Los Angeles, where a high transfer tax (“LA Mansion Tax”) was recently implemented, shows the following impacts:
- An 86% drop in property sales over $5 million within months of the tax taking effect.
- Property owners intentionally pricing listings just below tax thresholds to avoid higher rates.
- Increased efforts to avoid taxes through creative property structuring and price manipulation.
Similar trends could occur in Hamilton County if a significant transfer tax increase is adopted, potentially pushing prospective homebuyers, businesses, and developers to more tax-friendly neighboring communities.
- Transfer Taxes Can Lead to Reduced Property Values
As buyers account for the additional cost of a transfer tax, the net price they are willing to pay for properties decreases. This can have a ripple effect, reducing overall property values and weakening the tax base that supports local government services. Lower property values also reduce homeowner equity and limit the ability to leverage property for future investments.
- Hamilton County is Already Losing Market Share to Surrounding Counties
Over the past 30 years, Hamilton County has experienced a decline in the number of homes sold, while surrounding counties like Clermont, Butler, and Warren have seen significant increases in sales volume. This trend can be attributed to a combination of factors:
- More inventory and development – Surrounding counties have prioritized new housing development, creating more opportunities for buyers.
- Lower taxes – Lower property and transfer taxes make these counties more attractive to both homebuyers and businesses.
- Better affordability – A more competitive housing market with lower costs has driven higher sales volumes.
In contrast, Hamilton County’s higher tax burden and limited new development have contributed to its declining share of the regional housing market, reducing its competitiveness for new residents and businesses.
- Transfer Taxes Should Fund Programs with a Multiplier Effect
If a transfer tax increase is considered, any revenue generated should be invested in programs that create a multiplier effect on the local economy. This means prioritizing projects that stimulate growth, attract businesses, and increase the long-term tax base. Examples include:
- Infrastructure improvements that support commercial and residential development.
- Workforce development programs that attract new residents and businesses.
- Affordable housing initiatives that increase housing inventory and reduce costs for first-time buyers.
Investing in such projects can create a virtuous cycle of economic growth, driving up property values, increasing homeownership, and generating higher long-term tax revenues.
- Municipalities Over-Rely on Real Estate-Related Taxes
Local governments disproportionately rely on real estate-related taxes to fund non-real estate programs. Nationally, property taxes account for approximately 72% of local tax revenues, placing an undue financial burden on homeowners. This heavy reliance on a single revenue stream makes local budgets more vulnerable to market fluctuations and housing downturns, putting critical public services at risk.
Conclusion – A Better Path Forward
While the need for local government funding is real, increasing the transfer tax is not the answer. More equitable, stable, and growth-oriented revenue solutions should be prioritized. By keeping housing affordable and real estate transactions accessible, we can build stronger, more vibrant communities that benefit all residents.
The REALTOR® Alliance of Greater Cincinnati encourages policymakers to carefully consider the broader economic impacts of transfer tax increases and to explore alternative funding options that do not disproportionately burden homeowners and REALTORS®.
For more information or to get involved in our advocacy efforts, please contact:
REALTOR® Alliance of Greater Cincinnati