Repealing Transfer Tax: A Long-Term Benefit to Delaware Economy

Delaware has the highest transfer tax of any state in the country, and there is a groundswell of support on the horizon to reduce that tax at the next legislative session.

When it comes time to buy or sell a home, there is a transfer tax that gets paid to the state.

This tax is shared evenly by both the buyer and seller. In 2017, the state was facing a major budget shortfall for the 2018 fiscal year, leaving legislators in Dover looking for a way to generate more revenue while at the same time, tightening the belt when it came to spending.

After several permutations and combinations were considered, the legislature pushed through an eleventh hour increase of the transfer tax by 33 percent from three percent to four percent.

A modest home sale of $200,000 saw a spike of an additional $1,000 tax bill for both the buyer and the seller of each property transaction.

This “solution” to the shortfall turned out not to be a solution at all but just a temporary Band-Aid, as the state had to deal with budget shortfalls in each of the past two years as well.

Instead, the result was that it made housing more expensive. It put the burden of Delaware’s spending problem solely on homebuyers and sellers, and likely had an adverse effect on the Delaware economy.

Housing tangentially helps the economy because it helps create revenue for local businesses, which in turn creates jobs, which helps boost wages, which attracts more people to a community and strengthens the tax base.

A rising transfer tax can be prohibitive to homeownership because it increases the cost to buy a home, and when prices increase, fewer people can afford to buy, therefore fewer people are also able to sell their homes.

Not everyone can afford to add an additional $1,000 to the cost of a home. According to the Wilmington New Journal, data provided by the Homebuilders Association of Delaware indicates that for every $1,000 increase in the cost of buying a home, 850 households are priced out of the market.

That means since this tax increase in August 2017, an additional 1,700 families in Delaware each year were unable to afford to buy a home.

And for those who can afford this additional tax, many have to borrow more money to finish the purchase. This means larger mortgage payments and larger mortgage payments mean less money to spend in the local economy.

This is the converse of what was highlighted above – as less spending in the local economy hurts local businesses, reduced jobs and wages, and diminishes the tax base.

Earlier in 2019, Delaware State Legislator Michael Ramone introduced Hb 32- An Act to Amend Title 30 Of the Delaware Code Relating to Decreasing the Realty Transfer Tax.

The legislation would have reduced the transfer tax rate back to three percent, where it was prior to the 2017 increase.

However, Ramone’s legislation was tabled over questions regarding economic impact in the 2020 fiscal year.

Yet, there seems to be some grassroots support for it to be brought back to the table at the next legislative session in Dover.

The Delaware Association of REALTORS® (DAR) conducted a poll and found that when once residents knew the basics of transfer taxes, that 56 percent would support reducing the tax by one percent.

DAR is not alone in support of this rollback. The Delaware Chamber of Commerce as well as the Homebuilders Association and Building Contractors Association have publicly expressed support of reducing this tax.

Again, the key points against higher transfer taxes are:

• Real estate transfer taxes are regressive because the tax burden is higher for lower-income households.
• They are also discriminatory because they are assessed against one type of asset – real estate – while similar taxes are rarely, if ever, applied to financial assets, such as stocks and bonds.
• They violate the principle of horizontal equity, which holds that people who are equal should pay similar taxes, meaning that people who move more frequently, for whatever reason, are shouldered with more of the burden than those who don’t move at all.
• The narrow focus of property transfer taxes places a larger burden on a smaller share of the population relative to broader-based taxes.
• Increased closing costs on the transfer of existing residential property are likely to reduce the ability of new and current homebuyers to purchase a home. The tax cannot be rolled into a mortgage and must be paid upfront at transfer.