Legislatures in several states that historically have steered clear of real estate transfer taxes now are considering adding them to help deal with mounting deficits. Although proponents say real estate transfer taxes are necessary to help fund state services, opponents view them as an unwarranted tax on home sales. Some experts claim real estate transfer taxes could have a dampening effect on an already-depressed housing market.

What transfer tax opponents say:
Recently, taxpayers in several states that don’t have transfer taxes have launched campaigns, including proposed constitutional amendments, to prevent state lawmakers from imposing transfer taxes.

Those groups say there are good reasons for taxpayers to block transfer tax statutes, because they:

• Raise the cost of home sales transactions, says NATIONAL ASSOCIATION OF REALTORS® Chief Economist Lawrence Yun. “The increased cost may prevent some buyers from purchasing a home.”

Example: A 1% transfer tax on a home valued at $400,000 would amount to $4,000. First-time home buyers can be hit especially hard, as they have no equity from the sale of a prior home to help pay transfer taxes.

• Are hard on seniors who need to sell their home, since a home is often the largest and most important asset a person has. A real estate transfer tax burdens home owners who work hard to create equity in the home only to see it go to the government when they sell their home.

• Can negatively influence current home values, says Al Angrisani, former U.S. Assistant Secretary of Labor and author of Win One for the Shareholders.  “A transfer tax works like a depressant on home value,” he says.

• Amount to double taxation. Home owners already pay property taxes to state and/or local governments every year, say critics. Making home buyers and home sellers pay more taxes when a house changes hands adds a second layer of fees.

In states that don’t have transfer taxes, home owners often fight frequent legislative attempts to impose them. In Montana, lawmakers have proposed a transfer tax nine times in the past 10 years.

Proponents think transfer taxes are needed:
Transfer taxes are a popular tool for generating revenue. In fact, 37 states now impose transfer taxes, which are paid at the real estate closing by the buyer, seller, or both as a percentage of the total sale price. Percentages range from .01% in Colorado to up to 2.2% in the District of Columbia.

In some places, more than one jurisdiction charges a transfer tax. For example, in Philadelphia, the state collects a 1% transfer tax and the city charges another 3% transfer tax.

Good reasons to use transfer taxes:

• Fund many state programs. In fiscal year 2004, real estate transfer taxes produced about $7 billion in state tax revenue, according to the U.S. Census Bureau, as reported by the Federation of Tax Administrators.

• Pay for schools, roads, and other infrastructure that government has to build to accommodate growing populations.

• Dedicate to specific purposes, such as the environment: Tennessee gives a portion of the transfer taxes it collects to wetlands preservation programs.

What others are doing:
Not every state legislature believes in using transfer taxes. Fourteen states have remained free of real estate transfer taxes: Alabama, Arizona, Idaho, Indiana, Louisiana, Mississippi, Missouri, Montana, New Mexico, North Dakota, Oregon, Texas, Utah, and Wyoming.

In Missouri and Montana, taxpayer groups successfully worked with state REALTOR® associations to pass a constitutional ban on transfer taxes in 2010.

Angrisani notes there’s good reason for this groundswell of sentiment against transfer taxes. “States resort to taxes like these because politicians simply can’t make the hard decisions to cut spending. Whether they like it or not, that’s a decision state governments are going to have to make,” he says.

What you can do

If this is an issue you want to get involved in:

• Contact state and local legislators. Let your state representatives know you’re in favor of legislation banning or regulating transfer taxes.

• Volunteer with groups active in the issue. State REALTOR® associations are actively working with taxpayers and taxpayer groups to gain support for bans on or regulations of transfer taxes. Find a listing of state associations here.