Why Tax The American Dream? Why Raising The Realty Transfer Tax Is Bad Public Policy

Governor Ed Rendell's Transportation Funding and Reform Commission has proposed to raise the state's realty transfer tax from 1 to 1.9 percent as a way to raise additional revenue to fund Pennsylvania's mass transit systems. The report questions the correlation between a sales tax on property ownership and the funding of mass transit and also details the harmful effects on Pennsylvania's economy the increase can have. The report notes that a recent poll of Pennsylvanians found that eight out of ten Pennsylvanians oppose increasing the realty transfer tax to help fund mass transit. Opposition to the proposed increase comes from all parts of the state including in both the Philadelphia and Pittsburgh areas where more people ride mass transit.

The realty transfer tax is a sales tax added to the purchase price of real estate and paid by the seller, the buyer, or split between the two. At the close of the fiscal year ended June 30, 2006, Pennsylvania took in more than half a billion dollars - $552.5 million - from this sales tax. Currently the state's realty transfer tax is 1%, but the proposed increase will raise it to 1.9%. On top of the state tax, at least another 1% is levied by the local municipality as well. Therefore, the 1.9% state realty transfer tax proposed by the Commission would actually bring the total to a 2.9% tax on the property's sale. Some cities in Pennsylvania, such as Reading, charge 4% in addition to the state's current 1%. Philadelphia and Pittsburgh charge an additional 3%.

In January 2006, the purchase price for a 3-bedroom home in Pennsylvania averaged $222,370. When one buys this “average” home, one owes $4,447 in realty transfer taxes, with half going to the state and half going to one’s locality. If the state succeeds in increasing the realty transfer tax to 1.9%, the transfer tax on this “average” 3-bedroom house would total a formidable $6,450, with the state getting $4,225 and local, $2,225. But even more punishing, if one bought or sold property in Pittsburgh or Philadelphia, one’s realty transfer tax total would spiral to $10,896, as one would have to hand over 3% for the local realty transfer tax and 1.9% for the state.

Increasing the realty transfer tax would immediately make the purchase of every property in Pennsylvania more expensive, and Pennsylvania is already struggling with a slow-growing or even shrinking population, a shortage of high-quality jobs, declining tax bases, and a housing slump. Making the tax climate more punitive chases people and businesses to friendlier climates in nearby states. Raising the tax could help make the costs of doing business in Pennsylvania higher than other states. With a decrease in the number of houses being sold in the state and the nation, Pennsylvania can ill afford to raise the prices of homes by increasing the transfer tax. Higher-priced houses also means less money can go into the private marketplace, where individuals can choose to invest in everything from property upgrades, to their children’s education, and to their retirement plans.

The report concludes that placing the burden of mass transit on something as sensitive to market changes as real estate and as important to our economy seems both unfair and unwise.