News from SFAR: Transfer taxes

Sep. 3—With an ongoing debate over levying a local home tax in Santa Fe, it's a good time to review the impact transfer taxes can have on housing.

A transfer tax is generally a percentage of consideration or a flat fee (excise tax) per unit of value. In states that levy a transfer tax, most use a flat fee with only about 20 percent using a percentage. Some states, including the neighboring state of Arizona, have adopted constitutional amendments that prohibit these types of taxes on real property mortgages or transfers.

In New Mexico, a local option real estate property transfer tax is prohibited: the state does not give local governments, such as the city of Santa Fe, the authority to impose any tax on property measured on an ad valorem, per unit or other basis.

With the ongoing housing crisis across the country, many states and localities continue to consider levying transfer taxes and other associated taxes on housing. Transfer taxes are regressive by impacting entry-level or lower-income homebuyers more greatly than buyers with higher incomes. Transfer taxes cannot be financed into the mortgage loan since it is not tax deductible like some property taxes and must be paid in full at the time of closing.

Transfer taxes have a negative impact on sales, with research indicating that for every percentage rate or increase there is a direct causal reduction in sales. In New Mexico, a reduction of sales would adversely impact the collection of gross receipts taxes associated with the real estate transaction. In some cases, research has demonstrated that the transfer tax reduced home sales and prices so dramatically that the overall benefit of the tax was completely diminished.

Every home sold boosts the surrounding economy since a variety of industries and businesses benefit at each stage of the process of moving into a home. In New Mexico, it is estimated that for every home sold, the local economy gets, on average, a boost totaling $93,000. According to research, transfer taxes would reduce both the volume and number of home sales along with any additional economic benefits generated from those sales.

Transfer taxes remain an unpredictable source of revenue due to fluctuating economic and housing market conditions. In fact, some states will not bond against transfer taxes due to this volatility. The 2008 recession and 2020 pandemic are recent examples of how housing markets can face unpredictable and significant adjustment periods.

Once enacted, legislative changes to transfer tax laws are common. The most significant changes typically revise the statutes' applicability or exemptions, redirect fund allocations or increase the tax rate.

Some localities and states that direct growth by providing significant infrastructure for development, such as roads along with access to water and sewer, could argue that a local transfer tax helps defray these upfront costs. But in New Mexico, developers are burdened with underwriting these costs through impact fees, and in many cases, demanding and costly land use regulations. These additional expenses are passed on to consumers, thereby increasing the price of homes. It seems unreasonable for state or local governments to further capture any equity from New Mexican homes when there has been so little, if anything, invested by the government.

News from SFAR: Transfer taxes