A Real Estate Transfer Tax (RETT) is a tax on the buyer and seller of a home (or any other real estate) at the time of sale. Most of the cities west of “the hills” have this tax, varying between 1.2 and 1.5 percent of the sales price of a home (compared with 5-6 percent real estate sales commissions).
The Road Action Group has projected that a RETT of 1.0% starting in 2017 could fund all of the required repairs and provide sufficient funds for maintenance through 2041. If this tax was supplemented by an extension of the half cent sales tax starting in 2023 when the current sales tax expires, the RETT could be reduced by 20 percent to 0.8%.
How would this financially impact the Orinda homeowner? The current homeowner would have to pay half of this tax when they sell their home. The average Orinda home sells once every 25 years. Last year, the average Orinda home sold for $1.5 million with the lowest sale being $466,000 and the highest being $4 million. A tax of 0.8 percent of the sales price is $12,000 on the average $1.5 million. While this is a lot of money, (a) the seller only has to pay half of this ($6,000); (b) he only has to pay this once every 25 years which equates to $240 per year or about 65 cents per day; (c) the tax will come out of $1.5 million in proceeds from the sale of the home; (d) for recent home buyers paying the highest propery taxes, this tax will not be due for many years.
However, there is one “condition” attached to a RETT which scares a lot of people. The only way the City can adopt a RETT is to become a Charter City. There is a lot of “fear” about what that means. The Road Action Group has studied the issues and is certain that the fears people have about Charter Cities are either unfounded or can be managed with a good charter. Details on this and other aspects of the RETT are contained in the Pros and Cons below.
Pros and Cons of a Real Estate Transfer Tax
- It is a single tax that can pay for all remaining ($45 million) repair costs and on-going maintenance costs so our repaired roads will not fall back into terrible shape.
- When coupled with an extension of the half cent sales tax, a RETT rate of 0.8% ($800 per 100,000 of sales price) could provide full funding.
- For the average Orinda home, now selling at $1,500,000, this would be a $12,000 tax with $6,000 being paid by the buyer and $6,000 be paid by the seller.
- For the seller, this can be thought of as an exit fee for accruing $80 million ($12,000 per household) of deferred maintenance. For the buyer, it is half the payment for 25 years of good roads.
- This tax is paid once every 25 years. Averaging the $5,000 over 25 years is equivalent to $240 per year or about 65 cents per day.
- The buyer pays half the tax. For buyer coming from west of the hills (Oakland, Piedmont, Berkeley, Alameda, Emeryville), this is half or less than what they are accustomed to paying. It is a fraction of the 5-6% sales commission.
- It is a one-time tax when a lot of money is “on the table”. It is not a tax one needs to come “out of pocket” for annually or more frequently as all the other taxes are. For the buyer, it is part of the closing costs and is probably 80% financeable.
- For the recent home buyer, who is paying the majority of the City’s ad valorem tax ($16,500 annually on a $1.5 million home), this is a tax that will not be payable for many years.
- This is the only tax option based on the market value of a home which reflects a taxpayer’s wealth.
- For the seller selling in the near future, he has to pay his full fair share; $5,000 on the average Orinda home. This will be compared to a few hundred dollars of a parcel tax for the next couple years until he leaves or even less of an ad-valorem tax as his property probably has an assessed value that is a fraction of the average assessed value. However, he should reflect on why Orinda’s roads are currently in such terrible condition. The reason is that we have not been paying enough taxes to properly maintain them for the past 25 years. So a $6,000 “exit fee” is not unfair.
- It has been claimed that the RETT would provide a “volatile” source of revenue which would be unacceptable for road repair and maintenance finance. The City has 15 years of records of what a RETT would have provided over the deepest recession since the great depression. Using RETT funds, Sales Tax and “General Fund” revenues to fund repairs and then finance debt service for repair costs in excess of current tax receipts, plus fund maintenance expenses, it can be modeled that even with a series of “bad years” as we experienced in 2008 through 2012, with appropriate reserves and with the ability to defer maintenance for a limited time period without drastic repercussions, a RETT provides a viable, by accepted project finance standards, source of revenue.
- Adoption of a RETT also requires adoption of Charter City status. There are many apprehensions about becoming a charter city although there are over 120 charter cities in California and most are doing as well as their sister “General Law” cities. In 2014 Emeryville became the latest charter city, mainly to take advantage of the RETT provision available only to Charter Cities. Some points that should be clarified:
- It takes a 50% vote of the people to convert a city to a Charter City. The vote adopts a very specific Charter which can be broad or restrictive.
- It takes a 50% vote to change the charter. The City Council cannot change the Charter. The Charter can specify that the any vote amending the Charter be held at a high-turnout general election to suspend fears that Charter revisions could be shoved through in a low-turnout special election.
- The ability to raise taxes is no different for a Charter City than for a General Law City. Real estate taxes (ad valorem and parcel) require a 2/3 vote per Prop 13. Sales tax and Utility tax require a simple majority if the tax is for general use; 2/3 majority if for a specific use (just like for General Law Cities). The RETT requires a simple majority vote.
- The Road Action Group recommends a very simple, less than one page, Charter. It would simply state that (a) all provisions of General Law Cities be maintained with the single exception being the City had the right to adopt a Real Estate Transfer Tax (if the people so voted for that tax which would be a separate vote from the Charter) and (b) the Charter could only be amended at a General Election (November of even years).
Note: A spreadsheet of funding option projections is available.