Happening in California 31.28
Welcome to Happening in California, a brief look at political news, insights, and analysis of the world’s fifth-largest economy.
There is a new trend with California local governments that are seeking to raise tax revenues.
It involves the Documentary Transfer Tax, and it used to be as mundane as the name sounds.
But thanks to several recent state court decisions, a handful of cities are using this property tax to generate billions of dollars.
Here is the story, including Alexander Hamilton’s cameo role …
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Tom Ross | President and CEO | Swing Strategies
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The Big Picture: The Big Picture: For Local Governments, Property Transfer Tax Increases are a Huge New Source of Revenue.
The history of the Documentary Stamp Act dates back to Alexander Hamilton recommending the tax on carriages and auction sales in 1794. Since then, Congress has imposed, expanded, and suspended the tax numerous times, with the final repeal occurring in 1968.
At that time California, like many other states, enacted its own Documentary Transfer Tax on real property. The combined tax rate between most California cities and counties is $1.10 per $1,000 of the total sale price.
Based on California’s median home price of $898,980, this equates to $987 — a modest tax imposed on the seller of a home or other real property.
But recent state court decisions have helped transform the property transfer tax into a huge new source of tax revenue for certain local governments …
In the past several election cycles, a handful of California cities have placed ballot measures before voters to increase property transfer taxes.
Since the average homeowner is generally skeptical of property tax increases, these ballot measures typically target properties valued in the millions of dollars with tiered rates.
Take for example San Francisco, where two ballot measures have passed since 2016.
Its top tier is now $60 per $1,000 of total property value on transactions of $25 million or more and is applied not only to property sales, but to certain leases too.
San Francisco went from collecting an average of $160 million per year for the ten years prior to 2016 to $345 million in property transfer taxes last year.
Commercial properties make up 48% of the transfer tax revenue followed by single- and multi-family residential properties at 43% and industrial properties at 9%.
This November Los Angeles voters will decide on Measure ULA — a billion dollar property tax increase.
ULA creates a new top tier of $55 per $1,000 of total property value on transactions of $10 million or more. A 1,200% property tax increase! (Full Disclosure: Swing is working on the campaign opposing ULA.)
Not to be outdone, Santa Monica has its own property transfer tax ballot measure this November.
Measure GS creates a top tier of $56 per $1,000 of total property value on transactions of $8 million or more — increasing property transfer taxes by $50 million annually and potentially making it the city’s largest source of tax revenue.
The Bottom Line: Property transfer taxes are another way to generate massive revenues for local governments by taxing the “rich.”
But ultimately it’s small businesses, renters, and everyday Californians who bear the brunt of the property tax increases.
And there are already signs that these taxes are making California less attractive for development and investors in real estate which will hurt the Golden State’s economy in the long run.