Nothing says "Welcome to Maryland" like the real estate transfer tax. Those new to the region experience a moment of disbelief as exorbitant closing costs consume what they thought was a good down payment. Only Delaware, Pennsylvania and Washington, D.C., have transfer and recordation taxes in the 2 percent to 3 percent range found in Maryland. Transfer tax rates in most of the country are a tenth as much, and 12 states have none at all.
In Annapolis, state lawmakers are concerned that transfer taxes are avoided when businesses that own real estate are sold, because there is no change in the deed to initiate the tax. It is argued that closing this "loophole" would increase fairness and revenue from the tax.
Before expanding the reach of the transfer tax, the legislators should consider more fundamental questions: Why do we impose this tax? Could there be a good reason why other states avoid it?
The real estate transfer tax is bad policy that has been made worse by rapidly rising property values and changes to federal tax policy over the past decade. Consider five reasons state and local governments should reconsider real estate transfer and recordation taxes.
Fairness. If you bought and sold a home in the Baltimore area last year, you likely paid more in transfer taxes than you paid in state and local income taxes and property taxes combined. Thus, people who buy and sell real estate shoulder a much larger share of local government costs than those who do not. Why should someone have double the tax burden because he or she moved across town? Moving doesn't mean someone has more income than a nonmover, nor does it mean the mover is consuming more government services.
Sprawl. This claim may surprise environmentalists, because the 0.5 percent state portion of the transfer tax historically has been dedicated to Program Open Space. Most other states fund similar programs in other ways, and local environmentalists should reconsider their traditional funding source. Some argue that transfer taxes reduce sprawl. However, most transactions concern existing properties, and many household moves are good for the environment. Rather than slow development, transfer taxes discourage people from adjusting their housing to changing needs. Why should we discourage people from moving closer to a new job or moving to a smaller home after the kids are grown?
