Baltiimore Sun: Problems with the Transfer Tax Click HERE to Bring Up Full Post

Jeffrey Michael in the Baltimore Sun, March 22, 2007:

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.

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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?

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Tax deductions. Unlike most state and local taxes, transfer taxes are not deductible from federal income taxes. IRS rules define them as nondeductible for the same reason they are unfair: Transfer taxes do not apply broadly and are paid by only a small portion of the population in a given year. Transfer taxes were indirectly deductible because they reduced the taxable capital gain from home sales, but that disappeared in 1997 when most home sales became tax-free. Moving from transfer taxes to income and property taxes (without increasing overall taxes) would direct millions in new federal tax refunds to Marylanders.

I would favor getting rid of the transfer taxes on transfer and recordation of property and replacing them with regular property or income taxes. I understand why they are politically popular: long-time residents who are more likely to be registered to vote get spared, while out-of-town investors get skinned. But it's an economically irrational tax, punishing form over substance, allowing massive lawful avoidance for the rich through the use of LLCs while inflicting harm on young homebuyers (who sometimes can get some relief as first-time homebuyers from some of those taxes.)

If Bill owns Billacre and Jane owns Janeacre, and the Maryland properties are worth the same, and they swap them, they are worse off by thousands of dollars in two sets of transfer taxes.