Making housing more expensive no way to solve budget problems
In case you weren't paying attention over the July 4th holiday weekend, Delaware's elected representatives decided to "solve" the budget problems by raising the real estate transfer tax from 3 to 4 percent - making it one of the highest in the nation.
Don't be fooled. This "solution" is not a solution at all.
It makes housing more expensive. It puts the burden of Delaware's spending problem on the backs of homebuyers and sellers, rather than the backs of all citizens. It will hurt Delaware's economy. Moreover, even after raising the transfer tax by 33 percent, members of the General Assembly and the governor are still saying there will be budget shortfalls again next year and, presumably, the need to raise taxes further.
Housing plays an important role in the Delaware economy. It generates jobs. It puts money in workers' pockets. It generates spin-off revenue for many other local businesses.
But, as the old saying goes, if you want less of something, then tax it. If you want less housing, then make it more expensive for buyers. This is, of course, bad public policy. Housing prices have still not recovered from the great recession. Many homeowners are still underwater on their mortgages, or, even if not underwater, own homes worth less than they paid. By increasing the cost to buy a home, the General Assembly has hurt housing prices - and houses are most people's biggest and chief asset.
The decision to raise any tax should never be made lightly, but here, the decision to raise the transfer tax was made behind closed doors with virtually no public input, except for those few folks at Legislative Hall July 2 as the General Assembly was in its final hours.
This was done in a completely unfair manner. It was unfair to everyone involved in the construction of a new home. It was unfair to existing homeowners. It was unfair to homebuyers.
The 33 percent increase in the transfer tax seriously raises the cost of homeownership to homebuyers. For a modest $200,000 home purchase, the total transfer tax spikes from $6,000 to $8,000. Since the tax is split between the buyer and seller; the seller realizes $1,000 less from the sale, and the buyer either has to take out of pocket the extra $1,000 or increase their mortgage. Not everyone can afford this - studies show that for every $1,000 increase in the cost of buying a home, 850 households are priced out of the market.
If housing costs more, those who can still afford to buy usually have to borrow more money in order to complete the purchase. Bigger mortgage payments mean less money to spend in the local economy. Less spending on home improvements. Less spending on restaurants.
Less spending on clothes, cars, electronics, and entertainment. Less spending period. And less spending in the local economy hurts local businesses, which in turn have less money to spend and, as a result, hire fewer workers. Some might think that only those in the housing industry will suffer, but the effects will be much broader.
Conversely, and contrary to what some people may think, new home construction benefits Delaware. Recognized studies demonstrate that each new home built produces 3.65 permanent new jobs. New housing adds to the property tax base. New housing leads to new retail space (shops and restaurants) to handle the increased population. New housing leads to more spending, and that spending ripples through the economy causing more benefits. The revenues state and local governments collect on each new home far exceed the costs to provide services to the homes. Housing helps grow the economy.
No matter how you slice it, the decision to raise the transfer tax will hurt the Delaware economy. Fewer homes will be sold. Fewer homes will be constructed. Income for those in the housing industry will be down. Income for other local businesses will be down. Next year, projected income tax receipts will be down (and some people will wonder why), and the whole process of budget shortfalls will start over again.
The laws of economics are called "laws" because, like death and taxes, they can't be avoided. If you want less of something, tax it. If you increase the price of something, then demand will go down. When you increase the price of housing, you hurt a significant portion of Delaware's economy and families, including first-time buyers, and those with low and moderate income.
I call upon the General Assembly to repeal the increase in the transfer tax - something that was done at the eleventh hour, with virtually no public input or comment. The governor and the General Assembly need to take a long, hard look at Delaware's spending problem (we rank fourth in the country in state and local government spending per person) and come up with a plan that does not unduly impact a segment of Delaware's population and does not adversely affect our economy.
Further, the General Assembly needs to put in place effective economic development plans and pro-business policies that will lead to real job growth. More jobs and more growth can solve our budget problems - not more taxes. June 30, 2018, when the next budget is due, is less than a year away, but the General Assembly ought to get started now because next June will be here sooner than we think.
James C. McCulley is president of the Homebuilders Association of Delaware.