Real Estate Transfer Tax
What is it?
San Francisco levies a tax on all real estate sales, the rates vary by property
values. Prop I would double the rates for all properties valued at $10MM and
|Sale price||Current tax rate||New tax rate|
The City Controller estimates that under economic conditions similar to the
2008-2020 time frame, this tax would generate between $13MM and $346MM per
year, for an average of $196MM. However, this assumes that the tax does not
impact economic activity.
The City Economist report states that this tax will have a cooling effect on
all development. It will depress some property values (because the new tax rate
gets priced in), and make projects like 12+ unit apartment buildings infeasible
at the margin.
Why is it on the ballot?
mandates that all new taxes be subjected to a vote of the public. Taxes that
end up in the General Fund require a 50% + 1 majority.
Supervisor Dean Preston, along with Supervisors Mar, Haney, Ronen, and Walton,
put it on the ballot. This is a reelection year for Preston and Ronen.
Why should you vote no?
This tax is extremely poorly designed. Unlike almost every tax in the world, it
is not a marginal tax, so each new bracket will tax the entire value; a property
valued at $10,000,000 will pay twice as much total tax as one valued at
$9,999,999. And while it is marketed as a tax on luxury homes, the majority of
the buildings with a value over $10 million are new apartment and office
buildings, making it essentially a tax on apartments and offices that
conveniently excludes single-family mansions. Considering that most new
apartment and office buildings are sold from the developer to the property
manager before being rented out, this essentially makes Prop I a drastic tax on
new office and dense housing construction, two things we are in desperately
short supply of.
Since this law contains no grandfathering, projects which were already under
way at the edge of feasibility (AKA on-the-margin) will suddenly become
impossible. This effect on marginal production is permanent and will result in
an immediate decrease in housing production of 400-500 units per year. To put
this in perspective, we need to build at least 5,000 homes per year just to
make rents increase more slowly and we haven’t even been able to achieve that
very low number for the past several decades.
According to the City Economist’s report:
The higher tax can have the effect of making some redevelopment plans less
feasible, leading to more constrained real estate markets, higher commercial
rents, and higher housing prices
To hit the new tax threshold of $10MM, one only needs to build a 12-unit
building, and the highest threshold is hit at only 28 units. Not only will this
kill new market rate housing, the resulting drop in fees on those units will
further starve the Affordable Housing Trust Fund which the city uses to fund
development of subsidized Affordable housing.
All 100% Affordable buildings for people with low incomes must be at
least 50 units to qualify for all of the necessary tax credits to make
financing the project possible, so this will also raise the price of
subsidized housing, which already clocks in at over $650,000 per subsidized
unit. Subsidized affordable properties are exempted until 2024, so this effect
won’t be seen immediately.
Finally, the City Economist also found that this tax will have a net-negative
impact on the city’s economy:
Based on these projected changes to the local economy, the REMI model forecasts
that the net impact on the city’s economy would be negative.
The negative impact is almost entirely associated with the development that
would be made infeasible by the Transfer Tax increase. Limitations to the
growth of the city’s housing supply will tend to inflate housing prices, while
limitations to the growth of commercial real estate will limit job growth, and
put downward pressure on wages.
As a result, the real incomes of San Francisco households would decline, on
average, because of the lower incomes and higher housing prices. San Francisco
would become less attractive economically as a place to live. Consequently,
the city’s population would decline, with both fewer migrants moving in, and
more residents moving out.
We cannot afford to raise the cost of housing production while simultaneously
depressing wages as we enter a recession. We already have a statewide shortage
of 3.5 million homes and the highest housing prices in the country; this new
tax will make it harder to build our way out.
This runs contrary to #Taxation.NewTaxes
from our voting framework, but it is so poorly designed and has such negative
consequences that we cannot endorse it.