Proposition L - Real Property Transfer Tax

What it does

A real property transfer tax is a one-time tax the city collects when a property is sold or transferred. This measure would increase the tax on properties sold for more than $1 million from 0.75% to 1.5%.

Why it is on the ballot

Several years ago, San Francisco 's business tax was challenged in court. Expecting to lose the legal challenge, San Francisco settled out-of-court, at a multi-million dollar cost to the city budget. There have been various attempts since then to fix the business tax, but so far none have been adopted. After the latest attempt to put a new business tax on the ballot failed, this measure was proposed as an alternative.

Because the real property transfer tax is a general tax (meaning that revenues go to the City's General Fund), Proposition L requires a simple majority vote to take effect.

Pros

Those who support Proposition L state:

• The property transfer tax is widely considered to be one of the most economically efficient taxes the City collects. It does not have an adverse impact on job creation or on the prospects for business attraction and retention. Other types of taxes, such as the business tax, have the effect of slowing down the economy as a whole, and are thus less suitable sources of revenues, especially in difficult economic times. Furthermore, even at increased rates--an additional $7,500 on the sale of a $1 million property--the tax is not large enough to have a significant dampening effect on real estate transactions. (Compare this amount with the real estate broker's fee of $60,000 on the same $1 million dollar sale).
• A tax on properties worth more than $1 million falls on those who can most afford to pay it.

Cons

Those who oppose Proposition L state:

• The city's budget has doubled from $2.5 billion in 1995 to $5 billion today, with little to show for the increase. During the strong economy of the late 1990s, new revenue came readily to the city, allowing the government to increase spending while paying little attention to efficiency. By contrast, difficult economic times such as the present are the only politically realistic opportunities to cut waste in government spending. We should address the deficit by increasing government efficiency instead of increasing taxes.

SPUR's analysis

Most cities in California and the nation which have transfer taxes charge a flat percentage of the sale price, generally less than one percent (see sidebar). For example, the transfer tax in San Mateo is 0.610%, or $6,100 on a $1,000,000 property. San Francisco is unusual (surprise!) in that it has a tiered tax. Properties valued at less than $250,000 pay 0.5%; between 250,000 and $1 million, 0.68%; and over 1 million, 0.75%.

If Proposition L passes, the transfer tax on properties valued at more than $1 million would double to 1.50%, but remain at its current rate for properties valued under $1 million. For example, a $1 million sale currently pays .75% of $1,000,000, totaling $7,500. Under Prop L, it would pay 1.5% of $1,000,000, or $15,000.

The amount of revenue to the City generated by the property transfer varies from year to year. Over the past three years, actual revenues from the current tax have ranged from around $68 million in fiscal year 1999-2001 to $47 million in fiscal year 2001-2002. The Controller's office calculates that if the tax rates proposed in this measure had been in effect over the last five years, the City would have seen an increase in revenue of roughly $31 million annually over that time period. In fiscal year 2001-2002, the altered rates would have resulted in around $21 million in additional revenues.

Many economists believe that the real estate transfer tax is a relatively efficient tax. In contrast to the payroll tax, there is no disincentive to create jobs.

The Ballot Analysis Committee voted 7 to 3 to recommend support for Proposition L. In general, SPUR believes w W e must adequately fund our government services, and the property transfer tax is the most an economically efficient tax way to do so. While it is also important to increase efficiency in government and thus reduce spending, new revenue sources must play a role in solving the City's budget problems. since it does not discourage economic activity. This tax represents an equitable and efficient form of public funding.

SPUR recommends a "Yes" vote on Proposition L.