Proposition N - Transfer Tax Increase

What it does

Proposition N would increase the amount of transfer tax paid for sales of high-value properties by increasing the transfer-tax rate to 1.5 percent of each $500 in value — or $7.50for each $500 — for transactions of $5 million or more. This higher rate would apply to the entire value of the building, not just the value of the building in excess of $5 million.

The City and County of San Francisco levies a tax called a transfer tax on each commercial and residential property sold within City boundaries. Specifically, when a property is sold — that is, when the title for a property is passed from one person to another — the value of the transaction is taxed at a rate ranging from 0.5 percent to 0.75 percent for each $500 of value, a rate that translates to $2.50 to $3.75 for each $500.

The proposed legislation also would add to the types of transactions subject to the transfer tax, by clarifying that the transfer tax applies when a person, business or other legal entity acquires a majority-share interest in a property or enters into a leasehold greater than 35 years in length — that is, buys the right to occupy land or a building for 35 years or more. Under current law, sellers can avoid paying the transfer tax by transferring property by means of the acquisition of a majority share or by entering into a leasehold, rather than executing a traditional sale. The proposed legislation would close this loophole.

The measure also includes an incentive to install solar systems and undertake seismic retrofitting. Prop. N would reduce the tax liability for residential property transfers by one-third if, after Jan. 1, 2009, the seller has installed an active solar system, or made seismic retrofits or other improvements to mitigate the effects of an earthquake. Solar systems that would fall under this exemption include systems used for domestic, recreational, therapeutic or service water heating, space conditioning, electricity and solar mechanical energy production, and heat processing. Systems used to power heaters for swimming pools or hot tubs would not be included. According to the proposed legislation, the amount of the exemption could not exceed the value of the improvement and would apply to multifamily residential properties. The solar and seismic retrofit exemptions are expected to result in $3 million per year in lost tax revenues.

Why it is on the ballot

San Francisco began the process of creating a new budget in 2008 with a deficit of $338 million. While revenues have been increasing citywide, expenditures continue to grow more rapidly. The City's transfer tax has seen rapid growth due to general health in the real estate market and significant turnover of many major office buildings in the downtown area. These purchases, coupled with the rapid increase in home prices citywide, produced record levels of property transfer tax revenue. Since 2002, the transfer tax has grown from $51.5 million in revenue to $144 million in 2006-2007.

Yet as the real estate markets began to slow last year, total revenue from the tax dropped to $91 million and is projected to grow only to $94 million in the current fiscal year. This volatility is common with the transfer tax, as the revenues it generates fluctuate depending on the strength of the economy and the quantity of real estate transactions.

At $94 million, the transfer tax is equivalent to just less than one-fifth of the City's $1.9 billion in discretionary revenues. As a comparison, the hotel tax and sales tax usually are larger revenue sources (projected to be $150 million and $110 million respectively), while the parking tax is smaller (projected to be $65 million).

Transfer taxes vary widely throughout the Bay Area. San Francisco's transfer tax rate is well below the rate in other cities. Even with Prop. N's increase on properties valued at greater than $5 million, San Francisco's transfer tax would be less than the rate in several other cities.

Pros

Arguments in favor of Prop. N:

• Prop. N could offset the effect of fewer real estate transactions and the accompanying decrease in transfer tax revenues by increasing the rate of the transfer tax on high-value buildings and by adding types of transactions subject to the transfer tax.
• By excluding the majority of property sales, this measure would not increase the costs of property ownership for most San Franciscans.
• Prop. N includes incentives for important social goals such as installing solar panels and conducting seismic retrofitting. These activities generate public benefits related to reducing greenhouse gas emissions and increasing the resilience and disaster-preparedness of San Francisco's structures.
• Transfer taxes are an appropriate place to increase taxes, because they extract value from property only at the point of sale, and do not provide a direct incentive against economic activity such as job creation. Because the value of property inextricably is linked to the level and quality of public investments, it is appropriate for the City to extract a higher percentage of value at the point of sale as a way to partially recoup its investment.

Cons

Arguments against Prop. N:

• Increasing the transfer tax rate and adding to the type of transactions subject to the transfer tax might stifle some real estate investment in San Francisco, further weakening a troubled economic sector.
• One of San Francisco's competitive advantages is its ability to attract people with high net worth as part-time or full-time residents whose expenditures throughout the economy provide thousands of jobs. By increasing taxes in a way that disproportionately affects wealthy individuals, Prop. N might cause those people to be less likely to invest in San Francisco's real estate, and thus reduce the time and money they would spend in the city. The net result of decreased spending and economic activity on the part of the very wealthy could far outweigh the specific decline in investment in expensive properties.
• San Francisco faces deficits primarily because its expenditures are growing faster than its revenues. Until the City can control its rapid growth in spending, it is not appropriate to increase taxes, as this provides no incentive to control spending growth. If the City could keep spending growth in check, its rising revenues would close the deficit over time and thus reduce the need for increasing taxes.

SPUR’s analysis

While San Francisco already has high taxes, and the proposed legislation would increase them, modifying the transfer tax is a necessary response to an expected decrease in transfer tax revenues. Without such modification, the City's structural deficit would only increase. Furthermore, because the transfer tax only extracts value from property at the point of sale and does not provide a direct deterrent against economic activity, modifying the transfer tax is preferable to modifying other taxes that have a more direct economic impact. Furthermore, the proposed legislation would provide an incentive to install solar power generation systems and undertake seismic retrofits, activities that support SPUR's goals of reducing San Francisco's energy use and helping our city's resilience in responding to a major earthquake.

SPUR recommends a "Yes" vote on Prop. N.