Real Estate Transfer Taxes (RETTs), authorized as documentary transfer taxes by the California Revenue and Taxation Code^[13] on the sale or transfer of real property are currently levied by all Bay Area counties^[14] and many cities^[15].

RETTs may be applied only to residential sales or to other types of real estate transactions including commercial and industrial sales. Revenue raised from a RETT may be added to the jurisdiction’s general fund or earmarked for specific uses, including funding homeless programs.

Prior to passage of Proposition 13 in 1978 local governments had broad discretion to create new RETTs, increase the tax rate on existing ones and, earmark funding for specific uses (including homeless programs). Proposition 13 added provisions to the California constitution which made it difficult perhaps impossible to create new RETTs or increase the tax rates of existing ones. Even if a legal way to create a new RETT or increase the tax rate for an existing one could be devised it would almost certainly require approval by a 2/3 vote of the general electorate which is virtually impossible.

RETTs are collected at the time ownership of a property such as a private residence is transferred, usually by sale. In the Bay Area RETTs are paid by the seller. The tax is set at a percentage of the sale price. The law allows a county to impose a tax of $1.10 per $1,000 of value on every real estate transaction. This is usually expressed as $.55 per $500 of value in local ordinances imposing the tax. If a city also chooses to impose the tax, then the $1.10 rate is split between the city and county. RETTs are administered by the county which collects the tax on behalf of cities and transfers them any funds due. Thus if a private home is sold for $350,000 in a county which has enacted a $1.10 per $1,000 RETT the county would collect $3,850. If the county and a city within the county had had agreed to split the statutory RETT amount, the city and county would each receive $1,925 (half of the statutory amount each). If a city imposes a RETT which exceeds the statutory amount the entire statutory amount collected by the county goes to the county.^[16]

Many Bay Area cities have RETT tax rates which exceed the county statutory amount.^[17]

There is a logic to looking to the Real Estate Transfer Tax for homeless funding now. Bay Area single-family home prices have increased by almost 25% since 1995.^[18] Sellers are recognizing large capital gains at the time they sell their homes. The first $500,000 of capital gains on residential sales are excluded from capital gains taxes. At the same time the high cost of housing is contributing to the housing problems of people who have not benefited from the real estate market, including homeless people. Arguing in favor of capturing a small part of real estate profit at the time of sale for homeless programs might be politically palatable to local elected officials and voters.

Securing any new or increased property transfer tax for long-term homeless funding faces nearly insurmountable legal barriers due to Proposition 13. Proposition 13 in 1978 imposed limitations on local government’s authority to levy special taxes. Article XIIIA of the California constitution, added by Proposition 13, appears to prohibit any new city or county real estate transfer tax.^[19] BARI should not proceed on a RETT campaign without consulting an attorney knowledgeable about California State and local tax law about the specific proposal.

An alternative Bay Area homeless organizations might consider is a campaign to convince local governments to allocate some of the revenue from existing RETTs to regional homeless programs. Since the tax is a percentage of the sale value on property and Bay Area property values are rising rapidly the amount of revenue local governments are collecting from RETTs is increasing rapidly. It might be politically possible to convince local governments to give just the increment to homeless funding just so long as real estate values continue to escalate.

Table 2 below shows that Bay Area counties are receiving more than $61 million a year from RETTs. Bay Area cities are receiving about the same amount of RETT revenue. Property values for most types of real estate have increased rapidly in recent years. If counties and/or cities continue to devote all of the funding they received in a recent base year to pre-existing uses, but agree to devote some or all of the increment to regional homeless programs that would generate $6 million in the first year if property values increased 10% and additional amounts each year that property values continue to rise. The amount would cumulate, so that just county RETT incremental revenue given a 10% appreciation in real property subject to existing RETTs would be $6 million in the first year, $12 million in the second, $18 million in the third year etc. Reassigning use of RETT revenue, but not creating new RETTs or raising tax rates, might still raise Article XIIIA issues, but it is probable that a program could be devised that would comply with the constitution, require only simple majority approval from local elected officials, and not require voter approval.

Efforts to obtain just the increment in RETT revenue should greatly reduce political opposition that a new RETT or RETT rate increase would generate. Because RETTs are a significant funding source related to real property, well-organized anti-tax forces would vigorously oppose any effort to increase RETTs. Realtors would oppose the property transfer tax because they feel it will reduce property sales that are the basis of their business. Much of the real estate activity that would fund RETTs is taking place in suburban jurisdictions where there is little homelessness. Local elected officials and voters in these jurisdictions may oppose raising revenue for homeless programs either within the jurisdiction or elsewhere in the region. Property owners may not be willing to see even a small additional part of their profit in property appreciation taxed for homeless programs or anything else. Efforts to redirect just the increment in RETT revenue would not touch any of these raw nerves since there would be no increase. Realtors might even support use of RETT funds to reduce homelessness if they are convinced that this will improve the community and increase real estate values.

Even a campaign to secure some of the increment in RETT revenue for homeless programs would encounter opposition. Bay Area counties and cities that have enacted RETTs may be resistant to seeing any funds, even incremental funds, diverted from existing uses. Local housing advocates looking to RETTs to fund county- or city-level housing trust funds would probably contest using this source for regional programs or broadening the use of the funds to non-housing homeless programs. Thus, a strategy to secure just the increment in RETT revenues would reduce, but not eliminate, political opposition.

The amount of revenue a property transfer tax would generate currently would be very substantial. RETT funds received by Bay Area counties totaled $61,729,608 in 1997 as indicated in Table 3 below. Bay Area cities collect addition RETT revenue, as indicated in footnote 14.
 

Source: California Controllers Office, Status of California Counties Annual Report FY 1996-97, Table 6 Counties FY 1997-97: Detailed Statement of General County Financing Sources for the Fiscal Year Ending June 30, 1997

The revenue stream from a RETT would vary from year to year depending on the market, but should continue to rise in the long run. Property sales are cyclic and RETT revenue is sensitive to the number of properties sold. Real estate price escalation is also cyclic. A strategy to capture just the increment in RETT funds during times when property values are escalating runs the risk that the bubble could pop at any time. However, given the underlying strength of the Bay Area real estate market, RETTs should yield substantial funding even in years when home sales and other property transfers decline. Over time the amount of funding should continue to grow as the value of Bay Area real estate continues to escalate.^[20]

Recommendation

1. Homeless service providers, including BARI, should consider a campaign to obtain some of the increment due to rapid increase in RETT revenue;
2. Homeless organizations should not embark on any RETT campaign without confirming with an attorney knowledgeable about California State and local tax law that the campaign objectivedoes not violate the California constitution;
3. Homeless organizations should only undertake a RETT campaign that requires 2/3 voter majority approval in the unlikely event that there is compelling evidence of very strong voter support;
4. If BARI decides in principle to pursue a RETT campaign, a RSC subcommittee should craft a strategy to assure that the specific proposal maximizes support and minimizes opposition. A regional RETT campaign would be more likely to succeed if:
• The campaign takes place as part of a broader coalition effort to secure funding for Bay Area quality of life issues that enjoy broad political support. Possible allies include open space and environmental groups, sustainable development forces, innovative transportation advocates, and other groups. Support of the Bay Area Council and other mainstream business groups would be very important;
• There is a trigger or sunset provision tying the tax to economic prosperity. For example, a trigger might only activate the tax (or the capture of an increment in an existing tax) if property values rose more than the Consumer Price Index;
5. Support from the ABAG Regional Policy Committee and General Assembly to encourage all Bay Area jurisdictions to pass identical RETTs would be important. (Santa Cruz and Monterey counties are now participating in BARI and their local governments might be encouraged to pass similar legislation).