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Add-On Tax Hits Harder In Downturn

Opinion By ROBERT FIORITO

March 17, 2008

For the past five legislative seasons, since a temporary increase in a hidden municipal conveyance tax on home sales was approved, Connecticut's mayors and first selectmen have lobbied legislators to allow the new revenue stream to continue. The local officials have argued that even though the tax revenues are meant to be short-term, the additional levy on home sales really wasn't hurting homeowners who have been making loads of money in a booming housing market.

Legislators have agreed, at least in part. They haven't made the increases permanent, but they have postponed the sunset date three times. If the legislature takes no action, the increases will end June 30, giving home sellers a $40 million tax cut as of July 1.

As representatives of homeowners, we have always argued that the conveyance tax surprises and hurts sellers, and that the strong market would not always be so strong.

According to national reports, the housing market across the country is in trouble. Home prices have dropped 13.9 percent since December 2006. More alarming, nearly a third of homes bought in 2005 and 2006 have mortgages valued higher than resale value.

Already this year in Connecticut, home prices have taken the biggest fall in more than a dozen years; and the volume of sales is down 28.6 percent and is expected to continue its downward trend.

At the same time, federal officials are reporting a drop in available jobs and an increase in unemployment.

Whether the economy is in a recession is open to debate, though nearly all observers agree there are more than enough signs. The question for Connecticut lawmakers is how we can lessen the impact.

Given the grim economic outlook, it is astounding that lawmakers have just introduced bills that would permanently increase the real estate conveyance tax.

For homeowners whose property is no longer valued as high as it was for their mortgage, selling their homes probably will cost them money. The conveyance tax is calculated on the sale price, not equity or ability to pay. In the current down market, the additional percentage for the conveyance tax owed to the city or town at closing amounts to a massive tax increase, coming at a time when the taxpayer has less to spare.

And for those proponents of the conveyance tax who say there is no evidence the tax has stopped a home from selling: Consider the significant drop in sales. More people are out of jobs. Many homeowners have purchased property they are struggling to afford. We will never know how many have concluded they simply can't afford to sell.

Is the conveyance tax a factor? We don't know. But it certainly isn't helping sell homes.

When the conveyance tax was launched more than 20 years ago, lawmakers acknowledged it as bad tax policy, hitting low- and middle-income home sellers the hardest. Since then, however, they've defended increases in the tax because the revenues from a booming market outweighed the negatives of the tax.

Lawmakers and local officials can't have this argument both ways. The market is no longer booming. Home sellers are struggling and the tax hurts. Connecticut's beleaguered home sellers have a $40 million tax break coming at the end of June, and the General Assembly should let them have it.

Robert Fiorito is past president of the Connecticut Association of Realtors and a realty professional in Southington.