The debate behind the Real Estate Transfer Tax
Solutions for financing the Housing Opportunity Fund has the RTT in the crosshairs.
By: Neil Strebig
Since the creation of a committed Affordable Housing Trust Fund (commonly referred to as the Housing Opportunity Fund or HOF) last year, the debate over an increase to the Realty Transfer Tax (RTT) has been a bit of a hot-button issue within the city and throughout a number of Northside neighborhoods as of late. This is nothing new for tax-related issues, especially when increases are discussed, but what exactly is the RTT? And what does an increase mean for Northside residents?
The RTT is implemented anytime a commercial or residential property is sold; essentially it is a sales tax on real estate. The tax itself is divided up between the state, school district and the municipality. The current state tax is at 2 percent, so the remaining percent is split between the school district and the municipality. For example, the current property tax in the City of Pittsburgh is at 4 percent meaning, the state tax is at 1 percent, the City of Pittsburgh (municipality) is at 2 percent and the school district is at 1 percent. So if a property is sold at $200,000 the state receives $2,000, the City of Pittsburgh $4,000 and the school district receives $2,000 bringing the total RTT to $8,000.
Now, this is where it gets a bit confusing. When the RTT (also referred to as the ‘Deed Transfer Tax’) is enforced there is also a similar split between the buyer and the seller of a property. They’ll split the actual transfer tax, which here in the City of Pittsburgh is at 4 percent (the highest among Allegheny County municipalities). So each party will pay 2 percent based on the agreed upon sales price of the property. That revenue then will be split accordingly amongst the state, city and school district.
In the same aforementioned situation that $200,000 property with the $8,000 RTT will be split $4,000 apiece by the buyer and the seller.
So, where does the HOF and the RTT come together?
When the City Council voted last December to create a $10 million fund for affordable housing, they did not immediately implement a system to fill that $10 million fund.
The HOF itself is built on good intentions. The fund is aimed at helping low-to-moderate income residents stay in their homes. Currently, more than 20,000 low-to-moderate income families are spending half of their income on housing, whether that be initial costs, maintenance or emergency spending. The HOF would help offer aid for such families and help eliminate the risks of eviction and foreclosure that many of these families face.
The conflict over the RTT is built around the ability to fulfill the $10 million reserve to keep the HOF active.
Currently, there has been a movement to increase the RTT by one percent. This means that the buyer and seller would be splitting the costs at 2.5 percent each. An approach Mayor Peduto has been in favor of since the initial vote towards a staunch affordable housing fund was agreed upon last December.
Between May 2016 and May of this year, the Affordable Housing Task Force (AHTF) has met 17 times trying to find the best solution to meet the $10 million minimum attached to the HOF. The AHTF weighed a number of options from increasing the hotel tax, implementing a document recording fee, upping service taxes or commercial linkage fees, but all of those options required state legislation. In turn, the 1 percent increase of the RTT was viewed as a sufficient option.
“The practical reality is that none of that stuff will get passed in Harrisburg, in the opinion of a lot of people on the task force,” said AHTF member and Northside Development Fund director Mark Masterson in an interview with Downstream earlier this month. “It’s not something we should give up on, as it might be a way to augment this in the future, but in the short term it’s not going to happen.” In the same interview, Masterson stated that the revenue needed for the HOF came down to “two real sources.”
“It came down to, do you increase property taxes—which everybody pays every year—or do you increase the transfer tax,” Masterson said.
“In my mind, if I can pay a little more and know that my neighbor has a safe, decent place to live, I will do that,” said Perry Hilltop/Fineview Citizen Council program manager, Joanna Deming. Deming has been a strong advocate for the 1 percent increase.
She believes the potential bump in revenue from the increased RTT will help benefit infrastructure and improving vacant and low-income housing neighborhoods like Perry Hilltop, which currently sits at a 24 percent vacancy. In theory, property purchases will be generating funding to help refurbish the same neighborhoods buyers are relocating in. “Most people don’t see what their taxes do,” she said in regards to the potential impact the suggested proposal can have on neighborhoods like Perry Hilltop.
According to Celeste Scott of Pittsburgh United, the increase has a “board appeal” and is “flexible.”
Scott believes that with the varying needs of each neighborhood the RTT increase offers the “fastest and best opportunity to make changes.”
However, not everyone agrees with that approach. Executive vice president of the REALTORS Association of Metropolitan Pittsburgh, John Petrack believes the proposition “statistically decreases the value and number of sales.”
“[It] makes no sense to make housing more affordable by making it more expensive,” Petrack said.
To him, due to the already high real estate tax in Pittsburgh and with closing costs being the number one burden for new homebuyers, increasing the RTT at this stage would “would cause long-term harm” for both the housing market and low-to-moderate income residents.
He believes the increase would not only deter potential buyers, but it would inadvertently lead to a hike in rental costs across the city since closing costs would be elevated.
With over 20,000 vacant properties throughout the city, Petrack believes displacement is the best solution. He encourages the city to purchases these properties with deed-restrictions and utilizes them specifically for affordable housing.
Petrack acknowledges that there is no easy, quick solution to the problem, but such a maneuver might be the best “first step” in the process.
If the $10 million cap is reached, hypothetically the HOF can preserve 3,000 housing units city-wide and build access to an additional 3,600 units over a ten-year period.
As reported by the Post-Gazette in July, the City Council did not vote in favor of a RTT increase, but no immediate solution was created either. After the vote Councilmen, Ricky Burgess and R. Daniel Lavelle discussed a proposition they made in May that would create housing in low-to-moderate income neighborhoods using bonds from the Urban Redevelopment Authority. However, similar to the RTT debate the proposal has been greeted with limited traction.
All parties involved are in agreement with the need for the HOF, but the discrepancy appears to be how does Pittsburgh effectively reach and sustain that $10 million minimum?