To Extend Conveyance Tax or Increase Property Taxes? That was the Question

It’s not often that you will hear me talk about voting in favor of a tax, but that is exactly what happened when the General Assembly met in Special Session last week to keep the municipal portion of the state’s real estate conveyance tax at a rate of 0.25 percent for another year. Without legislative action, the tax would have gone back to the 0.11 percent rate that was in effect up until 2003, and cities and towns across the state would have stood to lose approximately $25 million in state aid this year.

Connecticut law requires anyone who sells real property for $2,000 or more to pay a real estate conveyance tax when they convey the property to the buyer. The tax has two parts – a state tax and a municipal tax. State and municipal real estate conveyance tax revenue goes to each entity’s general fund and is used for general state and municipal operations.

Ordinarily, the legislature will address the conveyance tax issue during the regular session, but when the matter was not taken up by the May 5th adjournment, it left some towns in jeopardy of being shortchanged. That is because these municipalities expected the current rate to be extended, and thus created their local budgets (which in most cities and towns have already approved) based on that additional funding being in place. Reverting to the old rate would have left these towns in a bind, especially with most town budgets going into effect this week.

Voting in favor of the conveyance tax bill is what I consider to be the lesser of two evils. Because the 0.25 percent rate is a “temporary” tax it stands a better chance of being repealed than that of a substantial increase in local property taxes, which is really the only way towns could recoup the funding already budgeted. While I am fully aware of the track record of temporary taxes in Connecticut, (including the conveyance tax rate which has been extended five times now since 2003) the fact is because the tax was extended for only one year it must be reauthorized again next year for it to continue, whereas local property tax increases would not.

The bill also restores an exemption for foreclosed property and “short sales” (where sale price is less than the total amount the seller owes on the property for mortgages and liens for property taxes or other charges that have priority over mortgage liens). Times are indeed tough, and forcing those who foreclose on their property to pay a conveyance tax doesn’t seem to make much sense, if anything, it kicks them while they are down. So that is a positive to the bill.

But the conveyance tax once again brings up the issue about what the state should or should not be taxing. It doesn’t seem right to me that the government should be taking a cut off of a property transaction. In fact, many people aren’t even aware the tax exists until they show up for the closing.
With the state looking at a budget deficit of over $3 billion projected for next year, many changes in the way the state operates will have to be made when the legislature convenes in January. The conveyance tax is one of the issues that will need to be addressed. The failure of the General Assembly to make the difficult decisions that go along with making real, substantive reforms to state government left the legislature with two options when it came to the conveyance tax. Either it could extend it for another year, or place an even greater burden on struggling municipalities. I voted for the former.