Understanding St. Helena’s Proposed Transfer Tax: Weighing the Pros and Cons

As St. Helena considers the introduction of a new transfer tax, it's essential for residents to understand both the potential benefits and the concerns surrounding this proposal. This blog aims to break down the details of the proposed tax, how it could impact our community, and provide a balanced view of its possible advantages and disadvantages.

What Are Transfer Taxes?

Transfer taxes are fees imposed on the sale of property, typically calculated as a percentage of the sale price. In St. Helena’s case, the proposed transfer tax is structured as follows:

• 1.5% tax rate on property sales ranging from $1 million to $5 million.

• 3% tax rate on property sales over $5 million.

• No tax on property sales under $1 million.

  
  

This tax is not graduated, meaning the entire sale price is taxed at the rate applicable to the property's total value. For example, if a property sells for $6 million, the entire sale amount would be subject to the 3% tax rate.

The Rationale Behind the Proposal

St. Helena is facing significant financial challenges, including aging infrastructure, growing demands for public services, and the need to maintain our unique character amidst development pressures. The proposed transfer tax is seen to generate much-needed revenue while avoiding more controversial (as the current city government sees it) revenue sources. The funds collected from this tax could be allocated to essential city projects, including road repairs, park improvements, and potentially affordable housing initiatives.  All funds generated go into the general fund, which is important to keep in mind when considering any promises made regarding how these expenditures will be spent.  

Potential Positive Impacts of the Transfer Tax

1. Increased Revenue for City Projects: The transfer tax is projected to generate approximately $5.3 million annually. This influx of funds could provide a much-needed boost for city projects. With this revenue, St. Helena could address critical infrastructure needs, such as repairing downtown sidewalks, improving evacuation routes, and enhancing public spaces. These improvements could significantly benefit residents and make the city more attractive to visitors, which in turn could support our local economy.

2. Support for Public Safety: The city’s fact sheet highlights the importance of maintaining public safety, especially considering increased wildfire risks. The revenue from the transfer tax could help ensure that St. Helena has adequate emergency services and first responders, which is crucial for protecting our community. By investing in public safety, the city could enhance its resilience against natural disasters and other emergencies, providing peace of mind for residents.

3. Local Control Over Funds: One of the selling points of the proposed transfer tax is that all funds generated would remain under local control, without risk of being redirected by the state. This local control means that the revenue could be used to directly address the specific needs of St. Helena, as determined by the city and its residents. Additionally, the measure includes provisions for accountability, such as annual audits, which could help ensure that funds are used effectively. 

4. Exemption for Lower-Value Properties: By exempting properties under $1 million, the tax is designed to protect lower income homeowners from additional financial strain. This exemption could help preserve the affordability of housing for residents of Vineyard Valley.

   
   

Concerns and Potential Drawbacks

1. Impact on the Real Estate Market: The introduction of a flat transfer tax could have a cooling effect on St. Helena’s real estate market, particularly in the luxury segment. Sellers of properties could reconsider listing their homes due to the added tax burden. This could result in fewer transactions and possibly lower property values, especially in the higher-end market where the 3% tax on sales over $5 million could be significant and is exacerbated by the decision to forego a graduated tax and opt for a flat tax structure—we are creating very real incentives for sellers to opt for a smaller selling price to avoid losing more money.  For example, a home that is estimated to sell at 5.2m would incur a 3% tax on the entire amount (rather than just the 200k over 5m that a graduated tax would levy at 3%) incentivizing a 4.99m selling prices where it would drop to a 1.5% burden.   

2. Revenue Allocation Concerns: Despite the potential benefits, there are concerns about how the revenue from the transfer tax will be allocated. According to projections (page 9), 60% of the funds could go towards raises and hiring additional staff. This allocation could limit the effectiveness of the tax in addressing long-term financial issues, such as replenishing reserves or reducing the city’s CalPERS debt. If a significant portion of the revenue is directed towards operating costs rather than strategic investments, the tax may not deliver the promised benefits.

3. Lack of Specific Controls: While the tax revenue will stay under local control, the fact that the funds go into the general fund raises concerns about accountability. Without specific earmarks or restrictions, the money could be used for a wide range of purposes, some of which may not align with the community’s most pressing needs. The absence of firm controls around the use of these funds could dilute the tax's impact and lead to dissatisfaction among residents.

4. Misleading Claims About Public Safety: The city’s fact sheet suggests that the transfer tax is necessary to maintain public safety services. However, it’s important to note that the city could prioritize its existing budget to avoid cuts to essential services like police and fire without needing a new tax. The suggestion that public safety is directly dependent on this tax may be misleading and could unfairly influence public opinion.

5. Unbalanced Burden on One Segment of Residents: A significant concern is that this tax targets a single segment of revenue—real estate transactions. By focusing solely on property sales, the tax places the burden disproportionately on homeowners and sellers, particularly those with higher-value properties. This approach lacks balance and equity, as it does not distribute the financial responsibility across a broader base of residents or revenue streams. The result is an undue burden on a specific group, which could lead to resentment and a sense of unfairness within the community.

6. Lack of Consideration for Government Efficiency: An elephant in the room is that the city is asking residents for more revenue without seriously considering (or making public) the reduction of city government or reorganizing its structure to become more efficient in a significant way. Before imposing additional taxes, the city could demonstrate that it is sharing the burden and has made efforts to streamline operations. By failing to educate on or pursue these efficiencies, the city misses an opportunity to gain buy-in from residents who might otherwise support the tax if they saw a genuine effort to cut costs and increase government efficiency. This would also offer a much-needed brand makeover, showing that the city is committed to being fiscally responsible and considerate of the taxpayers’ contributions.

7. Misleading Revenue Projections: Based on Coldwell Banker data, 40 homes were sold in St. Helena in 2023 along with one land parcel at 42m, with an average home sale price of $2,053,892. Assuming most of these homes fall under the $5 million mark, the city's proposed transfer tax (1.5% for homes between $1 million and $5 million) would have generated around $3 million in revenue, including a 42m dollar property sold which is atypical and even with this one property falls far short of the city’s $5.3 million revenue projection. Currently in 2024, we are tracking 2.8m in transfer tax dollars through September 1st of this year--on track for 3.8m or so in potential revenue. Again, far short of target. One critical factor behind this discrepancy is that the city seems to have based its projections on historically high housing data from the era of the Federal Reserve's zero-interest rate policy (ZIRP). However, we have now exited that era and returned to more historically typical Federal Reserve policies, which include higher interest rates. This shift bodes ill for the real estate market, as it will likely dampen both demand and prices moving forward. Given these changing economic conditions, the city’s revenue estimates appear flawed and overly optimistic, making their $5.3 million projection seem more like wishful thinking than a factual assessment of our current market reality.

   
   

Moving Forward: A Balanced Approach

As St. Helena continues to debate the proposed transfer tax, it is crucial that residents consider both the potential benefits and the concerns. The tax could provide significant revenue for important city projects and help maintain essential services, but it also raises questions about accountability, allocation, and its impact on the real estate market.

Community involvement is key. Residents should engage in public forums, ask questions, and share their perspectives on the proposed tax. By doing so, we can ensure that any decisions made reflect the best interests of the entire community and that the tax, if approved, is used in a way that truly benefits St. Helena. 

Where I Stand

As a candidate for City Council, I am committed to ensuring that any decisions regarding this tax are made transparently, with a clear focus on long-term sustainability and equity. For the record I am supportive of becoming a Charter City (Measure A1) as this will allow us to consider a revised transfer tax that balances concerns with other proposed revenue sources. That being said, I am supportive of a more equitable and balanced revenue plan based on shared burden that does not unduly impact one segment of our population—you can find that plan here

Thank You

November 15, 2024, 6:00 – 9:00 PM|St. Helena

Register Now