When the General Assembly adjourned at midnight May 5 without extending the municipal conveyance tax it promised to return and fix it. On Monday it did just that.

In addition to extending the municipal conveyance tax it agreed to exempt foreclosures and short sales from the tax, which means homeowners under water will no longer have to pay the tax.

While there was some debate late last week about whether the state could afford to exempt foreclosures and short sales, a revised fiscal note sealed the deal.

According to the Office of Fiscal Analysis report the state will lose only $1.73 million a year and the municipalities will lose just $866,000 a year by exempting just foreclosures and short sales from the conveyance tax. The state plans on paying for the revenue loss with an unallocated general fund lapse in fiscal year 2011.

If the General Assembly had failed to take action on the municipal conveyance tax it would have expired on July 1. The tax brings in about $20-$25 million to municipalities on an annual basis.

Jim Finley, executive director of the Connecticut Conference of Municipalities, said the cities and towns are “appreciative because it guarantees funding for one more year.” He said his members would have liked to see it extended for two years since next year is expected to be “one of the most contentious budget sessions in Connecticut’s history.”

Rep. Tony Hwang, R-Fairfield, was one of the nine lawmakers in the House to vote against the extension of the conveyance tax.

“One it’s a tax on property owners and two it’s a tax that many years ago was supposed to sunset,” Hwang said. He said it just reinforces the need for municipal mandate relief, which wasn’t included in the bill.

Sen. Dan Debicella, R-Shelton, said he agrees with exempting foreclosures and short sales from the conveyance tax, but the state should have cut $40 million in spending in its $19.01 billion budget, so it had money to give to the municipalities.

Rep. Kim Fawcett, D-Fairfield, agreed with Debicella. She said her work on the budget has consistently shown her that the state needs to reduce spending. She said the state would have a revenue stream to give to municipalities, if concentrated on reducing spending.

Sen. Bob Duff, D-Norwalk, said he doesn’t like the real estate conveyance tax, but was willing to extend it for one year to offer municipalities some relief. Duff said he was also pleased that foreclosures and short sales were exempted from the tax.

“I’m just happy it’s being done,” Duff said. Duff has been monitoring the situation with the tax on foreclosures since it appeared in the budget back in 2009.

“I knew it wasn’t going to work,” Duff said. He said some people wrongly assumed that the banks would just pick up the tab, but that wasn’t how it was going to work. He said it was a difficult tax to collect which is evident from the fiscal note.

But on a more human level, “It wasn’t fair to the homeowners,” Duff said.

The Connecticut Realtors Association, which has historically been against the real estate conveyance tax, gave up its opposition this year because it understood cities and towns were hurting. However, it lobbied for the exemption on foreclosures and short sales.

“On behalf of home owners across the state who are struggling to make ends meet, we thank the state House and Senate for doing the right thing and providing relief from the real estate conveyance tax for homeowners selling at a loss and in foreclosure,” Nicholle Dagata, president of the Realtors Association, said. “The REALTORS® understand that these are difficult economic times and we applaud the General Assembly for balancing the needs of the municipalities that collect the tax with the home owners across the state who are most vulnerable.”

The Senate passed the bill 32 to 4 and the House passed it 129 to 9.