A taxing proposition or two
Back in 2016, I wrote a blog about tax issues here in California relating to the state's extreme reliance on personal income tax revenue to fill the state's coffers. Now a story in the Los Angeles Times helps to put the state's fiscal problems into sharper focus. For both the immediate and long-term future.
This past June marked the 40th anniversary of the passage of California's Proposition 13. To illustrate it in the simplest terms, imagine two identical houses sitting side by side. Both are worth $2 million dollars today. The one on the right is still owned by the same people who owned it in 1978. That homeowner's property tax bill is based on its value back in 1976, of around $50,000. The one on the left was purchased in 206 and its property tax bill is based on its then value of $1.9 million.
Based on a property tax rate of 1.25% of assessed value, the property tax bill of the home on the right would be 1.25% of $50,000, which would make it $625. The property tax bill of the home on the left would be 1.25% of $1.9 million, which would make it $23,750. Quite a disparity, isn't it?
The original idea behind Prop 13 was to prevent rapidly rising property values from causing seniors to be forced out of their homes by ever-increasing property tax bills. Fair enough. But then came another initiative on the ballot. Proposition 58 was passed in 1986. It allowed homeowners to pass on their Prop 13 property tax valuation on to their children. 1996 extended this right to grandparents in situations where both parents of the grandchild are deceased.
The L.A. Times story points out that Jeff Bridges and his two siblings (brother Beau and sister Lucinda) have saved over $300,000 in property taxes that they would have paid had the value of the home they inherited from their mother in 2009 had been subjected to a new property tax assessment at that time.
The way it works is like this. The home inherited by Jeff Bridges and his siblings was valued at approximately $3.3 million in 2009. Once the Prop 58 paperwork was filed, the assessed value was reset to only $383,077.
On the other hand, thanks to federal tax law, the basis of the home was stepped-up from the original purchase price paid by Lloyd Bridges and his wife to its current market value. So if they'd turned around and sold it immediately, there would have been no capital gains tax on the sale of the home.
So what if we were to apply the logic of Prop 13, Prop 58 and so on to the issue of calculating the tax on the sale of properties being held with Prop 13 values?
Zillow says the value of the Bridges' home is currently $6.8 million. Their gain under federal law would be around $3.5 million. We could change CA law to require calculation of the capital gains tax on a home with an artificially low property tax valuation so that the gain would be calculated under that original property tax valuation. In the case of the Bridges' home, that would mean a gain of $6.5 million.
Obviously this will never happen. It would be onerous, although it would actually result in additional taxes of $399,000, which is only slightly more than the property tax savings they've realized since 2009.
* * *
But this stuff becomes more critical than ever thanks to the Tax Cuts and Jobs Act, which was passed by the Republican-led Congress at the behest of Donald Trump last year. It limits the ability of taxpayers to deduct their State and Local Taxes (SALT) to a maximum of $10,000. That means the owner of the house on the left described above is losing more than half of the deduction they are allowed, assuming that home is their personal residence. For people who are renting out homes they own, there is no limit on how much property tax they can deduct.
Does the name David Tepper ring a bell? Refer back to that blog written back in 2016. There are going to be a number of California residents who are going to see very large increases in their federal tax bills because of that limitation on their ability to deduct state income taxes they pay. Some of them may decide to relocate as a result.
Let me repeat a statistic or two from that 2016 blog.
In the upcoming CA fiscal year income taxes will be around 70% of the total revenue.
In CA in 1950 income taxes provided only 10% of the total revenue.
In that upcoming CA fiscal year, sales taxes will provide 22% of the total revenue.
In CA in 1950, sales taxes provided 60% of the total revenue.
Those upcoming fiscal year numbers are two years old. I'm guessing the percentage of total revenue from income taxes have only increased.
This past June marked the 40th anniversary of the passage of California's Proposition 13. To illustrate it in the simplest terms, imagine two identical houses sitting side by side. Both are worth $2 million dollars today. The one on the right is still owned by the same people who owned it in 1978. That homeowner's property tax bill is based on its value back in 1976, of around $50,000. The one on the left was purchased in 206 and its property tax bill is based on its then value of $1.9 million.
Based on a property tax rate of 1.25% of assessed value, the property tax bill of the home on the right would be 1.25% of $50,000, which would make it $625. The property tax bill of the home on the left would be 1.25% of $1.9 million, which would make it $23,750. Quite a disparity, isn't it?
The original idea behind Prop 13 was to prevent rapidly rising property values from causing seniors to be forced out of their homes by ever-increasing property tax bills. Fair enough. But then came another initiative on the ballot. Proposition 58 was passed in 1986. It allowed homeowners to pass on their Prop 13 property tax valuation on to their children. 1996 extended this right to grandparents in situations where both parents of the grandchild are deceased.
The L.A. Times story points out that Jeff Bridges and his two siblings (brother Beau and sister Lucinda) have saved over $300,000 in property taxes that they would have paid had the value of the home they inherited from their mother in 2009 had been subjected to a new property tax assessment at that time.
The way it works is like this. The home inherited by Jeff Bridges and his siblings was valued at approximately $3.3 million in 2009. Once the Prop 58 paperwork was filed, the assessed value was reset to only $383,077.
On the other hand, thanks to federal tax law, the basis of the home was stepped-up from the original purchase price paid by Lloyd Bridges and his wife to its current market value. So if they'd turned around and sold it immediately, there would have been no capital gains tax on the sale of the home.
So what if we were to apply the logic of Prop 13, Prop 58 and so on to the issue of calculating the tax on the sale of properties being held with Prop 13 values?
Zillow says the value of the Bridges' home is currently $6.8 million. Their gain under federal law would be around $3.5 million. We could change CA law to require calculation of the capital gains tax on a home with an artificially low property tax valuation so that the gain would be calculated under that original property tax valuation. In the case of the Bridges' home, that would mean a gain of $6.5 million.
Obviously this will never happen. It would be onerous, although it would actually result in additional taxes of $399,000, which is only slightly more than the property tax savings they've realized since 2009.
* * *
But this stuff becomes more critical than ever thanks to the Tax Cuts and Jobs Act, which was passed by the Republican-led Congress at the behest of Donald Trump last year. It limits the ability of taxpayers to deduct their State and Local Taxes (SALT) to a maximum of $10,000. That means the owner of the house on the left described above is losing more than half of the deduction they are allowed, assuming that home is their personal residence. For people who are renting out homes they own, there is no limit on how much property tax they can deduct.
Does the name David Tepper ring a bell? Refer back to that blog written back in 2016. There are going to be a number of California residents who are going to see very large increases in their federal tax bills because of that limitation on their ability to deduct state income taxes they pay. Some of them may decide to relocate as a result.
Let me repeat a statistic or two from that 2016 blog.
In the upcoming CA fiscal year income taxes will be around 70% of the total revenue.
In CA in 1950 income taxes provided only 10% of the total revenue.
In that upcoming CA fiscal year, sales taxes will provide 22% of the total revenue.
In CA in 1950, sales taxes provided 60% of the total revenue.
Those upcoming fiscal year numbers are two years old. I'm guessing the percentage of total revenue from income taxes have only increased.
posted by me at 6:29 PM
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