Sacramento Report
By Ron Kingston

What The CBO Is Proposing

While we are reeling from the adverse affects of the economy, legislators in Washington DC and Sacramento continue to consider additional significant changes in tax policy. The proposed changes follow on the heels of income and sales tax hikes that were signed into law earlier this year.

Fiscal chaos, plummeting tax revenues, redefining core governmental services, adverse judicial challenges, a desire to level out boom-or-bust tax cycles are just some of the key forces that compel the California legislature and Governor to reexamine tax law.

In Washington, the Congressional Budget Office (CBO) delivered its revenue raising tax options as the Senate and House consider new tax policy. The CBO’s list for housing should shake up anyone involved in housing. At the top of the hit list is to slash deductions for homeowner mortgage interest from the current $1.1 million limit to just $500,000, phased in with $100,000 annual reductions which would start in 2013.

Taxpayers can currently write off mortgage interest on their principal residence up to $1 million and on home equity debt up to $100,000. The CBO is proposing that the maximum mortgage debt amount would be reduced yearly until it reached $500,000. This would increase federal tax collections by an estimated $41 billion over ten years. If that is not enough, Congress could raise even more money by replacing mortgage interest deductions with a flat 15 percent tax credit for taxpayers with amounts below the declining limit.

The beneficiaries of this plan would primarily be low and moderate-income taxpayers that don’t itemize on their tax returns. The losers under this plan would be primarily California taxpayers with big mortgages who are more likely to itemize under existing tax law. The CBO estimates that this approach would increase tax revenue by nearly $390 billion from 2013 to 2019.

The entertaining commentary by the CBO about these tax proposals is that they think that it may have negative side effects on the real estate market! The CBO is also suggesting that Congress consider raising federal tax revenue by prohibiting all write-offs for state and local taxes including property taxes. This would add an additional $343 billion into the federal coffers between 2010 and 2014, and $862 billion by 2019.

Another proposal by the CBO is to place a clamp on the value of all itemized deductions at 15 percent—not just mortgage interest and property taxes but also charitable contributions, medical expenses and casualty losses. This revenue windfall is 1.3 trillion over 10 years.

And finally, CBO is suggesting that we revert to the capital gains approach that prevailed before 1987. Instead of taxing most gains at 15 percent, the CBO plan would exclude 45 percent gains from taxation and the remaining 55 percent would be taxed at a taxpayer’s regular tax rate. This would raise an estimated $48 billion over the next 10 years.

With billowing deficits, trillions of dollars needed to be raised to balance the existing federal deficit, additional money to balance other tax increases which could include health care and economic “stimulus bills” Congress will feel the intense pressure to increase federal tax revenue.

In Sacramento on the other hand, in addition to acknowledging the need to reduce state spending, the Legislature continues to negotiate over a massive overhaul of the state’s water system in an attempt to achieve a compromise in the endless water wars with a plan to get voter approval on an $11.7 billion water bond package. Additionally, the Commission on the 21st Century Economy will present a new tax planning policy to the Governor and Legislature within weeks.

Under consideration by the Commission, the state would establish a “business net receipts tax” (BNRT) requiring every business to pay taxes on overall receipts minus purchases of goods or outside services. This would have an immediate adverse affect on our industry.

The BNRT rate would be initially set at 3 percent, lower existing sales tax or corporate tax rates, and the corporate income tax rate and the state’s 5 percent general fund share of the sales tax would be reduced. It would also reduce personal income tax rates thus reducing reliance on that revenue.

The Commission is expected to recommend that the state establish a larger rainy day reserve, even though the voters rejected this concept just a few months ago.

A “carbon tax” is being actively considered as well which would amount to an 18 cent per gallon fuel levy that would pay for transportation projects and “smart growth”. Low-income drivers would receive a rebate.

Of noteworthy importance is that the commission is considering a “split roll property tax” that would eliminate Proposition 13 tax protections for businesses. The proposed change requires voter approval and will be one of the fiercest fought tax battles in decades.

If you thought that these issues were enough, the state tax authorities have decided to take a little bit more out of your pocketbooks this year. For the second time in 30 years the tax board is lowering the point where each tax bracket begins, which will bump many taxpayers into a higher tax bracket. Most everyone will pay more even though income doesn’t change. Tax officials state that these adjustments have been triggered by inflation . . . or the lack thereof. This year the state inflation rate was a negative number, which is the first time since 1983. So when the economy plunges, so do the tax brackets.

Ron may be reached at: Ron@CALPCG.com
or you can call him at (916) 447-7229.