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By Kim Murphy
Murphy and Murphy Southern California Realty 

Real Estate Round-Up: New taxes impact housing

 

Last updated 8/6/2020 at 11:47pm



As residents approach November’s election, everyone should be aware of the many attempts to add taxes on your income and your property. Make no mistake, every new tax will impact housing.

The less income individuals retain, the less an individual can afford to spend. With housing being one of the largest expenditures for an individual or a family, even $100 less in expendable income will impact what a buyer can afford or even if they can purchase at all.

It’s so interesting to me that the socioeconomic group that the controlling party in California extolls to represent will be hurt the greatest by many of these new taxes.

I’d like to introduce you to Assembly Bill 1253. The California Legislature’s new effort to significantly raise tax rates on taxable income of $1 million and higher in an effort, the state said, to provide billions of dollars to improve K-12 schools and a variety of government services vital to the state’s recovery from the COVID-19 pandemic.

Once again, the state wants more of your money to spend as they choose. You’re probably saying, Kim, we don’t have people living in Fallbrook with those kinds of incomes. You might be surprised. But the fact is, it doesn’t matter where in the state those high earners live, the increased tax will affect everyone else. It’s called cause and effect.

Increased taxes filter down and impact not only the original recipient of the tax, but also the people that are in direct contact with that individual’s business or product.

Think of it this way. If I’m a wealthy individual and my taxes are personally increased, I’m not simply going to take one for the “team.” I am going to find a way to generate more income for myself, so my personal expendable finances are not decreased. How do I do that? I increase the cost of the product I produce or the service I provide. Those costs get passed down to the end user, not as a tax but as a real and tangible expense.

Have you noticed that when guidelines were added so that businesses could be COVID-19 compliant, the cost of most of those services increased because of the additional expense the service provider incurred to be compliant?

The other byproduct of a tax on the wealthy is the impact it will have on charitable donations. If I have less expendable income, then I cannot donate financially at the same level. Who loses? All the nonprofits that rely on those large donations. We’re talking food pantries, senior facilities, children’s groups, land conservancies and the arts, you name it. In Fallbrook alone, we have 150 nonprofits that could be impacted if taxes are raised.

If prices increase on necessary household items, because of the additional taxes on the producer of those items, then housing prices will be affected. There’s not a bottomless pit of money that can stretch to pay for everything. If potential buyers must spend more to provide for themselves or their family, they must pay less for a home or not purchase one at all.

The 15 Democrats who introduced the bill Monday, Aug. 3, in the Senate, argued that California’s deep-seated racial and socioeconomic inequities, exacerbated by the current recession, can’t be addressed without more government resources. These legislators are attempting to put pressure on business-aligned legislators, so the bill can be passed and signed into law before the session ends Monday, Aug. 31.

Assembly Bill 1253 lays out three new surcharges on income tax for California’s highest earners. It would impose a new 1% surcharge on adjusted gross income starting at $1 million, increasing to 3% for those who earn more than $2 million and rising to 3.5% for taxpayers with income above $5 million.

Assemblyman Miguel Santiago (D-Los Angele), who wrote the bill, said that the bill could add new annual revenue of $6.8 billion. That amount is equal to nearly half of the state general fund spending for the University of California and California State University systems in the current fiscal year. And to make matters worse, it would be retroactive to Jan. 1, 2020. The impact would be immediate.

AB 1253 would affect the tax returns of only 0.5% of those who filed in 2018, according to data compiled by the state Franchise Tax Board. But those taxpayers already account for 40% of all income tax revenue collected that year – a function of the state’s strongly progressive tax structure.

California’s highest marginal tax rate is 13.3%, higher than that of any other state, according to statistics compiled by the Tax Foundation, a conservative-leaning think tank in Washington. For years, critics of California’s tax policy have warned that its most wealthy residents might consider moving to other states if taxes continue to rise. And that exodus is what is already occurring.

According to research released by Charles Varner, associate director of the Stanford Center on Poverty and Inequality, California lost an estimated 138 high-income individuals following passage of the Proposition 30 income tax increase championed by former Democratic Gov. Jerry Brown and approved by Golden State voters in 2012.

Proposition 30 raised the state’s top income tax rate by more than 29%, increasing it three percentage points from 10.3% to 13.3%, which is now the highest state income tax rate in the nation. Proposition 30 also hiked the tax rate on income between $300,000 and $500,000 by two percentage points – a 21.5% rate increase – and raised the rate on income between $500,000 and $1,000,000 by three percentage points – a more than 32% rate hike.

In 2016, California voters extended the Proposition 30 income tax increases, which were originally scheduled to expire in 2019, until 2030. And now we have this new proposed tax. If 40% of the state’s taxes are paid by 0.5% of the population, the state cannot afford for that population group to leave. But they are, and they will continue to do so.

California has a budget problem, but increasing the already high tax burden may not have the impact that’s expected. Whether it’s higher costs for services or products that filters down, or less contributions to nonprofits, or an exodus of the population that is bearing the burden of the additional surcharge tax, the outcome will affect everyone, and it will affect housing prices.

There is an old adage that states, when you tax something you get less of it. That theory applies whether the thing being taxed is cigarettes, alcohol or, in California’s case, millionaires. Losing millionaires would not produce the positive financial result that is being promised by the passage of this bill. It will end up costing us all.

Kim Murphy can be reached at [email protected] or 760-415-9292 or at 130 N. Main Ave., in Fallbrook. Her broker license is #01229921, and she is on the board of directors for the California Association of Realtors.

 

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