Here are our comments to the Prop 13 blog on the SJ Mercury News http://mercextra.com/blogs/edreform/2008/03/27/revisiting-prop-13/ . We also sent a letter to Eric Hanushek, who is a fellow at the Hoover Institute Stanford University focusing on education and economics and was mentioned in the same blog.
Capital gains competing with Property tax revenue
According to USA Today, the state employees (Calpers and Calstrs) defined benefit plans are under funded by $49 Billion. Schools are grossly under funded. And now, the Sub-prime problem will lead to a disastrous structural revenue fall in the future.
There are three pieces of state, State and Federal combined pieces of legislation that set the formula for a permanent structural deficit.
- Prop 13 affects home and commercial real estate ownership at all ages. The myth that it will go away when the original beneficiaries die off has no factual foundation. The opposite is true.
- The combined Federal 15% and California 9.3% Capital gains taxes (Home exemption $250,000 per person) has become a huge disincentive to sell, especially among seniors (Age 65+). Commercial property securities have no exemption. Many well established economies do no tax Capital gains.
- The ‘Step-up-basis-at-first-death’, a provision of the current Federal Estate tax laws eliminates Capital Gains when a current surviving spouse sells any of their assets. So, it gets couples (mainly seniors) selling their homes in excess of the $250,000 exemption and aren’t worth the $4 million per couple exemption.
If there is a decision by a long term senior couple who choose not to sell because of the Capital Gains, the State and seniors lose all around. Waiting might be the best investment decision they ever make. Property taxes vary from $1800 to $36,000 in our area. Any one of the three pieces of legislation keep people in their homes at all ages. There are probably millions of seniors, not only in California, waiting for a death before selling.
The solution should be directed at the elimination of State and Federal Capital gains for those homeowners over age 65. There are millions of California homeowners that would move on when they choose and make neighborhoods more homogeneous and level the tax-paying field.
Seniors facing $4-$6,000 a month for assisted living need liquid assets, not brick and mortar. Prop 13 should be changed but it won’t happen, because it affects so many homeowners positively in relation to their new neighbor willing to pay high prices.