Title: Is there a way to increase property tax revenue without increasing taxes: the answer is yes.
- There are three pieces of State and Federal legislation that are the root cause of revenue deficits here in California.
- Calpers and Calstrs unions here in California have carved out very lucrative defined benefit pension plans that can pay close to 100% of their retirement salaries for life after 30 years of service: a huge incentive to retire and then possibly get other employment. According to USA Today Feb. 2008, the state employees (Calpers and Calstrs) defined benefit plans are under funded by 49-billion-dollars.
Most of us have heard of Prop 13. Some of you voted for it. Most of us have heard of Capital gains, which is at 24.3% when State and Federal are combined. Nobody talks about this last one. Have you heard of the “Step-Up-Basis-at-First-Demise”? It is very powerful. You need to know what it is. Any one one of these three can create a major financial windfall, especially for the rich and problems that affect millions of home and commercial property owners contemplating a sale who aren’t worth 4-million-dollars here in California and other upscale areas in the US. The Mercury News reported May 2008 upscale neighborhoods sales values went up 1-10%, as reported by Zillow.com, while the rest of Santa Clara County went down. The upscale homes offer more property tax revenue increases when sold.
A partial solution to the revenue shortages for schools and other key services is to allow seniors (age 65+) to sell their homes free of Capital gains, similar to current surviving spouses who can sell all their appreciated assets here in California paying no taxes, at any age. There is an untapped reservoir of early Prop 13 owners of homes that aren’t for sale because of one or all three pieces of legislation. There are millions of homes in California that have exceeded the $250,000 per person Capital gains exemption that are over 65. How many of those millions over 65 would sell early if given the opportunity, similar to any-aged current surviving spouses?
- Prop 13 affects home and commercial property ownership at all ages. Moving up or down can trigger increases in property taxes, and those moving down often pay sizable capital gains with possible increased property taxes, depending on where they move. The myth Prop 13 will go away after the original beneficiaries die is indeed a myth. In fact, the opposite is true. It affects all ages owning homes and will continue to do so indefinitely in some middle to upper middle class neighborhoods.
- The combined Federal 15% (Barak Obama wants to raise it to 28%) 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) planning for possible assisted living in the future. Commercial property and securities have no exemption available which is more incentive to hold. Some well established economies don’t tax Capital gains.
- The ‘Step-Up-Basis-At-First-Death’, a provision of the current Federal Estate Tax Laws, eliminates State and Federal Capital gains when a current surviving spouse sells any of their assets here in California, a community property state. Example: Home purchased 1970 for $100,000 – No improvements. Sale price $1,700,000 (2008). Capital gain exemption $500,000. Subject to gain 1,100,000. Current surviving spouse steps up to $1,700,000 with no Capital gains. So, the tax gets surviving couples (mainly seniors) selling their securities and homes in excess of the $250,000 per person exemption, and aren’t worth the $4 million per couple exemption that the Federal Estate Taxes are meant to tax. Two presidential candidates want the Federal estate tax exemption to be fixed at 3.5-million-dollars per person. Mr. McCain voted in June 2006 to completely remove Federal estate taxes. No mention of the ‘Step-Up’ by any candidate. Too many powerful unions and other big money private interests that benefit from a dysfunctional and vague tax code.
Super seniors over 75 might make their most sound financial decision for their survivor and children by waiting and avoiding Capital gains. Property taxes vary in some middle to upper middle class neighborhoods by $1,000-$12,000 and $2,300-$36,000 respectively. Capital gains can vary $300,000 and much more, between surviving spouses versus couples the same ages selling. Seniors moving to assisted or full-time care can cost $4,000-$10,000 per month. The last thing they want is to pay a huge Capital gain in the process. There needs to be incentive to sell in order to free up inventories for new buyers. The legislation needs to focus on increased Property tax revenue by new home buyers. The solutions should be directed at State and Federal Capital gains treatment that is fair. If you eliminate all State and Federal Capital gains on all assets for current surviving spouses selling their assets at any age, the same should hold true for seniors Age 65+ selling their homes. Allowing seniors to sell and be replaced by a current property taxpayer makes sense and will make neighborhoods more homogeneous and increase revenues.
Wouldn’t it make more sense for legislators to modify Federal and State Capital gains taxes to address their competing interest with Prop 13. Modifying Prop 13 is apparently untouchable. It makes sense to move around it. The annual structural deficits should be reduced with time as seniors choose to sell when they want to, not need to. Also, don’t forget those very rich retirement programs. Legislators need to address revenue and retirement benefits that turn the private sector into second-class retirees.
Jim Hall, CLU
James U. Hall, CLU – Former President Santa Clara County CLU Society, Estate Planning Counsel and General Agents and Managers Association.
Don Sherer – Esquire, Tax Attorney
John E. Upton – Former chairman of California state board of supervisors (1998) from El Dorado County