Thomas Oatway: Legislators must stand up against potential tax reform threats

By Signal Contributor

Last update: Monday, June 19th, 2017

The tax reform legislation which is being formulated in GOP-led Congress has serious implications for Californians, who pay some of the highest income and real estate taxes in the nation.

Some legislators from “red” states may be inclined to punish California and other big tax states by eliminating the deductions for state income tax and property taxes.

This could accelerate the flight of big earners and businesses from these states while seriously impacting state government budgets. But the biggest impact would be felt by younger middle-income homeowners who spend a high percentage of their income on housing costs.

Many struggled to purchase their first homes, and high home prices paired with high property taxes are a strain on their budgets. Taking the state income and property tax deduction from these residents would lead to financial instability and possibly another housing crisis.

Our elected U.S. representative, Steve Knight, plus other California Republicans, must fight to derail this plan. To do otherwise will risk not only the financial health of their constituents, but also their own jobs.

Thomas Oatway
Valencia

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Thomas Oatway: Legislators must stand up against potential tax reform threats

The tax reform legislation which is being formulated in GOP-led Congress has serious implications for Californians, who pay some of the highest income and real estate taxes in the nation.

Some legislators from “red” states may be inclined to punish California and other big tax states by eliminating the deductions for state income tax and property taxes.

This could accelerate the flight of big earners and businesses from these states while seriously impacting state government budgets. But the biggest impact would be felt by younger middle-income homeowners who spend a high percentage of their income on housing costs.

Many struggled to purchase their first homes, and high home prices paired with high property taxes are a strain on their budgets. Taking the state income and property tax deduction from these residents would lead to financial instability and possibly another housing crisis.

Our elected U.S. representative, Steve Knight, plus other California Republicans, must fight to derail this plan. To do otherwise will risk not only the financial health of their constituents, but also their own jobs.

Thomas Oatway
Valencia

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  • Brian Baker

    I agree with you, Thomas, and I’m pretty sure this proposal is going absolutely nowhere. Why would the GOP be so stupid as to eliminate the deductions that their natural base depends on? Yes, they’re the PSP — Perpetually Stupid Party — but not THAT stupid. It would be electoral suicide.

    This is yet another loony proposal popping from the “mind” of Paul Ryan, a nerd without a lick of common sense.

  • Ron Bischof

    Aren’t high tax states being subsidized by the rest of the country? Why?

    • Brian Baker

      None of that is germane to the political point I’m making here.

      Eliminating the mortgage and property tax deductions is going to immediately cause home values to drop. Who owns most homes numerically? The middle class, the exact same demographic from which the GOP draws most of its support.

      So, as those people sit there, with their mortgages and ongoing property taxes, they’re going to see the value of their homes drop out from under their feet.

      Good luck on trying to tell them that, “Hey, it’s okay! Now you’re not subsidizing California anymore!” I don’t think some dude in Arizona or Texas is going to be very happy when all of a sudden his house drops in value by $40,000.

      Then there’s the secondary, or ripple, effect. As home values drop, so do rental rates. So, those who own investment properties are going to see their income decrease as rental rates chase property values down. That’s a DIRECT effect on income for those people.

      Who actually BENEFITS from this? People who can’t afford to buy homes, or others who are renters, and I’d guess the majority of them are people who support Dems.
      So in reality, the GOP will manage to alienate middle class home owners and investment owners, their natural base (as I said), while providing a benefit for people who are never going to vote for them anyway.

      That’s what I mean by political stupidity. Ryan’s a bonehead, but then I’ve been saying that for years.

  • Brian Richards

    Why should high tax be subsidized by low tax ones? If CA wants to spend 50 million dollars protecting illegal immigrants, why should the citizens of Nevada help pay for that, even indirectly? And finally BB, CA and other high tax states don’t have too many in the natural base anyway. CA treats our President and the GOP with contempt and they/we get what we deserve.

    • Brian Baker

      Are you saying you SUPPORT eliminating the mortgage and state tax deductions on federal income taxes?

      Because that’s what this LTE is about.

      • Ron Bischof

        That doesn’t address the points Brian Richards and I raised, Brian. Tax competition is important to provide competitive pressure to keep the state tax burdens lower.

        Does the proposed tax plan actually eliminate mortgage interest deductions? Secretary Mnunchin states it doesn’t and I wouldn’t rely on the representations of big government statists like Mr. Oatway.

        https://www.law360.com/articles/897549/mnuchin-says-tax-plan-keeps-mortgage-interest-deduction

        Regarding state tax deductions, currently three states, namely California, New York and New Jersey consume over 30% of the state tax credits on Federal income taxes.

        Is that not a subsidy to these high tax blue states by the remainder of the union?

        Reducing these subsidies would be a start on making Federal taxation more fair.

      • Brian Baker

        None of that is germane to the political point I’m making here.

        Eliminating the mortgage and property tax deductions is going to immediately cause home values to drop. Who owns most homes numerically? The middle class, the exact same demographic from which the GOP draws most of its support.

        So, as those people sit there, with their mortgages and ongoing property taxes, they’re going to see the value of their homes drop out from under their feet.

        Good luck on trying to tell them that, “Hey, it’s okay! Now you’re not subsidizing California anymore!” I don’t think some dude in Arizona or Texas is going to be very happy when all of a sudden his house drops in value by $40,000.

        Then there’s the secondary, or ripple, effect. As home values drop, so do rental rates. So, those who own investment properties are going to see their income decrease as rental rates chase property values down. That’s a DIRECT effect on income for those people.

        Who actually BENEFITS from this? People who can’t afford to buy homes, or others who are renters, and I’d guess the majority of them are people who support Dems.

        So in reality, the GOP will manage to alienate middle class home owners and investment owners, their natural base (as I said), while providing a benefit for people who are never going to vote for them anyway.

        That’s what I mean by political stupidity. Ryan’s a bonehead, but then I’ve been saying that for years.

        (This is the reposted comment)

        • Ron Bischof

          I’ve already addressed that the mortgage interest deduction isn’t going to be eliminated, so it’s moot.

          Due to the economic disruption it would cause, I doubt if the blue state property tax subsides would be eliminated precipitously.

          Other than an appeal to consequences, do you concur in principle, Brian?

          • Brian Baker

            The mortgage deduction IS going to be eliminated, Ron, according to what I’m seeing, unless one itemizes their deductions.

            http://www.businessinsider.com/gop-tax-plan-could-affect-real-estate-market-2017-1

            I don’t know where you’re getting your info. So no, I don’t concur at all. This has nothing to so with “blue state equities”. We’re talking about federal taxes.

            As a homeowner, I’m looking at PERSONALLY losing almost $50K in hard equity from my house. Why would I think that’s any kind of good idea at all? That’s exactly the same thing as taking $50,000 out of my savings account.

          • Ron Bischof

            The link I provided quoted the Treasury Secretary.

          • Brian Baker

            And the link I provided showed the results of the policy, as well as a link to the Federal Reserve analysis.

          • Jim de Bree

            I am not sure which link you provided, but I have been watching Mnuchin’s remarks closely and I think he is full of crap from a tax policy standpoint.

          • Ron Bischof

            No doubt you agree the Treasury Secretary has some influence on tax policy, yes?

            “U.S. Treasury Secretary Steven Mnuchin on Wednesday said that President Donald Trump’s administration will preserve the mortgage interest deduction, a tax reform plan that aligns with the House Republicans’ blueprint.”

            https://www.law360.com/articles/897549/mnuchin-says-tax-plan-keeps-mortgage-interest-deduction

          • Jim de Bree

            The home mortgage interest will be eliminated on a de facto basis as I previously discussed.

        • Jim de Bree

          Brian, the experience in Australia is that rental properties became more valuable because people choose to rent instead of own their residence.

          What we saw after the great recession is that Wall Street got into the single family residential business. Two of the top performing REITs are American Homes 4 Rent (founded by the founder of Public Storage) and Invitation Homes (founded by the world’s largest private equity firm).

          Your point about the GOP alienating the middle class was the point I was making in a recent column.

          • Brian Baker

            Well, Jim, I’m not sure how applicable Australia is to this country. Typically, rental prices are reflective of real estate prices; they usually both move in the same direction.

            And of course institutional investors will be the gainers in such a scenario. Their business model is geared to different stimuli than individual investors. My comment is specifically limited to the middle class, as I said, and those are the investors — landlords — who’ll be hit by the drop in property values. For them it’s a double whammy: loss of cash value and loss of income.

          • Jim de Bree

            Brian, the Australian situation had similar economic consequences to the local real estate market that the 1986 Tax Reform Act had to real estate markets in the US. Tax laws ended subsidies and over the next several years the markets reached a new equilibrium point. Why should the economics be any different in Australia? The amount of housing costs subsidized by the Australian tax laws was similar to that of the US. When the subsidy was removed, homeownership in Australia declined by 25%. Prior to the change in tax laws, the percentage of Australians who owned their homes was comparable to that of the US. If we end the deduction for home mortgage interest, we will likely see a decline in home ownership and the demand for owner occupied housing.

            About a year ago, I attended a meeting with a number of my former partners who specialize in real estate taxation. At that time we surprisingly concluded that, due to low interest rates, tax subsidies are no longer provided to those buying homes for less than $500,000. That is because the interest and property taxes for homes in that price range amount to less than the standard deduction. I believe that this is a primary driver (but not the exclusive driver) of why millennials prefer to rent rather than own.

            The millennial housing preferences have resulted in a bull market for multifamily residential rental housing. It also has put a lid on the value of single family residences. My home, for example, is still worth less than in 2007. I agree with your assessment that the mom and pop middle class folks who own smaller rental properties will see a decline in the value of their rental properties.

          • Ron Bischof

            When the price of housing goes up, does that affect demand for first time buyers? Do ever more rigorous building codes and energy source mandates encourage or discourage building of “affordable” housing?

            I agree that there are other factors than tax subsides in the reduction of demand for single-family dwellings among millennials. In fact, those factors are likely paramount.

          • Brian Baker

            It’s not just an isolated issue of economics. Cultural issues come into play, too, just as they do regionally in this country, and there are cultural differences between Australia and us. I lived in Sydney for six months and saw it firsthand. Demographics are also a factor, as you mentioned, and we’re trying to compare a country of 20 million with one of 330 million population. It’s not apples and apples.

            Demographics: Consider the electoral map of the last election, which was awash in red with a few huddled areas of blue along the coastal enclaves. Well, those large areas of red are exactly the people I’m talking about, the “mom and pop middle class folks who own smaller rental properties” you mentioned, who are going to be whacked by this proposal. I agree that in those dinky blue areas there’s been “a bull market for multifamily residential rental housing” (as you put it), but they’re irrelevant to my point, since they’re already Dem supporters (hence the blue). In fact, that simply reinforces what I’m saying.

            If the GOP was actually TRYING to figure out a way to alienate those huge red areas, they probably couldn’t come up with a better way to do it.

    • Jim de Bree

      I presume you are aware that the federal government spends $1.81 for every tax dollar collected in Nevada, but only spends $1.18 for every dollar collected in California. See https://mises.org/blog/which-states-rely-most-federal-spending. The nationwide average per state is $1.20 for every tax dollar collected. So California is not even getting the national average.

      I simply do not understand your point about tax subsidies.

      Furthermore, what do you mean when you refer to the “natural base?”

      Based on your last sentence, are you suggesting that states who suck up to the party in power should get more federal spending? California certainly did not get that when Obama was President.

      • Ron Bischof

        I knew you’d be there on this, Jim!

        That there are other subsides that net out differently doesn’t negate my point about blue state tax subsides. Should all states adopt that model to even it up?

        Of course not. Instead, cross-subsides between states should be eliminated.

        • Jim de Bree

          Do you really want to eliminate federal highway spending that is spent disproportionately in rural states with a large area? That spending benefits the nation as a whole because it facilitates commerce.

          What if there is a huge casualty loss in a state requiring federal aid? Should we eliminate that? I am pretty sure you will want FEMA assistance when the big one hits the SCV.

          By the way, most of the states receiving the largest net subsidies are red states.

      • Brian Richards

        Does that take into account the high housing costs in CA and how much it’s citizens benefit from the home mortgage deduction because of those high costs? Direct government spending is only part of the equation. If there are more houses in CA that the rest of the country and more valuable houses than the rest of the country, then is it not logical that we benefit disproportionately? Look, I hear what you’re saying and I hear what Baker is saying. I’m just trying to be philosophically consistent in my opposition to picking winners and losers with the tax code. Even if we capped the mortgage deduction at the price of the medium valued house within a state, that would be fine. I could care less if someone loses a bit of value on their 3 million dollar West LA home.

        • Jim de Bree

          Picking winners and losers is inevitable. For example, labor costs are deductible when incurred, but the cost of technology that replaces labor has to be amortized over a prescribed useful life, typically five years. The Ryan/Trump tax plan calls for allowing a deduction for costs of goods incurred in the united states, but disallows a deduction for costs incurred outside the US. The closest we came to putting everyone on a similar footing was after the 1986 Tax Reform Act was passed.

          As to the cap on the home mortgage, Section 163 of the Internal Revenue code disallows interest deductions on the portion of a home mortgage exceeding $1.1 million. As I stated in an earlier post, given the proposed increase in the standard deduction, there will be no tax benefit for interest on a home mortgage less than around $600,000. Therefore, under the Trump/Ryan proposals the government will subsidize mortgages between $600K and $1.1 million. That change was made in the 1986 Act and sought to eliminate deductions on high priced housing.

          • Ron Bischof

            Picking winners and losers is inevitable only if you allow politicians and Executive agency technocrats to do so, Jim.

            Surely you know the tax code is a thing of wax in a political playground. Class warfare rhetoric is one of the tactics to sell folks on more tinkering to screw them.

            Remember when the Federal Income Tax was designed to net a few millionaires?

            We need to unwind the undue Federal influence, not “fix” it.

          • Jim de Bree

            Ron, any change to the Internal Revenue Code has winners and losers. Any code that is enacted will have winners and losers because an income based tax relies on the use of accounting methods and conventions which inherently treat taxpayers differently. Our code is replete with complexity generated by lobbyists, but the Republicans do not seek to remove such complexity. Instead they seek to shift the tax burden.

            You apparently disagree with me that the proposed changes are class warfare. Clearly they are because the burden shifts form the wealthy to the middle class. I don’t care what the Heritage Foundation and other conservative think tanks say. I have practiced in the tax profession for over 40 years and have studied tax policy for almost as long. I understand that most of what is written is based political objectives rather than looking at an unbiased view of reality.

            Over the past several weeks, I have had extensive conversations with tax professionals who used to work on the Hill with matters involving tax legislation and they all agree with me. Some are Republican, some are Democrats, but they all agree with me.

            As to remembering when the Internal Revenue Code was designed to apply income tax against only millionaires, I wasn’t around then so I don’t remember it. The Code was first effective in February 1913. John D. Rockefeller paid 70% of the federal income tax collected. When the US entered World War I, instead of running deficits, the tax base was broadened to fund the war effort.

          • Ron Bischof

            While I certainly agree that you have expertise and extensive experience, I’d caution you about appealing to your own authority while assuming that the Heritage Foundation et al don’t have access to those equally or more qualified, Jim. Therefore, it’s important to address the argument rather than the source.

            I stand by my principle that the Federal and its vast administrative agencies that are nearly beyond the reach of representative government need to be unwound. Cross-subsidies among states for in state projects under the guise of “Interstate Commerce” is unconstitutional.

            Any progress on that is fraught with consequences but allowing Leviathan to continue incrementally removing itself beyond the limits The People have placed on it.

          • Jim de Bree

            Ron, your caution is pretty darn funny. I have been addressing the arguments, as you well know. I referred the Heritage Foundation because I disagree with the merits of some of their arguments–particularly those on tax policy.

            Just for the record, I have read numerous points of view and given each considerable thought. Unlike others, I don’t seek out sources that reinforce my own perceptions. I also have had the good fortune over the years, but more importantly over the past few weeks to have significant discussions with former staff of the House Ways & Means Committee, the Senate Finance Committee, and the Joint Committee on Taxation, including economists who were involved in the revenue scoring process. Even the Republicans in that group question some of the talking points of Ryan et al.

            So my views are not, as you put it, based on my own authority. I am sorry that you have differing view about tax matters and economic policies, but don’t tell me that I am “appealing to my own authority.” Reasonable people can have differing views.

            Quite frankly, that comment seeks to question my integrity rather than discussing the merits of my position. You are a bright guy. I respect your views and don’t question your integrity.

            I don’t disagree that much of government needs to be unwound, I am not sure about the constitutionality arguments though. I understand that many on the right believe that many of the government’s activities that commenced in the 20th century are unconstitutional. If all of these activities are unconstitutional, then why haven’t the courts struck them down? For example, I have heard from several that Medicare is unconstitutional. Well it has been here since 1965. If it is unconstitutional why haven’t the courts outlawed it? I am not even sure that there have been any cases arguing the constitutionality of Medicare.
            As to cross boarder subsidies, you did not respond to my previous points about building roads or FEMA assistance. Are they also unconstitutional?

          • Ron Bischof

            No one is questioning your integrity, Jim. Nothing I write here about policy is intended personally.

            That said, your comment about not caring about what “conservative think tanks say” came across as a genetic fallacy and less than your usual intellectual rigor. I know you well enough to ascertain that you don’t argue that facts are dependent on their source for validity.

            As you know, think tanks across the political spectrum retain and have access to considerable academic and professional intellectual firepower and play key roles in the formulation of policy. As you point out, there’s a range of expert opinion on this topic.

            Next, are you seriously arguing that that every policy of government is constitutional if it isn’t ruled otherwise by a court? If so, you may wish to rethink that as a legal theory.

            I consider the interstate highway system a national infrastructure project that crossed state boundaries. The same with space programs, temporary emergencies, etc. These aren’t the same as ongoing permanent subsides.

  • Jim de Bree

    Boy there is a lot of misinformation here. The problem is that this issue is politically charged and people lack a fundamental understanding of taxes and base their conclusions on incomplete data. I am really surprised that people who should know better keep mentioning this faulty analysis.

    First of all, let’s discuss the partisan aspects. The Republicans want to stick it to Blue States so that people who would otherwise not vote for them bear the cost of the tax proposals. As Brian Baker says, this is part of the Republicans’ perpetually stupid approach.

    Furthermore, if the Republicans’ idea is to suspend the federal subsidies of state budgets through the tax system, why don’t they repeal the tax exemption for interest earned on state and municipal bonds? Oh, I forgot, that is a tax benefit enjoyed by the wealthy and we cannot possibly make them pay more tax.

    The tax system is darned complex and the IRS captures raw data which provides an incomplete analysis. Those who believe that the US taxpayer is disproportionately subsidizing state and local government spending in blue states fail to understand the intricacy of the nuances in tax law.

    Taxpayers who earn above a certain amount are subject to the alternative minimum tax or AMT. The AMT is a parallel tax system where taxable income is recomputed with a number of adjustments. This recomputed income is subject to tax at a lower rate than the regular tax. One of the biggest adjustments is the addback of state and local income taxes. In California, New York and other blue states with high tax rates, the AMT generally affects taxpayers with household incomes of $125,000 or more. Thus, for those households in California and elsewhere, the AMT generally ensures that there is no tax benefit for the deduction for state and local income tax.

    The IRS data cited by the supporters of the repeal of the state and local income tax deduction considers the reduction in regular tax that results from this deduction. However, it fails to consider the impact of the incremental AMT that is paid which offsets the reduction in the regular tax. Therefore, it is unlikely that taxpayers in California who are subject to AMT will see a meaningful change in their tax liability.

    However, California taxpayers with a household income of less than $125,000 and taxpayers in other states with low tax rates (principally red states) who not subject to AMT will suffer a tax increase as a result of this provision. So this perpetually stupid approach is going to shift the tax burden from the wealthy to middle class taxpayers in red states and to people in high tax blue states who make less than $125,000.

    Furthermore, the suggestion that the repeal of state and local tax deductions are going to slow down the rate of spending by state and local governments is preposterous. Eliminating this deduction is merely a way to fund the rate cuts that primarily benefit the wealthy.

    Now let’s discuss home mortgage interest. There are no plans to overtly repeal the deduction for home mortgage interest or charitable contribution deductions. However, the standard deduction will be increased to $25,000. You can itemize your deductions, claiming home mortgage interest and charitable contributions to the extent that those deductions exceed $25,000 (the amount of the standard deduction). (At a 4% interest rate, a home mortgage of $625,0000 generates $25,000 of interest deductions the first year.) Unless a taxpayer is generous to charities, it is unlikely that they will have sufficient home mortgage interest and charitable contributions to itemize their deductions. Thus, for most people there will be no tax benefit to owning a home.

    When I was in Australia a few months ago, I read an article about the Australian housing market. About thirty years ago the Australian (and New Zealand) government repealed the home mortgage interest in the guise of tax simplification, justifying the action by saying that the government should not be subsidizing housing. Thirty years ago about 65% of Australians owned their own home. Today that percentage is about 40%. The segment of the population comprising the twenty five percent reduction saw no build up in value of their personal residence over the past thirty years. Now that they are getting ready to retire, they have a much smaller (perhaps non-existent) retirement nest egg. Consequently, there is increasing political pressure being brought to bear to increase the amount of government pensions. If the pensions are increased, it will cost the government considerably more than the cost of subsidizing home mortgage interest.

    The proposed US tax legislation provides for a de facto repeal of the home mortgage deduction. We should consider the Australian experience before we go too far down this path.

    • Ron Bischof

      If it will have no effect on spending in blue states, why do you believe those states are opposed to modifying deductibility of state taxes, Jim?

      • Jim de Bree

        First of all, the government is pointing a finger at them. A couple of weeks ago, I read an op-ed column about this topic in the LA Times that was in the hard copy edition, but I cannot find it on-line explaining from a banker’s perspective why this does not make sense. The column was written by the CEO of City National Bank. A big part of the argument is that CA will pay more federal taxes without receiving any additional federal benefits, exacerbating the issue that it contributes more to the federal government than it receives.

        Let me elaborate on why, I believe it will have little effect on spending. In the past year, CA has enacted or proposed several tax increases that will not result in additional deductions for federal income tax purposes. Sales tax and gas tax increases are the two examples that come to mind off the top of my head. They are considering a gross margin tax and others. The fact that these taxes are not deductible hasn’t stopped the legislature or local governments from imposing new taxes.

        • Ron Bischof

          Since the state can’t print money and their borrowing depends on the state’s bond rating, aren’t tax increases ultimately self-limiting?

          At some point, the denser part of the CA population will figure out someone else isn’t paying for the tax increases they or their proxies vote for, eh?

          My thought is blue states wish to continue the Federal income tax support of their high taxation model because they loathe tax competition and the escape of their “rich” cash cows. Additionally, those bloated bureaucracies are public sector union Democratic voters who will turn CA and other blue states into Illinois if they’re allowed to continue.

          We’re not going to agree on this philosophically. Rather than tinkering with the absurdly complex crony rewarding tax code, substantial portions of it need to be flushed because it’s harmful to most citizens except the favored (subsidized).

          The status quo is unacceptable and power and funding need to be devolved out of Washington, D.C. We cannot continue to let the perfect be the enemy of the good just because the extant system has been in place for decades.