Lead Story…. The French chemist Antoine Lavoisier discovered the Law of Conservation of Mass which states that “matter can neither be created or destroyed” in 1785. As a corollary to this, I’d like to propose a new law in 2018: the California Law of Conservation of Taxes. It states that a tax can be created in the state of California but can never be destroyed or even reduced.
Before the end of 2017, the tax reform proposal that dominated much of our economic conversation for months passed. While writing about the impact a few weeks back in a series of blog posts, I concluded that:
- The legislation was likely to substantially benefit owners of commercial real estate over home owners; and
- That benefit was likely to result in new pressure on California’s iconic and controversial Prop 13, which fixes property tax rates for all property types at 1% and caps annual increases at 2%, increasing to market value only upon sale.
Just like clockwork, there is already an initiative that has been filed which would lead to a so-called “split-roll” where home owners would retain their Prop 13 protection but owners of commercial real estate would not. The logic employed by the initiative’s backers is likely that the state of California will have a difficult time raising tax revenue due to the inability of high earners to write off state and local taxes against their federal income tax. Commercial landlords will be receiving generous breaks from the Federal government under the new tax legislation, so they will end up in the cross-hairs when California needs to raise revenue.
As a fairly vocal Prop 13 critic you may think that I would support this initiative. However, I do not. Here’s my issue: California is already overtaxed and this initiative would seek to overtax it further. In order to accomplish this, it relies on voter approval through the initiative process (the entirety of which is dysfunctional to it’s core – but that’s another topic for another day) but offers voters little in the way of tangible benefits to their personal bottom line if it passes, leaving it wide open to attacks from the deep-pocket opposition that will most certainly materialize.
Instead, I would suggest a different route: a revenue neutral proposal that swaps higher property taxes on commercial buildings – excluding for-sale and for-lease residential – for an across-the- board reduction in California’s state income tax in order to provide some relief to overtaxed citizens. This would be beneficial in a few major ways:
- It gives voters a tangible benefit to their bottom line by reducing the sky-high income tax that now will not be available to reduce Federal income tax liability. This would be the first time that a Prop 13 reform proposal could actually make the argument that it would save the vast majority of Californians money.
- California’s revenue base is an unstable mess since it is highly reliant on high income earners and capital gains. Transferring a portion of that revenue to a higher property tax on commercial buildings would help to stabilize this revenue base at some level
- Excluding for lease-residential (mainly multi-family) would effectively neuter the argument that such a split-roll solution would not shift the burden to renters, many of whom are already stretched.
Now I’m not naïve, this is California after all and our elected officials always overreach when it comes to taxation. I’m also not advocating for a tax increase, merely noting that if part of the solution is to roll back Prop 13, it should at least be done in a logical manner and in a way that would provide a benefit to the economy. However, instead of replacing an inefficient tax with a more efficient one, the bungling powers that be in Sacramento and the special interest groups behind these sorts of ballot initiatives tend to double up and simply add the more efficient tax on top of the inefficient one, in a never-ending bid to shake every last dollar out of the pockets of California taxpayers and businesses. In conclusion, I have been quickly proven correct about the tax reform bill resulting in an attack on Prop 13 but wrong (at least thus far) about politicians and initiative proposers using this opportunity to go about attempted reform in a logical win-win manner. I’m sure this will not be the last we hear about this issue in 2018.
The “I” Word: Why 2018 could (finally) be the year that inflation gets going again.
Fighting Back: Blue states are scrambling to figure out ways to blunt the negative impact of the new tax law on their residents and preserve lost state and local tax write offs. See Also: Will the new tax law stall California’s economic growth?
Looking Good: Why the tax overhaul could end up being a huge win for US commercial real estate investors.
Long Term Wealth: Homes have a much better return profiles than commonly thought versus other asset classes when rent and imputed rent (not just capital gains) are taken into account.
Paralysis: How “Not in My Backyard” became “Not in My Neighborhood” and paralyzed the growth of cities. See Also: How a closed Par 3 Golf Course in LA became a poster child for NIMBY obstruction of much-needed housing.
Back up the Truck: Investors are piling into suburban rental housing now that the urban luxury apartment boom is slowing.
It’s Lit: Pot is now officially legal for recreational use in California but comes with a whole lot of regulation and risk now that the DOJ has rolled back rules that used to protect dispensary owners from Federal prosecution.
Making Gains: Meet Ripple, the cryptocurrency that has the support of much of the banking system and ran laps around Bitcoin in 2017. See Also: Why the supply of deals and digital assets is poised to explode upward in 2018. And: Companies are re-branding as crypto plays and their stocks are going HAM.
Crime Pays: Fabien Gaglio stole $100 million from his clients. Now he’s living in luxury on the Côte d’Azur. (h/t Stone James)
Charts of the Day
Want to know why the Fed is projecting a sub-2% GDP expansion over the long run? This is why:
So much for the NAR’s disingenuous prediction of doom for the housing market. It turns out that legislation that encourages people not to sell their homes is good news for home builders (but not for realtors). Who knew.
Source: The Daily Shot
The Hero We Need: A British chef was forced to resign after claiming to add meat to an obnoxious vegan’s dish and subsequently received death threats. I think that she’s a hero.
Plausible Deniability: A Pennsylvania prison inmate claimed that drugs found in his rectum during a body cavity search weren’t his.
My Kind of List: Year in review lists are mostly lame. This one is not: All the times in 2017 that Florida put the ‘F’ in WTF.
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