Housing affordability is once again at the top of Sacramento Democrats’ policy agenda this session. Several bills have already been proposed to try and bring down state housing costs.
Addressing the state’s housing crisis is now running into conflict with another perpetual top priority for many liberals at the State Capitol – raising taxes. And when push comes to shove, raising taxes usually wins out.
Consider the proposal (Assembly Bill 1905) by Assemblyman David Chiu, D-San Francisco, to limit the amount homeowners can claim for the state mortgage interest deduction tax credit to the first $750,000 value of their primary home. The bill would also outlaw Californians from deducting mortgage interest on a second home.
Using his best class warfare rhetoric, Chiu told the San Francisco Chronicle that, “these are the individuals who own the most expensive homes in California. It’s a small price to pay among a small number of wealthier homeowners to establish a permanent fund for homeless prevention.”
While some wealthy Californians are shelling out big sums to buy a house, a lot of regular folks are too, thanks to the government-created housing crisis. Consider the fact the median sales prices for a home in Los Angeles County in 2019 was $817,000. In Chiu’s district in San Francisco, the median price of a house was $1.6 million last year, based on figures from the real estate brokerage firm, Compass. In Santa Clara County, the median price was $1.26 million, and it was $860,000 in the Oakland-Berkeley area. So, Chiu’s proposal would target a lot of average Californians who are simply paying the market rate for housing.
Chiu’s proposal could significantly impact the real estate market in communities that feature a lot of residents buying second homes. Commenting on a similar proposal pushed by Chiu in 2017, Judy Horn of the California Desert Association of Realtors told the Desert Sun that, “it’s going to affect the little guy in Palm Springs who has the one-bedroom condo that he’s dreamed about his whole life and has a mortgage on it. We are heavily dependent on remote owners in this valley, many of whom have mortgages.”
Back then, the California Association of Realtors estimated that if the mortgage interest deduction were eliminated for second homes, the state would realize nearly 2,200 lost home sales in the first year after implementation and a $180 million economic loss.
According to Chiu’s office, the bill would be an estimated $400-$500 million annual tax increase, with the proceeds to be used for homeless programs. While these programs may be worthy budget priorities, surely sufficient funding could be found in a time of record state tax revenue without pushing another big tax increase.
Chiu argues that second homes are really just weekend homes or vacation homes – playgrounds for the wealthy. In fact, some California workers keep a second house in another city for work during the week. Some use second homes primarily to generate income, especially retirees who no longer have a job. Many buy two, three, four, or more homes of all prices and offer as rental properties to earn income.
Already, there are signs that Chiu’s bill may be in trouble at the hands of his fellow Democrats. Long Beach Assemblyman Patrick O’Donnell tweeted that, “this bill is a massive tax increase and assault on the middle class. We should be finding real solutions to increase housing affordability and not relying on gimmicks that will make the problem worse . . . put this on the bad idea file.”
Chiu should also heed the words of PRI’s Kerry Jackson, who argues that, “what California needs are homes of all types: large, single-family houses on big lots, medium-sized houses on modest lots, small homes on small lots, McMansions, suburban tract homes, high-rise apartments, townhomes, condominiums, duplexes, triplexes, quadplexes and granny flats.” And that includes second homes.
Jackson echoes the words of the nonpartisan Legislative Analyst’s Office, which says that, “building new market-rate housing indirectly increases the supply of housing available to low–income households in multiple ways.”
One thing is for certain – making any type of homebuying more expensive runs counter-productive to the Legislature’s efforts to increase home building and affordability.
Tim Anaya is the Pacific Research Institute’s senior director of communications and Sacramento office.