The New Tax Plan: Impacts on California & Affordable Housing
by Santos Alferez, Intern
On December 22 2017, the final federal tax bill signed into law will impact everyone, but especially high-tax states. In California, Republican and Democratic delegates alike negotiated furiously on terms to preserve aspects that impact their constituents. The Republican- majority Senate and House have written a bill that some say skewers towards the Golden State with tax reformation that come at a cost to Californians. The final version of the bill cut favorable tax tools that previously supported crucial aspects for personal and economic growth, especially in the housing sector. Some of these elements include reducing and capping the mortgage interest deduction to $750,000 (the average Bay Area home is $1 million); elimination of miscellaneous deductions (like unreimbursed job expenses, bike commuting, moving expenses, etc.; and state and local tax deduction of up to $10,000 for income and property taxes (though the 2015 CA average was $18,438.
In a state constricted with a housing shortage, the House version of the bill proposed taking away important tools that help permit affordable housing. Financing affordable housing projects rely on tax credits and tools such as private activity bonds (PAB) – an indispensable tool used in qualified projects that issue benefits for the public, such as affordable housing for veterans, single-parent families, etc. The elimination of PAB would devalue the low-income housing tax credit, a major financing tool that aids in constructing new housing projects. As California slowly rectifies the imbalance of supply and demand, eliminating these tools would clog the pipeline as it can barely catch-up with its current yearly production of 80,000 new homes – a number that falls under the 180,000 recommended amount needed to sustain growth and needs. This financing tool accounts for over 40% of affordable homes, and its elimination could lead to a deficit of almost a million affordable homes in the next decade. Not only do PABs deliver homes for those most in need, it provides tax-exempt financing for other critical capital projects such as roads, hospitals, primarily private colleges and universities and airports.
Although the final version of the tax bill preserved PABs, many congress members have signaled revisiting the tax exemption for PABS very soon. Furthermore, the reduction of the corporate tax rate from 35 percent to 21 percent will indirectly slash city housing funds. With significantly lower tax obligations, banks have less reason to buy tax credits. Even with Trump’s election, when comprehensive tax reform became a real possibility, banks immediately reacted to the uncertainty and likely devaluation of tax credits by limiting and even withdrawing their investments in affordable housing.
Based on the bill’s impacts, will California consider reforming its own tax code to alleviate the financial burden for their taxpayers? It’s unlikely, given that Proposition 13, the state legislation that puts a cap on property taxes, is considered the third-rail of California tax policy.