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Nov. 10, 2023 - Epoch Times
23:55
How California’s Inheritance Tax Hurts Affordable Housing | Susan Shelley #californiainsider
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When the parents die, the kids get a new tax bill in the mail with the sympathy cards.
It's horrible.
In February of 2021, Proposition 19 went into effect in California.
Those who inherit property have one year to make it their permanent residence.
Otherwise, it would be reassessed at market value, which leads to a significant tax increase.
It's never going to pencil out.
And they're not going to be able to raise the rent because of rent control, and the tenants will end up evicted, and the building will end up sold.
And you do that across the whole state of California for 5 years, 10 years, 20 years?
You're going to wipe out all that older affordable housing stock.
And that is a disaster.
That helps no one.
My guest today is Susan Shelley, Vice President of Communication for the Howard Jarvis Taxpayers Association.
Today she will explain the consequences of Prop 19 and her organization's effort to repeal it.
It wipes out the intergenerational wealth that these families worked so hard to establish.
And that's just unfair.
It's wrong, and it's not necessary.
California has a budget surplus.
It does not need tax increases.
At all.
Anywhere.
And this has to be reversed.
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I'm C.M.I. Korami.
Welcome to California Insider.
Thank you.
Thank you very much.
It's great to be with you.
You're working on an initiative to repeal the death tax in California.
Before you get into your initiative, can you tell us about this death tax?
Yes.
Well, inheritance taxes are illegal in California.
The voters said in 1982, no inheritance taxes, no gift taxes.
They did not want the state coming in when someone passed away and taking people's property.
And in 1978, When Proposition 13 passed, that was a way of preventing the state from forcing people to sell their property also, because property taxes were based on market value, and it was at the time 2.67% statewide average of market value.
That was the property tax bill.
Well, imagine paying 2.67% of the market value of your house right now Every year as a condition of keeping it.
That's what was happening.
So you have to make a lot more money every year to be able to keep up?
Just to be able to keep your own house to pay the tax.
Because inflation is pushing those prices up and no one can control the price of real estate in California.
And it was 2.67% statewide average of the market value every year.
That's why Prop 13 passed.
With almost a two-thirds vote.
Because Prop 13 said no more of this.
While people own their property, it cannot be assessed at more than 2% more than it was before.
So there was a cap on how much the assessed value could rise in any one year.
The cap was 2%.
And the tax rate was cut to 1%.
And that's in the state constitution.
When there's a change of ownership, the law said that the property would be reassessed to market value.
Well, what happened in 1986, by the time we got a few years past Prop 13, people were inheriting property and inflation had pushed those values up.
And so the kids were being reassessed on their parents' property when somebody died and they couldn't pay the 1% of the new market value of that property.
This huge tax increase was too much.
So upset were the people of California that the legislature passed unanimously an exclusion from reassessment when property was passed from parent to child.
That was Proposition 58 in 1986.
A unanimous vote of the legislature and 75% voter approval that when parents pass a home of any value to their children, it is not reassessed.
And up to a million dollars of assessed value of other property was similarly protected.
So that's a small business, a rental home, a small apartment building that someone bought for income in their retirement years.
Up to a million dollars of assessed value of other property was protected.
No reassessment, no increase in the tax bill.
And that was the law until 2020.
And then Proposition 19 passed.
Proposition 19 looked like it was about protecting wildfire victims and seniors who wanted to move to a new home and not have a tax increase.
And it did that, and that's fine.
But it also had another provision.
It repealed Proposition 58, the parent-child transfer exclusion from reassessment.
So now, when property is passed from parent to child, it is reassessed to market value, and the kids owe 1% of the new market value Every year as a condition of keeping that property in the family.
There's a limited exception if it's a primary residence and the kids move into it within one year.
You only have one year to move into it and make it your primary residence.
And then it's excluded from reassessment, but only up to a million dollars over what it's currently assessed at.
So in a place like Orange County, San Francisco, parts of Los Angeles, that's not going to go very far.
The Silicon Valley property has appreciated a lot.
So there will be a tax increase even though there's an exclusion when the kids move into it, there will still be a tax increase.
And for family businesses, no exclusion.
Reassess to market value.
Little restaurants, small hotels, any kind of family-owned business property.
When the parents die, the kids get a new tax bill in the mail with the sympathy cards.
It's horrible.
Now, when Prop 19 passed, it passed by a small margin, right?
Very narrow.
When it passed, was it clear that this would be a consequence?
The tax break portion of it was marketed very hard.
Something like $50 million of advertising talking about wildfire victims, seniors, people who needed a tax break when they moved to a new house.
Most of the advertising was on that.
This was in there, but nobody talked about it.
And this is going to result in, what's going to be the impact of it if this proposition continues?
Because it's law already, right?
This intergenerational transfer change became effective a year ago, February 16, 2021.
Everybody who lost a parent and inherited property after that is coming up against a one-year deadline to decide if they're going to move into the house permanently.
Otherwise, it's going to be reassessed to market value.
And that's just brutal.
What that does is it robs families of the ability to develop intergenerational wealth.
People get on the economic ladder by buying property in America.
That's usually the biggest investment a family makes in their life.
You buy a house.
You pay for it for 30 years.
You want to give it to your kids.
Maybe they can't live in it.
They shouldn't have to live in it.
Maybe they want to rent it for income and help put the kids through college or pay medical bills.
They should be able to do that.
It's their property.
But Proposition 19 prevents that.
So let's say some of these kids, they have to, some people have to sell their houses.
What will happen to them?
Well, there are two types of taxes that affect you when you sell a house in California.
One is the property tax, where if you go to a new house, you're going to pay market rate property taxes unless you're transferring under Prop 19.
And the other thing that stops people from selling is the capital gains tax hit.
Because in California, capital gains are taxed as ordinary income.
The top tax rate is 13.3%.
13.3%.
That you will pay on capital gains in California at the top marginal rate.
And that's the highest in the country.
So if you sell a house that has been owned for a very long time before you die, if you sell a property You will pay capital gains tax on that gain from the price you paid to the price you sell it for.
And it's a huge hit.
That stops a lot of seniors from moving because the inflation rate has pushed property values up very high and capital gains taxes are not indexed to inflation.
So you just have to pay that.
So essentially if you give the property to your kids, they cannot go live there for whatever reason and Prop 19 will make them raise taxes.
They're taxes, and if they end up selling, they're going to probably have to give a third of it to the government.
Well, if the property is transferred to the kids before death, somebody owes capital gains taxes on that.
The kids would owe capital gains taxes, or the parents would owe capital.
Somebody's going to owe capital gains taxes at some point on that sale.
If it's passed at death through inheritance, there's a step up in federal law.
So the value of the house is reset for capital gains purposes to the market value as of the date of death.
And therefore, if the kids sell it after that, they will not have the capital gains tax.
But this is stopping people, even though Prop 19 created the situation where people can move and take their old property tax bill with them.
I'm not sure this has caused the turnover that people expected because many people are trapped in their home by the capital gains tax hit that they will take if they sell a house they've owned a really long time.
How much taxes do you think it would generate, this proposition?
Where do you think the money will go?
Was there any thoughts on how they would spend this money?
It was a little bit crafty.
The idea was that the money that the The transfer part, where people move to a new home and keep their old tax bill, the idea is that would be a net loss for the counties because people were leaving their property.
And the idea was that the intergenerational transfer would be a gain in tax revenue, and that would offset.
And then if there was anything left over, a complicated formula from the Department of Finance in Sacramento would give some money to wildfire fighting.
But this was really just show business.
You know, the wildfire fighting is a drop in the bucket.
It doesn't really solve the problem.
But more importantly, firefighting is a state priority, or should be.
It should be funded from the general fund before they fund anything else.
That's extremely important.
It should not be funded through trickery and gimmicks on the backs of people who have just lost a parent.
That's just wrong.
And you mentioned there was $50 million that went into marketing for this bill.
Who was behind that $50 million?
Do you know?
The California Association of Realtors was behind Proposition 19.
So they wanted older people to move more?
The idea was that they would generate more sales, that they would make the market turn over more often, and if people were taxed out of their home by a new tax bill when somebody died, well, that was also going to generate more sales.
But here's something that people don't realize about Proposition 19.
Affordable housing in California will be wiped out in a generation.
Because all of these older apartment buildings that are family owned, the mom and pop landlords, when they pass away and the kids inherit those four units, six unit, ten unit buildings, duplexes, they will be reassessed to market value.
If they are rented, what happens to the tenants?
Either they get a rent increase or, more likely, if they're under rent control, the new owners will have to sell that building because how are they going to pay those taxes?
It's never going to pencil out at the new market value in places like Santa Monica and Venice and San Francisco and San Jose.
It's never going to pencil out.
And they're not going to be able to raise the rent because of rent control.
And the tenants will end up evicted and the building will end up sold.
And you do that across the whole state of California for 5 years, 10 years, 20 years, you're going to wipe out all that older affordable housing stock.
And that is a disaster.
That helps no one.
So you mentioned that there was $50 million spending for Proposition 19.
Something like that.
What about on the other side of it?
On the yes side, there was $50 million by real estate, Association of Realtors, right?
What about on the other side?
Well, the Howard Jarvis Taxpayers Association spent some money trying to defeat Proposition 19, trying to educate voters, but we didn't spend very much.
I think it may have been $40,000 or $50,000, and it was spent on yard signs, which were effective, I think, because we almost beat it.
We almost beat it with yard signs that said, stop the tax hikes, no, on 15 and 19.
But that was really the story of that election.
Proposition 15 was a direct attack on Proposition 13.
It was a split roll that would have forced the reassessment of all commercial property in California to market value.
And that would have been devastating to California businesses.
Devastating.
And we fought very hard against Proposition 15.
We also fought against Proposition 19, but we didn't have the resources or the ability to do everything at once and compete with $50 million of advertising.
Still...
When someone is trying to raise your taxes and you call them on it, the voters hear it the first time.
So you don't really need to spend $50 million.
You have to get the word out.
But a lot less than $50 million will do when you're fighting a tax increase.
Do you think we pay enough attention when we vote for these propositions, when we are looking at them?
Well, that's always the question, isn't it?
Some people pay attention, and some people sit down the day they're going to vote and say, what is this?
I don't understand this.
I'm going to call somebody and ask, how do I vote on this?
This is what I want.
Do I vote yes?
Do I vote no?
People get very confused.
And some of the confusion is intentional, where there's advertising that tries to persuade you one way or the other, and it's not always completely different.
It's not always honest, because sometimes it says the same thing.
If you say, if you do yes, you're protecting the teacher.
If you do no, you're protecting the teacher.
This is the safe neighborhood bill.
Well, what does it do?
Well, we don't know, but it's called the safe neighborhood bill.
Well, this is a problem.
And the attorney general, who's a partisan elected official, is in charge of writing the titles and summaries...
For ballot measures, and many times people have accused the Attorney General of being very biased on these and using essentially poll-tested language to help political allies get their measures passed and to quash the ones that the political allies don't like.
So that's a problem that needs to be addressed.
Really, the legislative analyst is the one who should write the titles and summaries.
That would be neutral.
That takes a change to the law.
And the Assembly and the Senate don't want to change the law.
So it would have to be done through a ballot initiative, and then who knows what that one would be named?
Kill All the Puppies Act.
No, we don't want to do...
You have an initiative.
You guys are working on getting signatures to repeal this, right?
The Howard Jarvis Taxpayers Association opposed Proposition 19 because of these changes, because of the repeal of the parent-child transfer.
Yes, we are.
We thought that was just wrong.
And so we are going back to the voters with an initiative To return the law to what it was before.
So the parents would be able to transfer a home of any value and a certain amount of other property to their kids without reassessment.
We're going to put that back.
That's all we're doing.
And we have to collect a million signatures, probably a million and a half signatures to be sure we have it, by the middle of April.
So everyone who's concerned about this should sign the petition.
And you can have the petition mailed to you by going to HJTA.org.
That's the Howard Jervis website, HJTA.org.
You'll see a red flashing light at the top.
Click that.
It takes you to the Repeal the Death Tax website.
And then just click Get the Petition.
Fill out the form.
We will mail it to you.
Sign it.
Send it back.
What if somebody inherited 100 apartment units?
Other people in the state may argue so he should pay the 1% increase on the current value.
Well, our measure restores the old rules, which were that a home of any value can be transferred from parent to child without reassessment, and a limited amount of other property can be transferred and excluded from reassessment.
So under the old rules, it was $1 million of assessed value, meaning the amount that you're paying taxes on, the Prop 13 protected amount.
A million dollars total of that could be passed to children without reassessment.
Anything that was worth more than that taxable value would be reassessed to market value at the time of transfer.
So our measure took that one million dollar figure of other property and adjusted it for inflation.
So from 1986 to 2021, when we did the calculation, That amount is now $2.4 million.
Same value, but $2.4 million in today's dollars.
So a family would be able to transfer a home of any value plus other property with a total taxable value of $2.4 million.
So if someone inherits an entire block of apartment buildings, that will have a higher value.
They will pay the new tax, the new market value taxes on everything over an assessed value of $2.4 million.
The idea is to protect small family businesses.
So that when a family inherits a restaurant, a small hotel, an apartment building, a duplex, they're not forced by this new tax bill to sell it immediately.
Because that's very harsh.
Or raise the rent significantly.
Or raise the rent significantly to the tenants.
So that's the point.
It's to protect the home and a limited amount of income property.
And we think that's very important for the middle class in California.
To be able to protect your children and provide for your children is everybody's right in a free country.
It's wrong for the government to step in at the time of death and say, now everything belongs to us and you have to sell.
That's just wrong.
If your ballot initiative that you're working on, if it doesn't get passed and Prop 19 stays as it is, the death taxes stay as it is, is there any consequences for California?
Well, I think it will wipe out affordable housing in California within 20 years because as these older apartment buildings are inherited and the children who are the new owners get this new tax bill, 1% of the current market value of these apartment buildings in Santa Monica, San Jose, San Francisco, 1% of the market value of an apartment building in San Diego, This is unaffordable.
And if the rents can't go up because these are older buildings and perhaps under rent control, what's going to happen to the tenants?
They're going to be evicted as the building is sold and used for another purpose.
And year after year, little duplexes, small apartment buildings, They'll be sold.
And what will replace them?
Market rate housing will replace them.
Or perhaps commercial buildings will replace them.
But it will wipe out the older housing stock of California.
And all the people who are in it will be out of luck.
And I don't know what happens to them.
It would be a disaster, I think, for California.
If Proposition 19, the intergenerational transfer part of that, stays on the books, I think it's a disaster for affordable housing.
So you think the rents will go up as a result of it.
So the renters essentially have to pay the tax.
The renters would have to pay the tax, unless they're under rent control, in which case it's more likely the building will be sold and they'll be evicted altogether.
But if they're not under rent control, then absolutely those costs will have to be passed through because it's the cost of doing business and the tax bill has to be paid every year at that new market value level.
And it's going to be devastating.
And something else that is really painful to watch is how Proposition 19 affects communities of color, which have gotten on the ladder of economic growth a little later than everybody else, and they finally own a house, own some property, maybe bought some rental properties for income, And now the next generation inherits it, and they don't have the income to pay those taxes, because nobody has the income to pay those taxes on market rate assessments in California.
1% of the market rate assessment in California is beyond what people can afford to pay.
And what are they supposed to do?
They're going to wind up selling those assets.
And who's going to buy them?
Probably corporate America is going to buy them.
Probably investor groups are going to buy them and gentrify neighborhoods and wipe out the middle class in these neighborhoods because the kids will sell the property.
They'll have the cash.
The cash is losing value to inflation.
The asset is appreciating, but somebody else owns it.
It wipes out the intergenerational wealth that these families worked so hard to establish.
And that's just unfair.
It's wrong, and it's not necessary.
California has a budget surplus.
It does not need tax increases at all, anywhere.
And this has to be reversed.
So I urge everyone to get the petition and sign the petition to repeal the death tax.
So now on this ballot proposition, what do you recommend to Californians when we get to the season of voting?
And a lot of times people find out afterwards what happened.
Very true.
Well, you can go to the Howard Jarvis website.
There's typically recommendations from the HJTA Political Action Committee about certain ballot measures.
You can read the opinion pages of different newspapers.
Depending on which newspaper it is, if they recommend it, you may want to vote no.
If they tell you to vote no, you may want to vote yes.
You have to consider the opinion of the editorial board.
I'm with the Orange County Register Editorial Board, the Southern California News Group.
I think we do a very good job of analyzing the propositions and making recommendations.
And I make recommendations in my own column for what they are.
I try to explain in quick language what they are, what they do, and which way to vote if this is what you want.
Do you have any other thoughts for our audience?
Well, I think it's a really important year to pay attention to every part of your ballot.
Pay attention to the candidates.
This year we had redistricting, which is every ten years required by the U.S. Constitution that the seats in Congress are apportioned according to the population and all the lines are redrawn in all the states.
And the same for assembly seats and state senate seats, county supervisors and city councils.
So you may see new people on your ballot.
You may have unfamiliar names.
Do some research.
Pay attention to what's going on in your community.
Because if you don't pay attention, All your taxes are going to go up and they're going to waste the money, which is what happens all the time.
So pay attention to all these races, the local measures, the state measures, and join the Howard Jarvis Taxpayers Association because that strengthens the voice of taxpayers in California.
It's the best organization in the state.
Well, thank you.
Thank you.
Pleasure to be with you.
Thank you so much for watching.
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