From the big (changing the mortgage interest deduction) to the medium (loss of tax break for electric cars) to the small (retaining a special tax treatment for the kombucha fermented tea drink!) the GOP tax bill that lawmakers are chiseling into a grand piece of sculpture as we speak will have all sorts of implications for the Golden State.
While Republicans race to reconcile the Senate and House’s versions of their ambitious tax-reform legislation, some fairly obvious impacts have begun to materialize. And Californians, both because of their tech-driven innovation culture and perhaps because of their Democratic leanings, can expect to feel more of those impacts than, say, some guy and his wife living in Little Rock or Boise. Throw in some of the last-minute amendments that helped push the Senate bill through this past weekend by a 51-49 vote and you’ve got a whole mess of possible fallout coming our way.
Remember that the tax bills cut corporate taxes across the board, and income tax rates for many Americans. So it isn’t a simple matter to say how the loss of one tax break or the addition of another will affect any individual tax bill. Nevertheless, California will see lots of changes in rules we’ve all grown used to.
Here are some of the ways the GOP’s tax bill could impact the state:
Home Prices Drop? Careful What You Wish For
As the local housing market continues to soar into the stratosphere, homeowners and hopeful home-buyers should know that the tax bill may well pull down prices. This news organization reported this week a warning from a prominent group of Realtors that both the Senate and House proposals will slash home prices and values in California and beyond. The cuts to real estate-focused tax deductions under consideration might trigger a price drop between 8 and 12 percent, leading to a loss in home value of between $37,710 and $56,550 for the typical home owner, according to the National Association of Realtors. And the group points out a ripple effect: sinking prices could trigger a reluctance to sell which, in turn, may further squeeze an already tight supply of homes. This could happen because of a combination of changes in the bill, which include . . .
Mortgage-interest Tax Breaks Getting Slashed?
Currently, if you itemize your deductions, you can write off qualifying mortgage interest for purchases of up to $1,000,000, along with an additional $100,000 for that home-equity line you’ve enjoyed so much. That million-dollar cap applies to a mortgage on your primary residence plus one other home. But under the House bill, current mortgages would be grandfathered in (no impact) while new mortgages would be capped at $500,000 for deduction purposes. And that deduction could only be used for your primary residence. On the other hand, under the Senate bill, the deduction would remain in place for mortgages up to $1,000,000 “but the deduction for equity debt (meaning refis not related to improving your home) would be eliminated.” During this week’s reconciliation powwow, lawmakers from the two chambers may well strike a deal and cut the baby in half at cap of $750,000, which will still hurt new homeowners in California. And also . . .
Short-time Homeowners Could Take Another Hit
As my colleague Marisa Kendall points out, another controversial housing-related item in the tax proposals changes the rules on capital gains. Under current law, homeowners can exclude up to $250,000 (or $500,000 for married couples) in capital gains on the profit from the sale of a home if they have lived in the house for two of the last five years. Both the House and Senate proposals would change that — homeowners must have lived in the house for five of the past eight years to qualify for the savings. Last year, 13 percent of homeowners in California had lived in their home for between two and four years, meaning they wouldn’t be eligible for the reworked tax exclusion, according to the National Association of Realtors. As Kendall put it, “some housing experts worry the GOP tax plans will encourage Bay Area homeowners to stay put instead of selling, exacerbating the region’s housing shortage.”
SALT in the Taxpayer’s Wounds
As currently written, both bills cut out the SALT, or “state and local tax” deduction, taking away a wonderful tax break for residents in this (and other) expensive corner of the country. SALT deductions are currently used by one in three Californians (you must itemize your deductions to get it), allowing them credit for the relatively high state income tax rate they pay. One estimate says that these Californians receive an average $18,000 each in benefits.The only local tax deduction that remains is the deduction for the first $10,000 in property taxes; last-minute modifications to the Senate bill last week means both bills now contain that provision.
Sorry, Tesla Fans – Maybe No More Break for You
The House bill calls for the elimination of the tax credit for electric vehicles, a potentially big blow for Tesla, which has large manufacturing facilities in California, and the thousands of Californians who drive those and other electric cars. That credit, of course, is often used to subsidize leases on EVs, which is the most popular way for consumers to finance their plug-in vehicles. “The tax credit of up to $7,500 was set to be phased out for companies once they sell 200,000 new EVs in the country,” explains a report in The Verge. “Tesla and General Motors are the closest, but still far from the goal right now. But relative newcomers to EV production that include big names such as Mercedes-Benz, Volkswagen and Volvo, may face more headwinds in the American market because the initial cost of a new electric car will go up without the bonus of generous federal credit.”
Painful Hits in the World of Higher Education
Research universities like Stanford, Berkeley, U.C.L.A. and Caltech would likely be hurt by the repeal of deductions for graduate students and a new tax on university endowment income; Stanford has the third largest endowment of any U.S. university at more than $22 billion. The New York Times notes there are also smaller impacts on education: “Executives wanting to pursue a midcareer M.B.A. might reconsider; the House bill removes deductions for professional education courses.” Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at Berkeley’s Haas School of Business, told The Times: “These things have big consequences. It makes the decision of staying in California much more difficult. It’s already difficult, it’s already expensive. This adds one more negative.”
An Upside For Apple et al
Silicon Valley tech giants like Google and Apple, which for years have been stashing their overseas revenues to protect them from Uncle Sam, could benefit nicely from a couple of benefits in the GOP’s package: a slashed corporate tax rate, and a new chance to repatriate, or bring back home, billions of dollars of cash held overseas. Apple is the leader among U.S. industry in overseas cash, attributing about $250 billion to overseas subsidiaries. What it and other companies would do with that money once it’s state side, however, is up to debate. Rosen told The Times that he’s skeptical the money will trickle down from Apple and Google to the rest of us living and working here in Silicon Valley. “I don’t think they are going to use that money to invest more in the U.S. than they already have,” he said.