Our Real Estate Blog

Budget Shortfall and Real Estate

November 25th, 2008 2:11 PM by Lehel Szucs

Here is a piece of a letter that might interest everyone:

I’m writing to you today to share some critical information about the state budget and its impact on the real estate industry. Due to the recent dramatic declines in the California, national and international economies, revenues to the state are projected to erode substantially. The shortfall is estimated to run from $22.5 billion to $27.8 billion.

As a result of the projected budget gap, Gov. Schwarzenegger called the Legislature into special session on Nov. 5. A special session may only address the subject of the session as defined by the governor, and any resulting legislation will take effect 90 days after the close of the session. As many members of the current legislative body are "lame ducks" whose terms will expire at the end of November, it may be more difficult for the governor to reach agreement with legislators who will be out of office by the end of next week.

The governor has proposed a number of tax increases that he wants the Legislature to consider during the special session in order to close the projected budget gap. The governor has proposed tax increases including: increasing the sales tax by 1.5 percent, from 5 percent to 6.5 percent, for three years beginning Jan. 1; expanding the application of the state’s sales tax to include taxing appliance, furniture and vehicle repair, golf, and veterinarian services; and extending the sales tax to amusement parks and sporting events beginning March 1. He also has proposed imposing a 9.9 percent oil severance tax for the right to extract oil in California effective Jan. 1; increasing alcoholic beverage taxes by the equivalent of five-cents a drink as of Jan. 1; and increasing the Vehicle License Fee (VLF) by $12 beginning Feb. 1.

In addition to the governor’s proposed tax increases, the state’s Legislative Analysts Office (LAO) has proposed several tax expenditures that can be modified, including taxing all like-kind exchanges (i.e., 1031 exchanges) and repealing the exclusion that currently enables taxpayers to defer paying income taxes until the property is ultimately sold; and reducing the dependent credit to bring it in line with the personal exemption, currently $99 per person.

While the governor’s proposals for tax increases do not include real estate services at this time, the LAO is advocating that the governor’s Commission on the 21st Century Economy consider taxing all final transactions -- whether they be tangible goods or services.

C.A.R. has long-standing policy opposing extending the sales tax to services, as well as supporting the retention of 1031 exchanges. Also, while not proposed by either the governor or the LAO, some interested parties have suggested that, given the magnitude of the budget gap, the issue of a split roll -- a higher effective property tax rate -- for commercial property be revisited. 

Posted in:General
Posted by Lehel Szucs on November 25th, 2008 2:11 PM

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