Sacramento, CA—Assemblymember David Chiu (D-San Francisco) announced a bill to create a permanent source of funding to address homelessness by eliminating the mortgage interest deduction (MID) on vacation homes and reforming the MID on primary homes.
Assembly Bill 1905 would use the savings accumulated by reforming these tax policies to create the Housing and Homelessness Response Fund to finance homelessness policy solutions across the state.
“While thousands of Californians sleep on our streets every night, it makes little sense for the state to subsidize the wealthy’s ability to own two homes,” said Assemblymember Chiu. “Eliminating this tax break to create a permanent source of funding to address our homelessness crisis is simply the moral thing to do.”
Homelessness in California has increased dramatically in recent years with a 17 percent increase in the last year alone. The state is home to over 150,000 people experiencing homelessness on any given night and has the largest unsheltered population in the United States. The problem is only increasing despite valiant efforts by some localities to address the problem. For example, every day in Los Angeles County, 133 people are housed while 150 become homeless.
In recent years, the state has allocated one-time funds to help cities and counties fund homelessness initiatives, but California does not have a permanent source of funding designated to address this all-important issue. The uncertainty created by this approach makes it harder for localities to invest in long term solutions to homelessness that require ongoing budget allocations.
In stark contrast, the largest ongoing investment the state makes in housing is through the MID, a deduction that disproportionately benefits people with higher incomes and larger mortgages. For the 2020-2021 fiscal year, the MID is expected to cost the state $4.2 billion.
A mortgage interest deduction allows taxpayers to deduct the interest on their mortgage from their income on their annual tax returns, resulting in a lesser tax burden. This deduction can be made on primary residences as well as secondary, or vacation, residences. However, this tax incentive is only available to filers who itemize their taxes–typically wealthier individuals and families–rather than those who accept the standard deduction.
AB 1905 would entirely eliminate the option to claim the MID on second homes. On qualified home loans acquired in 2018 or later for primary homes, the amount of interest a filer can claim would be reduced from the current level of $1 million to $750,000, conforming California’s tax regulations with federal law. The savings from the elimination and reform of these tax deductions, which is estimated to be between $400-$500 million annually, would be redirected to the Housing and Homelessness Response Fund to alleviate California’s homelessness crisis.
In a state of 40 million, only 175,000 Californians utilize the MID tax break on vacation homes saving an average of $1,000 per year, and 224,000 Californians claim the tax break on primary home mortgages acquired in 2018 or later over $750,000 saving an average of $750 per year.
The federal Tax Cuts and Jobs Act of 2017 similarly reduced the amount of mortgage interest a homeowner can claim on federal income tax filings for primary and secondary residences to $750,000 of a qualified home loan. However, those savings were used to give tax breaks to large corporations. Conversely, California has the opportunity to use the savings to provide housing for some of the most vulnerable people in the state.
According to a 2016 report by the California Franchise Tax Board, most economists believe that the MID does not increase homeownership or make housing more affordable as the value of the tax break is factored into housing costs. Housing prices increase by the expected tax savings.
AB 1905 will be heard in an Assembly policy committee this spring.
Voices for a Permanent Funding Source for Homelessness
“Up and down the state, cities and counties like San Francisco need more support to help those suffering on our streets and sidewalks. By creating a permanent funding stream to help local governments do the work to address homelessness, we can get more people healthy and housed. This is a statewide crisis and I want to recognize Assemblymember Chiu for his leadership on moving forward a solution that can make a real difference in California.” –San Francisco Mayor London N. Breed
“Oakland and every city in California needs new revenue streams to help us address the homeless crisis immediately. Asm. Chiu’s bill helps us confront this humanitarian crisis, and invest wisely in the programs and initiatives that will help prevent and reduce homelessness across our state.” –Oakland Mayor Libby Schaaf
“Asm. Chiu’s proposal is simple: if you have two homes, you should help families who have none to get a roof over their head. We agree, and are proud to support this proposal and its values of fairness, equity, and prioritizing the most vulnerable in our state when it comes to resources. The wealthiest Californians can and should pay their fair share to ensure California is a place that all families, especially those experiencing homelessness or on modest incomes, can call home.” –Executive Director of Housing California Lisa Hershey
“It’s harder for Californians to find an affordable place to live than at any point in our history, and our state’s tax system isn’t making it any easier. At a time when California is facing a shortage of 1.4 million affordable homes and more than 130,000 people experience homelessness on any given night, our state continues to subsidize the purchase of vacation homes—and provide substantially larger tax breaks than federal law. This bill provides a sensible course correction: It protects the mortgage interest deduction for hard-working Californians seeking to achieve the dream of homeownership, conforms state tax practices with federal law, and uses the savings to provide affordable housing to the millions of Californians who struggle to put a roof over their head at all.” –Executive Director of the California Housing Consortium Ray Pearl
“California YIMBY is proud to support Asm. Chiu’s effort to align California’s tax policies with its values. California doesn’t have a second home crisis, we have a housing shortage crisis and a homelessness crisis. This bill will help our most vulnerable neighbors find the housing they need.” –President and CEO of California YIMBY Brian Hanlon