Capitol politicking blocks foreclosure relief

For those who work in state government and have experience in the legislative process, there are few surprises.  Every now and then, however, political tricks threaten necessary reforms.  Late last week, just before the Memorial Day holiday, a trick was pulled that could derail legislation to help prevent foreclosures by interests who want to create a new real estate tax.

If a tax increase faces opposition, tie it to a wildly popular measure: political hostage taking if you will.  Here’s how it happened.

The California Association of REALTORS® is sponsoring SB 30, which would correct an inequity where underwater homeowners are charged state income tax after a short sale.  Federal and state laws view the mortgage debt forgiven in a short sale as income. In recent years, REALTORS® have supported short-term relief for homeowners in state and federal law that keeps this “phantom” income from being taxed.  In early January, President Obama signed into federal law an extension of mortgage debt tax forgiveness until the end of this year. Because similar state legislation has not yet passed, many short sellers are in limbo.

Struggling homeowners often only have two difficult alternatives: short sale or foreclosure.  Having to pay taxes on income they will never receive can literally force them into foreclosure. SB 30 would provide that tax relief and was moving toward passage with bipartisan support.

Meanwhile, State Sen. Mark DeSaulnier, D-Walnut Creek, has a totally different bill, SB 391, which has nothing to do with short sales or helping underwater borrowers get relief.  His bill creates a new $75 per document tax on many different kinds of real estate transactions to generate funds for affordable housing programs.  REALTORS® oppose this measure because it unfairly adds to the cost of recording real estate documents.

Affordable housing is important, but funding it at the expense of homeowners who need to record real estate documents is unfair. To be effective, without unduly impacting California’s real estate economy, affordable housing programs should be funded by the broadest base possible of California’s citizens.  Moreover, there is not enough direction in SB 391 to ensure that the funds will go to affordable housing as opposed to administrative costs, and there is no background to explain why the tax is $75 per document as opposed to $25 or $50. An arbitrary new tax on real estate transactions without strict accountability is a risky approach, even if traditional sales documents are excluded.

The tax proponents took SB 30 hostage by attaching SB 391 to it. Now, to give homeowners tax relief from “phantom income,” legislators must enact a new and very real tax on real estate transactions.

Ultimately, this is a game of inside baseball.  Legislative interests are attempting to punish the California Association of REALTORS® because they oppose SB 391, even though the Association’s Board of Directors gave the tax proposal full consideration.

Tax advocates lost the policy debate so they’re now playing politics, perhaps to try and get even in some way, regardless of who pays the price.  Last minute political tricks, however, undermine the public trust and do taxpayers, especially those needing relief, a disservice.

State government shouldn’t force people into foreclosure because of political gamesmanship.  Let’s do the right thing instead. SB 30 and SB 391 should be considered on their own merits.  Have a vigorous and honest debate on the issues, and then count the votes.  That’s how it’s supposed to work.

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Ed’s Note: Don Faught is the president of the California Association of Realtors.