Tax breaks for second homes could end under lawmaker's proposal to fund low-income housing

In their quest for more money for low-income housing construction, state lawmakers are now turning to Californians who own more than one home.

Assemblyman David Chiu (D-San Francisco) introduced a bill Friday to end a tax break that allows homeowners to deduct the interest from the mortgage on their second home from their state taxes. About 31,000 Californians received the tax break last year, costing the state about $300 million, Chiu said. The bill, AB 71, would direct those funds to an existing program that finances low-income housing construction through tax credits.

“We need to ensure everyone has a roof over their head before we spend tax dollars to help a small group of people have two roofs,” said Chiu, who heads the Assembly Housing and Community Development Committee.

In recent years, state lawmakers and Gov. Jerry Brown have not agreed on major legislation aimed at addressing the state’s housing shortage at a time when home prices are spiking across California. Most notably, Brown and the Legislature earlier this year failed to reach a deal to implement Brown’s proposal to spur housing production by limiting some local approval hurdles for housing projects amid concern about weakening environmental laws and construction worker pay.

AB 71 is one of multiple bills introduced by Democratic lawmakers this month aimed at increasing money for low-income housing and boosting its production. Another new measure from Chiu would provide state dollars to cities that speed up permitting and environmental reviews within neighborhoods that reserve at least 20% of future housing development for low-income residents. Other bills would increase low-income housing dollars through new real estate transaction fees, put a $3-billion low-income housing bond measure before voters in 2018 and streamline permitting in jurisdictions that have fallen behind on their state housing production goals.

AB 71 is one of the more interesting proposals in the package of bills because it wouldn’t cost the state any additional dollars but strips away a benefit from homeowners.

For decades, state and federal lawmakers have passed numerous subsidies designed to increase homeownership. But the measures often have disproportionately benefited the wealthy.

The federal mortgage interest deduction cost the U.S. Treasury $95.5 billion this year with the largest advantage going to the top 20% of taxpayers, according to the nonpartisan Tax Policy Center. California’s program has a $4.6-billion annual price tag and represents the state’s largest investment in housing, according to Chiu’s office.

Beyond the mortgage interest deduction, California homeowners benefit from Proposition 13, the 1978 ballot measure that caps property tax increases at 2% a year regardless of the appreciation in a home’s value.

Proposition 13 saved state homeowners $12.5 billion last year, according to a recent analysis from real estate website Trulia. The analysis also found that homeowners in wealthy coastal cities in Silicon Valley and Southern California receive the most benefit, while those in less expensive inland areas pay higher property tax rates.

Because AB 71 changes tax benefits to individuals, the measure would require a two-thirds vote in both houses of the Legislature to pass. Assembly Speaker Anthony Rendon (D-Paramount) announced his support for the bill in a news release Monday.

Chiu plans to introduce more legislation to boost housing supply in 2017, and said he hopes lawmakers see AB 71 as one part of a broader package to deal with California’s housing affordability problems.

“We’re in an enormous affordable-housing funding hole,” Chiu said. “The tax dollars we’re spending to help a small number of people be able to pay for their second vacation home just doesn’t make sense in the context of the enormous housing crisis that we face in every part of this state. I hope that that trade-off is one that my colleagues can appreciate.”

liam.dillon@latimes.com

Follow me at @dillonliam on Twitter

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In this story, the bill’s author says that about 31,000 taxpayers receive a state mortgage interest deduction on a second home. The correct estimate is 195,000 taxpayers, according to the state Franchise Tax Board.
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