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Commentary: Here is a way community can benefit from home flipping

The Daily Pilot reported in April that the U.S. Department of Justice is trying to force the former president of South Korea and his family to turn over $700,000 they allegedly laundered by buying and selling a house in Newport Beach ("U.S. seeks $700,000 from former S. Korean leader," April 25).

It was a reminder of what many of us have long known: In Newport-Mesa, houses are not just places to live in. They are poker chips for elite investors from around the globe, not a few of whom came by their stake less than honestly.

Before the 2008 financial crisis, flipping houses for quick profit became a craze that spiraled out of control, nearly bringing down the U.S. economy. Just as Joseph Kennedy is said to have figured the stock market boom of the 1920s was ready for a fall when his shoeshine man offered him a stock tip, I knew the game was up when I overheard a server at Mimi's talk about how long it was taking for the sale of one of her flip properties to close.

There is good evidence that a full-scale depression was only averted by the extraordinary monetary expansion of the Federal Reserve. The central bank took the unprecedented step of quadrupling the economy's monetary base in an effort to help counter the deflationary effect of the waves of foreclosures that followed the bust of the housing bubble.

Rather than fueling sustainable economic growth, however, that new money has largely fed another asset bubble. Flipping is back, as if 2008 never happened. If inflation is a function of too many dollars chasing too few goods, asset bubbles are a function of too many dollars chasing too few sound investments.

House-price appreciation in Orange County has again outraced income growth, suggesting that yet again, something other than economic fundamentals has come into play.

As they say, though, markets can stay irrational longer than a rational investor can stay solvent. There's no telling how long it will be before another correction. In the meantime, we ought to consider that while millions of dollars are being made flipping Newport-Mesa properties, very little of that money — unlike money made from more productive activities that are subject to municipal taxes — benefits our cities.

Under section 17041.5 of the Revenue and Taxation Code, California cities are prohibited from taxing incomes. Our cities are therefore not permitted to tax the profits of house flipping. Cities can, however, tax the gross receipts of a business.

A 5% gross-receipts tax on the business of house flipping would yield $40,000 on the sale of a $800,000 flipped house. Given the tremendous margins of house flipping, this level of taxation should not significantly suppress it. To the extent it does — given how flipping contributes to absentee ownership and economic instability — that is not necessarily a bad thing.

I believe Californians are taxed more than enough already. Accordingly, the receipts from a gross-receipts tax on flipping ought to be credited against local residents' property tax bills, making the tax revenue-neutral.

We local residents, whose taxes and concern for our community help make this such an attractive place for international investment, should not be subsidizing money-laundering foreign politicians, fly-by-night flippers and others concerned less with making a home in our community than taking a quick gambler's buck from it.

THOMAS EASTMOND lives in Newport Beach.

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