California Mayors Support Bill to Reform Tax Breaks on Vacation Homes

Sacramento, CA–Today nine mayors of the largest cities in California came out in support of a proposed measure to reform the mortgage interest deduction in order to create a permanent source of funding for homelessness. Assembly Bill 1905 by Assemblymember David Chiu (D-San Francisco) would 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. 

San Jose Mayor Sam Liccardo, Los Angeles Mayor Eric Garcetti, San Francisco Mayor London Breed, Sacramento Mayor Darrell Steinberg, Oakland Mayor Libby Schaaf, Long Beach Mayor Robert Garcia, Santa Ana Mayor Miguel Pulido, Riverside Mayor Rusty Bailey, and Stockton Mayor Michael Tubbs issued a letter formally endorsing AB 1905. 
“As mayors of the state’s largest cities, we are on the frontlines of deploying resources for interim and sustainable solutions,” the group noted in the letter. “But we lack the funding to completely stem the tide. An ongoing source of state funding, leveraged by local resources and partners and matched by local governments, is essential in ensuring that we can meet the challenge of our generation head on.”

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. In recent years, wealthier Californians have enjoyed between eight and ten billion dollars a year in federal and state tax benefits due to the MID. 
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–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 tax 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; 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. 

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, since the value of the tax break is factored into housing costs, and housing prices are increased by expected tax savings.

“I am grateful that mayors from across California clearly understand that it makes little sense for the state to subsidize the wealthy’s ability to own two homes while tens of thousands of Californians sleep on our streets every night,” said Assemblymember Chiu. “Together we can create the permanent source of funding needed to address this crisis.”

AB 1905 will be heard in an Assembly policy committee in the spring.