Californians would lose $38 billion under GOP tax plan, Berkeley economist says

California’s real estate market remains strong, but a proposed Republican tax plan could put a dent in the state’s economy, according to a new report from a UC Berkeley economist.

Professor Ken Rosen, chairman of the Fisher Center for Real Estate and Economics at the university’s Haas School of Business, said the state’s hot real estate market is in “extra innings” and is reaching the end of its cycle. And the proposed Republican tax plan, which the Senate is debating this week, could reduce California’s economy by 2 to 3 percent.

“One-third of people in California are going to face a tax increase that’s going to be quite substantial,” Rosen said during a presentation in San Francisco on Monday, according to the Haas website. “There are also a number of provisions that will hurt housing, including the property tax deduction limitation and limitations on mortgage interest deductions.”

The House of Representatives on Nov. 16 passed a version of the bill that capped mortgage interest deductions at $500,000. The Senate version raises that cap to $1 million but retains the state and local tax deduction cuts.

The seller’s real estate market that took off after the Great Recession resulted in especially pricey homes on the Central Coast.

In San Luis Obispo County, the September median price — meaning half of buyers purchased more expensive homes and half purchased cheaper homes — was $585,000, according to Core Logic, an Irvine-based data firm.

Rosen said that this market cycle will end when interest rates, which the Federal Reserve has kept artificially low since the recession, are normalized.

“It’s important to say that unlike the late ’80s or 2004 to 2007, we’re not at a point where real estate values are about to crash,” Rosen said.

“They crashed then because real estate was too expensive relative to everything else — today it’s relatively fairly valued. I think we’re going to see a correction, but my best guess is we’ve got extra innings, a couple more years.”

In addition, a paper Rosen recently wrote on the proposed Republican tax plan said it would take $38 billion from middle- and high-income California taxpayers, mostly due to the elimination of state and local tax deductions, according to the Haas website.

Cutting those deductions would would hurt Californians and residents living in other high-income, high-tax states, Rosen wrote. The state’s economy would take a hit, resulting in fewer jobs and less sales and property tax revenue for local and state governments, he wrote.

“The long-run impact of this worsening relative tax differential means that the tax-motivated out-migration from California will accelerate.”

This story was originally published November 30, 2017 at 6:16 PM with the headline "Californians would lose $38 billion under GOP tax plan, Berkeley economist says."