Posted on by Californiacontrarian

A Better Use of Tax Money? Part 2

To review from the prior essay, housing affordability is a major problem and it’s getting worse. Among California cities, San Diego’s home prices showed the smallest increase at 7.3 % in a year. In Los Angeles the prices increased 7.6% in a year and in San Francisco the yearly increase was a whopping 10.9% gain. As noted before those who are already in the market can more easily move up because of the increased equity in their present home. However for those not already in the market the chance of being able to afford a house is steadily going down. If wages go up commensurate with inflation, then the increased income should be able to keep pace with the increasing monthly mortgage payment, however, remember that with the increased sales price of a house, the down payment is also increasing. This increasing down payment is what kills potential first time home buyers, as they cannot save enough for that initial down payment.
 A dilemma. What to do? Keeping middle class workers in the state will be crucial to California’s future economy
Like I said, I have an idea . . . a plan!
What I propose is a state-tax free house down payment savings plan.
Before you say, “Not another government plan,” hear me out.
This plan would only be for the middle class, arbitrarily defined as those making between $50,000 – $100,000 per year. The money that they owed each year in income tax to the state could instead be put into a “first house, down payment account”. This money would be before tax money, similar to an IRA, and would grow tax free for up to ten years. Unlike a traditional IRA, however, this money would not be taxed when it was removed from this account if it was used to make a down payment on a first house. As long as people remained in the middle class, they could continue to contribute to this account for a maximum of ten years.
Some caveats:
– Participants in this plan would have to be residents of California.
– The house purchased with the money saved in this special “house down payment
    account” would have to be the primary residence of the purchaser of the house.
– The individual beneficiary of this account would have to reside in California for at
     least ten years after the house had been purchased.
– If perchance any of the rules were broken,  e.g. the house purchaser moved out
  of state after two years or the money was withdrawn from this account, but not used
   to purchase a first house, there would be a significant penalty (?25%) in addition to
   the California tax owed on the money withdrawn.
The big caveat, however, would be for the state. The shortfall in the California tax revenue because of this plan would have to be accompanied by an equal decrease in state spending for the following year. In other words, giving a small proportion of the middle class a tax break could not be accompanied by an increase in taxes for others in order to make up the shortfall.
Even though in the long run this plan has multiple benefits for individuals as well as for the state, my guess is that the state of California would not be able to fulfill its part of the bargain!

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