FOR IMMEDIATE RELEASE -- September 5, 1997

Contact: Ron Roach (916) 441-0490

CAL-TAX: CAPITAL GAINS CONFORMITY IS NEEDED -- NOW

SACRAMENTO -- In the interest of taxpayers and government revenues, the California Taxpayers' Association (Cal-Tax) today urged the Legislature to act quickly and conform California to the federal capital gains tax change for principal residences.

"Conformity would actually increase tax revenues while it benefits taxpayers," said Cal- Tax President Larry McCarthy, citing Cal-Tax research that property taxes would increase by $429 million over three years. "Conformity should be adopted immediately, and it should be permanent."

Cal-Tax Research Director Steve Kroes said, "Conforming California to recent changes in federal law will trigger a dramatic surge in home sales. The combined effect of state and federal tax changes would result in new property tax revenues far exceeding any state income tax losses." He cited a state Franchise Tax Board estimate that four percent of homeowners would sell their homes within three years if California conforms to the new federal changes that exempt capital gains on the sale of a principal residence from taxation (up to $250,000 for single taxpayers and $500,000 for married, or joint, taxpayers).

If California does not conform to the capital gains exclusion, Kroes said, only two percent of homeowners would sell their homes to take advantage of the federal tax change, in addition to anticipated sales over the next three years.

The Franchise Tax Board has projected a revenue "loss" of $205 million over three years from income tax reductions through capital gains conformity.

"A complete fiscal analysis shows huge property tax revenue gains," Kroes said. "Because of Proposition 13's limits on assessment increases, homes that have been held for some time are assessed for property tax purposes far below their actual market value." According to a 1993 California Policy Seminar study, the average property sold will bring in 1.8 times more property tax than it did before it was sold, Kroes said.

Kroes said the $429 million gain in property taxes is a conservative estimate, because many of the new sales are likely to be homes that have been held for a long time because owners did not want to face a large capital gains tax or roll over the gain into a more expensive home.

Permanent conformity is needed to provide the full benefit of tax relief and property taxes for local governments and the state general fund. State government also would be a net winner because the change would increase schools' share of property tax revenue by about $223 million over the three years. This would more than replace the FTB's estimate of a $205 million revenue loss.

McCarthy said, "Indeed, this change would provide a net benefit to the state budget while providing taxpayer relief and increasing local revenues."

Note: Senate Bill 5 (Lockyer) includes only temporary conformity and as of September 4 had stalled in the Assembly Appropriations Committee. A conference committee was expected to be formed to deal with this and other issues, including other state-federal tax conformity measures.