Ray Haynes

A Bill Idea for my Legislative Friends

This is a MUST in the Republican bill package for the upcoming session.

Democrats in the Legislature claim to be for the working man, to help people in their time of need. The problem is this — in the current economic times, lots of people have experienced serious problems paying for their homes, and in many (if not most) cases, the debt that is secured by their homes is much larger than the value of the homes. To solve this problem, people have begun negotiations with their banks to rewrite the loans, that is, to reduce the amount of the debt on their homes, or in some cases, they have sold their homes to third parties through a process known as a short sale, that is, selling their house for less than the debt, and having the bank agree.

The problem with this process is that, when the debt is renegotiated, there is debt “forgiveness.” That is, if the loan is for $400,000.00, and the house is sold, or the debt is reduced, to $350,000.00 (usually because that is what the house is worth), the borrower (the homeowner) experiences a $50,000.00 debt forgiveness. In the eyes of the California state government today that $50,000.00 of debt forgiveness is taxable income to the homeowner. Think of it this way, because the state has made itself so business unfriendly, thereby destroying the state’s economy, and a lot of people’s jobs, the price of housing has fallen through the floor, leaving a lot of people underwater on their mortgage. If those people go through a foreclosure, the bank can’t collect anything other than the house for the loan. If the homeowner wants to keep their home, or salvage their credit, through a renegotiation of the loan or a short sale, the bank still can’t collect anything from the distressed homeowner, but the state can send them a tax bill. Those people will be taxed on the alleged income from the debt forgiveness (keep in mind, the homeowner never received the cash from the forgiveness, but they will get a bill from the state). A really nice gift from the state to taxpayers who are mainly middle or lower middle class taxpayers, and who have lost most if not all of their wealth as a result of this ugly economy.

The Republicans in Congress solved this problem long ago. The federal government has declared, by law, that this kind of debt forgiveness is not income. The Democrats in the Legislature continue to insist that these distressed middle income taxpayers pay “their fair share” of taxes on this income. The Democrats are more than willing to keep the banks from “ripping off” these distressed borrowers, but these same Democrats are more than willing rip off these hurting homeowners using the tax code. The burden of this truly burdensome tax falls mainly on the middle and lower middle class, the people who have been hardest hit by the failing economy, and the collapse of home values. The state should not profit from the economic devastation that people have experienced from the collapsing economy, an economy that is collapsing mainly because of government taxation and regulation.

It is easy to fix. Simply pass a bill that says that a debt forgiveness of a loan secured by real estate is not income to the borrower. That way, it cannot be taxed, and the homeowner, who has lost so much of his or her wealth with the real estate collapse will not be further burdened by a callous government that says “we don’t care if you lost all you had, we are still going to tax you on what you used to have.”

This should be done. Our state’s budget is fixed, right? Jerry Brown said so. We should hold him to his words, and rescue these homeowners who are continuing to suffer from the ugly economy. These people are not the rich, the rich won’t lose their property. These people need the help. It is a perfect way for Republicans to show that they care for those who are suffering from the devastation of the Obama created economy.