Jerry Brown should give a break to underwater homeowners

July 12, 2016

California tax collectors should stop rubbing salt in the wounds of homeowners still trying to recover from the mortgage meltdown.

By tax collector we mean Gov. Jerry Brown.

The issue involves the remnants of the mortgage crisis, which struck hardest in the Central Valley. People bought homes they could not afford at inflated prices. When the market tumbled, their mortgages were underwater.

Following state and federal dictates, banks modify home loans, forgive some of the debt, and allow for short sales. The difference between the loan amount and the amount discounted by the lender could be considered income and subject to taxes.

The amounts forgiven are in the tens of thousands of dollars or more, although homeowners never actually see any cash. It’s a paper transaction. Still, people struggling to get back on their feet could face nasty five-figure tax bills.

Congress has relieved taxpayers in such circumstances of federal income taxes. Sen. Cathleen Galgiani, D-Stockton, introduced Senate Bill 907 to give people a break from state income taxes. The bill passed the Senate 39-0, and cleared its first Assembly committee without a no-vote.

A similar bill by Assemblyman Henry Perea, a Fresno Democrat, passed both houses unanimously in 2015. But frugal Brown vetoed it along with several other tax breaks, warning of coming “financial uncertainties.”

“Tax credits, like new spending on programs, need to be considered comprehensively as part of the budget deliberations,” he wrote in his veto message.

We adhere to that view. But unlike many tax breaks, the one created by Galgiani’s bill would be of limited duration, and the cost to the state would decline from $95 million in the first year to $12 million in the final year, 2017-18.

Backers include Realtors, bankers, and mortgage companies, and Attorney General Kamala Harris, not bankers’ natural ally. But Harris has a stake in the outcome, having helped negotiate settlements requiring that mortgage lenders modify loans for homeowners ensnared by the mortgage crisis.

For many Californians, particularly ones who live in coastal areas, the mortgage crisis is a distant memory. Their home prices have more than recovered. But that’s not the case in much of the Central Valley.

The Assembly should approve SB 907, as it did Perea’s bill. And Brown should reconsider his position. The governor has looked for ways to help the Central Valley out of its economic doldrums. By making this narrow exception, he could give some relief to folks who could use a break.

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