Direct Democracy. FAIL. Prop 26 makes a mess of California tax law.

This one escaped my attention until recently.

On November 2, California voters narrowly approved Proposition 26. Skip to the next paragraph if you just want the take-away and not the lengthy explanation. This proposition amended the state Constitution to require a 2/3 vote to authorize ANY legislation that raises the tax liability of ANY taxpayer. So revenue-neutral bills–bills that increase funds from one source but reduce funds from another source–now require a 2/3 vote to pass. In addition, any bills that were passed after Jan 1, 2010 will become void on November 2, 2011 unless they are re-authorized by a 2/3 vote. One such bill is SB 401, which is very important to taxpayers because it brought California into conformity with Federal law for 2009 and forward. Conformity simply means California uses the same rules as the Federal government. Conformity means you don’t have to keep track of separate income and deductions on your state and federal tax returns. Keeping track of items that don’t conform is a huge burden on taxpayers (and tax preparers), and SB401 reduced the items that don’t conform to Federal law. Most importantly, SB401 allowed California taxpayers who had a foreclosure on a home with a mortgage balance higher than the value of the home to not recognize income from the value of the home. As an example, individuals with a $500k mortgage on a home that was foreclosed on and sold for $200k would have to recognize $300k of income without SB401. As a result of SB401, people who just went through foreclosure won’t have to pay tax on all that “income” that was not actually received. But without a 2/3 vote to reauthorize SB401–and frankly, no fiscal policy bill gets a 2/3 vote in the California legislature–the law will be nullified on November 2, 2011.

So, thanks to Prop 26,  many California taxpayers might have to amend their 2010 (and maybe 2009 as well) tax returns in November, 2011. Individuals who had a foreclosure in 2009 or 2010 may be facing tax bills of tens of thousands of dollars as a result. At this point, nobody knows if this will be the way the law is actually enforced, but that does seem to be what it says. It will certainly put the legislature in the awkward position of having to choose between enforcing a law that voters approved…even though it will be wildly unpopular once the effects are known…or doing the paternal thing of simply ignoring a law that voters approved because it’s “what’s best for them”.

One thing’s for sure: Unless by some miracle the legislature manages to re-authorize a fiscal policy bill by a 2/3 majority, the California public will be irate with Sacramento over a proposition passed directly by the California public.

I love the idea of democracy. But unfortunately, once again, when it comes to practical results…

Direct democracy. FAIL.

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