Taxation & Estate Planning

Tax Attorney Darrin Mish On Lawmakers? Allowances

By Darrin Mish

Tax attorney Darrin Mish was quoted in MSNBC and The Orange County Register in connection with the way California Lawmakers use their Lawmakers? Allowances.  Before we get into what Attorney Darrin actually said, we need to give you some background information.  We all know that all state assemblymen in every state are given lawmakers? allowances to cover their expenses while they are in the state capital carrying out their duties like what they are elected for.  What most people do not know is that the allowances given them are tax free and quite substantial, especially in California.  This allowance is known as ?per diem? meaning ?per day? in Latin.

California lawmakers receive an allowance of $141.86 a day, the fifth highest allowance rates in the country after Alaska ($189 a day), Tennessee ($185 a day), Georgia ($173 a day) and Pennsylvania ($154 a day).  However, in terms of amount of allowances, the Californian lawmakers are the highest because of their long legislative sessions.  In 2009, the number of days Californian lawmakers spent in legislative sessions was more than 200 while Alaska?s days were 90, Tennessee?s 45, Georgia?s 40 and Pennsylvania?s about 100.  And because the 2009 rate was as high as $173 a day, some Californian lawmakers took home about $37,000 in tax-free allowances per person and the state government forked out $4 million in total allowances, apart from lawmakers? salaries which were reduced from $116,208 to $95,291 in December.

So we have established that California lawmakers are paid the most allowances in the country.  That is not the issue.  The issue is what they do with the money.  It has been discovered that many of these lawmakers use their tax-free allowances (that ultimately come from tax payers) to buy second homes in the state capital, Sacramento.  And when their term is up, these houses are often sold at a higher price, thus making these legislators a tidy profit of often hundreds of thousands of dollars.

So the issue is whether it is right for lawmakers to use tax payers? money to make capital investments in the form of houses and rake in profits after a few years.  Tax attorney Darrin Mish had this to say in his response by email:

?I can't seem to find anything illegal about what they're doing.  I think that given the economic condition of California and of the US that it cuts against the spirit of the law for lawmakers to be personally enriching themselves using the benefits of elected office.  But again I can't seem to find anything illegal about the situation.?

Some wily lawmakers like Orange County's Jose Solorio and Tom Harman used their allowance to purchase second homes and then used those homes to secure additional income tax deductions.  Another Orange County assemblyman, John Campbell bought a new home in northern Sacramento reportedly for $300,000 in 2000.  Over his 5 year term as state assemblyman and member of the State Senate, his per diem came up to $132,930.  Eventually he sold his house for $665,000.  Taking his entire per diem into the purchase, Campbell spend about $167,070 of his own money and made a cool $497,930 in profit from the transaction.

Admittedly, there were other assemblymen who did not make such profits by doing the same thing.  Nonetheless, as far as the law is concerned, none them have transgressed, as attorney Darrin Mish has rightly pointed out.

Read more about this issue at these links:

http://www.msnbc.msn.com/id/35477559/ns/local_news-orange_county_ca

http://www.ocregister.com/news/-235056–.html

Tax Attorney Darrin Mish On Lawmakers? Allowances is a post from: IRS Tax Problem Solver Blog - IRS Help

Full post as published by IRS Problem Solver Blog on March 03, 2010 (boomark / email).