BILL ANALYSIS
REVISED
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 765 - Caballero
Amended: June 24, 2009
Urgency
Hearing: July 8, 2009 Fiscal: Yes
SUMMARY: Modifies California House Purchase Tax Credit
EXISTING LAW provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
EXISTING LAW authorizes a $10,000 tax credit for
taxpayers purchasing qualified homes after March 1st, 2009
and before March 1st, 2010. A qualified home has never
been lived in before and must serve as the purchaser's
primary place of residence. The taxpayer must apply the
credit in equal amounts over the next three tax years, and
must return a certification to Franchise Tax Board (FTB)
from the seller certifying that the house has never been
lived in within one week of the sale. The credit shall be
disallowed if the taxpayer does not occupy the house for
three years, and FTB will collect any underpayments from
the taxpayer. The Legislature appropriated $100 million in
credit, which the FTB allocates on a first-come,
first-served basis (SBx2 15, Ashburn).
AB 765 - Caballero
Page 5
EXISTING LAW also requires:
Upon receipt of a certification jointly
signed buy the taxpayer and seller, FTB reserves
a credit for the taxpayer. FTB determines the
date it receives the certification, and any
decision it makes regarding certification dates
and whether the taxpayer timely filed the return
cannot be reviewed administratively or
judicially.
If the FTB disallows the credit, the
inclusion of the credit is treated as a
mathematical error.
FTB may issue rules, guidelines, and
procedures to administer the credit.
The credit is not subject to the 50% of
liability cap on applying tax credits enacted as
part of last year's budget (AB 1452, Committee on
Budget).
THIS BILL allows house purchases made pursuant to
enforceable contracts executed prior to March 1, 2010 to
qualify for the credit if the home is purchased by December
10th, 2010. The bill allows taxpayers to reserve credits
prior to closing escrow if the taxpayer and seller jointly
sign and submit to the FTB a certification that they have
entered into the agreement on and after March 1, 2009 and
before March 1, 2010. The measure also specifies that the
one-week deadline for submitting the certification to the
FTB starts at the close of escrow.
THIS BILL provides that FTB shall reduce the total
amount of remaining credits by the average tax credit
estimated for the average taxpayer.
AB 765 - Caballero
Page 5
FISCAL EFFECT:
According to FTB, AB 765 results in revenue losses of
$14 million in 2009-10, $11 million in 2010-11, and $6
million in 2011-12.
COMMENTS:
A. Purpose of the Bill
According the author, "when legislators passed the tax
credit back in February, we were hopeful it would work to
stimulate the state's hibernating housing market. Then, as
we all know, home shoppers were sitting on the fence,
refusing to go back into the market. In just five months,
the credits are gone. The Franchise Tax Board has
announced that it has stopped accepting applications for
the new home tax credit as of Thursday, July 2, 2009, even
though legislators approved the program for a full year -
through March 1, 2010. The tax credit is doing a lot to
restore confidence in California's housing market. We have
been hearing from homebuilders and in news reports that
both traffic and sales are up dramatically and we've seen a
surge in permits for new construction. That's why I'm
pleased to be a joint author of this legislation, along
with Assembly Member Solorio. This legislation is about
job creation and economic stimulus"
B. Existing Tax Credit for New Home Purchases
The Legislature enacted SBx2 15 (Ashburn) in February,
providing a tax credit of up to $10,000 for taxpayers
buying never before lived in houses between March 1, 2009
and March 1, 2010. As of July 1st, FTB issued certificates
for $51 million in credits based on $102 million in credit
claims. Given that taxpayers have now claimed more than
$100 million in credits, FTB may soon stop accepting new
claims. . Taxpayers may only claim the credit after FTB
AB 765 - Caballero
Page 5
allocates the credit.
C. The Definition of Is
AB 765 expands the number of credits that FTB can
issue, and also allows other transactions to qualify for
the credit. SBx2 15 stated that "The total amount of
credit that may be allowed pursuant to this section shall
not exceed one hundred million dollars ($100,000,000)."
FTB may allocate 10,000 certificates for $10,000 credits to
equal $100 million. However, even though taxpayers spread
the credit into equal amounts over the next three tax
years, the taxpayers awarded credits won't have sufficient
tax liability to offset the entire amount of all credits.
For that reason, SBx2 15 as currently constructed cannot
cost the state $100 million; instead FTB must allocate $100
million in credits. AB 765 instead directs FTB to estimate
the average qualifying taxpayers' tax liability, then
allocate more credits than currently required to reach the
full $100 million, thereby expanding the total number of
taxpayers who will receive credits. Additionally, the bill
allows taxpayers and sellers to agree to purchase a house
before March 1, 2010 that will not be occupied until after
that date to accommodate taxpayers who purchase houses from
builders who construct homes upon order from the buyer.
D. Benefits of Homeownership
Just as investors want the companies they hold equity
in to do well, homeowners have a financial interest in the
success of their communities. If neighborhood schools are
good, if property taxes and crime rates are low, then the
value of the homeowner's principal asset--his home--will
rise. William Fischel calls this the "home voter
advantage;" and states that through buying homes,
homeowners become watchful citizens of local government,
not merely to improve their quality of life, but also to
counteract the risk to their largest asset, a risk that
cannot be diversified. Meanwhile, their vigilance promotes
AB 765 - Caballero
Page 5
a municipal governance that provides services more
efficiently than do the state or national government.
Furthermore, the federal government recently
apportioned $6.6 billion for new homebuyers in the economic
stimulus package; the intent is to increase homeownership
thereby stimulating the economy by putting more people to
work through the construction and sale of the home.
According to a study by the Association of Realtors, home
buyers also help carry the economy. California's housing
construction contributes $40 billion per year to the
State's economy. Home building, they state, is responsible
for 359,000 jobs statewide and every dollar spent on new
housing construction generates approximately $1.95 in total
economic activity.
E. Most Tax Subsidized Asset Class in History?
In the United State, federal and state government
subsidies for house purchases may be unmatched throughout
the world. Homeownership is clearly a public goal because
similar benefits are not afforded to any other asset class.
Tax subsidies include:
Mortgage Loan Interest: Taxpayers may deduct
interest payments on up to $500,000 single/$1 million
joint of indebtedness used to purchase a first and
second home. Taxpayers may also deduct interest
payments on up to $100,000 in home improvement loans.
The Department of Finance estimates that this tax
benefit results in more than $5.4 billion in foregone
revenue in 2009-10.
Capital Gains Exclusion: Taxpayers may exclude up
to $250,000 single/$500,000 joint in income resulting
from the sale of their principal residence. The
Department of Finance estimates that this tax benefit
results in more than $3.7 billion in foregone revenue
in 2009-10.
Deductibility of Property Taxes: Taxpayers may
deduct property taxes from federal income, although
AB 765 - Caballero
Page 5
California's low property tax rates limit the benefit
for Californians compared to residents of other
states.
Federal and State House Purchase Tax Credits: Both
Congress and the Legislature enacted tax credits for
taxpayers who purchase house in 2009. Specifically the
stimulus plan will provide first-time home buyers with
a refundable tax credit of up to $8,000, up $500 from
the original credit enacted last year, for purchases
made this year (before Dec. 1). The credit phases out
for single taxpayers with adjusted gross incomes that
exceed $75,000 (or $150,000 for married couples filing
jointly). The buyer will forfeit the credit if he or
she sells the house within three years.
F. Stay Just a Little Bit Longer?
Homebuilders argue that the SBx2 15 credit is reviving
and stabilizing dormant real estate markets, asserting that
tens of thousands of shoppers are seeking new homes,
homebuilders are reporting increases of traffic of more
than 80%, a jump in home sales, and homebuilders pulling
more permits. Homebuilders also state that new home
construction adds significant economic activity, tax
revenues, and jobs, which are needed during this time of
economic recession and fiscal stress on state and local
governments. Proponents of AB 765 are concerned that the
positive momentum they believe was caused by SBx2 15 will
dissipate unless the Legislature reauthorizes or expands
the credit soon.
G. Most Subsidized Asset Class in History?
Tax subsidies are just the beginning of government
subsidies for housing. In addition to other state and
federal efforts to assist first-time homebuyers and
administer down payment assistance, the Federal National
Mortgage Association (FNMA, or Fanny Mae) and the Federal
Home Loan Mortgage Corporation (also known as Freddy Mac),
AB 765 - Caballero
Page 5
are government-sponsored entities (GSEs), but owned until
recently by its shareholders who received all after-tax
income and valuation changes. GSEs purchase loans from
lenders that conform to specified guidelines, then issue
mortgage backed securities (MBS), securitizing the revenue
streams from these conforming loans to investors. Part of
the attraction of GSE MBS is that the GSE guarantee MBS
investors timely payment of principal and interest,
providing mortgage market liquidity and offering investors
a fixed rate of return without credit risk. Before this
year, GSE MBS traded very much like U.S. Treasuries because
of the lack of credit risk and the implicit federal
guarantee. GSEs issued between $1.2 and $1.3 trillion in
MBS from 2004 and 2007.
Two key events necessitated changes in GSE MBS in
2008. First, increasing loan defaults and deterioration in
collateral values corroded the GSE balance sheets, leaving
the entities unable to make timely payments of principal
and interest to MBS holders, necessitating federal
conservatorship. The U.S. Treasury made significant sums
available to the GSEs to maintain the guarantee, and likely
will need to allocate more. Essentially, the functionally
insolvent GSEs now partially rely on the U.S. taxpayer (and
its credit rating) for its MBS guarantee, thereby ensuring
that mortgage lenders have sufficient liquidity to keep the
house purchase market functioning. Second, demand for
private MBS disappeared. Now known as "toxic assets,"
issuance exceeded $900 billion in 2006 and 2007 but totals
less than $100 million in the last nine months. Soon
after, worldwide investors sold off GSE MBS, pushing
spreads against treasuries to 20-year highs earlier this
year, spurring the Federal Reserve Bank to authorize
purchases of $1.2 trillion of GSE MBS and up to $200
billion in GSE debt "to provide support to mortgage lending
and housing markets and to improve overall conditions in
private credit markets," according to its last three
statements. Without MBS purchasers, GSEs cannot buy loans
from lenders, liquidity dries up, and house prices fall as
purchases are limited to bank-held loans and cash
purchasers. Recent accounts from bond traders indicate
that the Federal Reserve is dominating purchasing on the
GSE MBS market. In another indicator of the state of
refinance markets, the GSEs announced on June 25th that
AB 765 - Caballero
Page 5
current mortgage holders could refinance up to 125% of
loan-to-value ratio.
Given existing tax subsidies, GSE-spurred liquidity, the
federal GSE backstop, GSEs refinancing homeowners with
negative equity, and the Federal Reserve printing money to
pour more than one trillion into the U.S. mortgage
financing market, will broadening this tax break actually
accomplish anything more than rewarding purchasers for a
decision they would make anyway regardless of a tax credit?
The Committee may wish to consider whether investing
further in this tax credit is merited given the
unprecedented scale of government intervention in the
housing market.
Support and Opposition
Support:California Building Industry Association
California Regional Chamber of Commerce
Oppose: None received
---------------------------------
Consultant: Colin Grinnell
AB 765 - Caballero
Page 5