BILL ANALYSIS SENATE REVENUE & TAXATION COMMITTEE Senator Lois Wolk, Chair AB 2136 - V.M. Perez Amended: June 16, 2010 Urgency Hearing: June 23, 2010 Fiscal: Yes SUMMARY: Adds to Disaster Provisions in the Personal Income Tax Law, Corporation Tax Law, and Property Tax for Imperial County, and taxpayers in Imperial County affected by the 2010 Earthquake; Requires the State to Pay 100% of the Non-Federal Costs for the Earthquake on April 4, 2010. INCOME AND CORPORATION TAXES : EXISTING STATE AND FEDERAL LAW allows taxpayers to deduct disaster losses in the year the loss occurs or in the preceding year by filing an amended return. Disaster losses result from fires, storms, floods or other natural events proclaimed a disaster by the President or the Governor. Disaster losses are the amounts not compensated for by insurance or other means. EXISTING FEDERAL LAW, which California conforms to, only allows loss deductions for personal income taxes that exceed $100 per taxpayer and 10% of their adjusted gross income for the year. EXISTING STATE LAW limits disaster losses for corporate taxpayers to the amounts set by state law for net operating losses - 55% for 2000 and 2001, 60% for 2002 and 2003, and 100% for 2004 and thereafter - and the carry-forward to five years. State law allows a limited AB 2136 - V.M. Perez Page 5 percentage to be carried forward up to 10 years Starting with the forest fires in 1985, and approximately 45 times thereafter for various disasters, the Legislature enacted measures that allow a 100% carry-forward of excess disaster losses for up to five years and a carry-forward of the excess disaster losses under the above percentages for up to an additional 10 years. THIS BILL enacts identical allowances for taxpayers with excess disaster losses in Imperial County as a result of the earthquake that occurred in April, 2010. PROPERTY TAXES : EXISTING LAW allows counties to adopt ordinances allowing taxpayers to apply for a reassessment of property destroyed or damaged by "a major misfortune or calamity" if the Governor proclaims a disaster. Taxes that had previously been paid are deemed "excess" as a result of a downward reassessment and are refunded to the taxpayer. County Assessors must defer the payment of property taxes when they receive a timely filed application from an affected taxpayer. Beginning in 1990, the Legislature provided state reimbursement of property tax revenue losses to local governments resulting from the downward-reassessment of damaged or destroyed properties for most disasters for one year. THIS BILL enacts identical provisions that require the state to backfill first-year local revenue losses resulting from the reassessment of property in Imperial County as a result of the earthquake that occurred in April, 2010. THIS BILL requires that Imperial County certify to the Director of Finance an estimate of the amount of reduced 2009-10 property tax revenues resulting from reassessment AB 2136 - V.M. Perez Page 5 by October 30, 2010. The Director of Finance then verifies and certifies the revenue loss estimate to the Controller in 30 days, who then sends the certified amount to Imperial County in 10 days. Before October 30, 2011, the Imperial County Auditor must remit to the Controller any overestimated balance. If the loss was underestimated, the Controller must return the difference to the affected county. PROPERTY TAXES (HOMEOWNERS' EXEMPTION) : EXISTING LAW provides a homeowners' exemption from property taxes equal to $7,000 in assessed value (at a one percent property tax rate, the exemption reduces property taxes by roughly $70) for owner-occupied homes. Once granted, homeowners' exemptions are generally permanent. However, an Assessor may deny a homeowner's exemption if the property becomes vacant or is under construction as of the January 1st lien date. THIS BILL provides that Assessors may not disqualify an otherwise qualified residence for a homeowners' exemption solely on the basis that the dwelling was temporarily damaged, destroyed, under reconstruction by the owner, or temporarily uninhabited as a result of restricted access to the property in Imperial County as a result of the earthquake that occurred in April, 2010. NATURAL DISASTER ASSISTANCE ACT : EXISTING LAW (Natural Disaster Assistance Act) provides that the state must pay 75% of the non-federal share of eligible costs for any state-declared emergency. If the President declares it to be a disaster, then FEMA covers 75% of costs, and the state covers 75% of the remaining 25% balance. For some statutorily specified disasters the state is required to pay 100% of the non-federal cost. AB 2136 - V.M. Perez Page 5 THIS BILL would require the state to pay 100% of the non-federal cost of the earthquake that occurred in Imperial County on April 4, 2010, as specified in agreements between this state and the United States for federal financial assistance. CalHOME Program : EXISTING LAW authorizes the CalHOME program, administered by the Department of Housing and Community Development (HCD), which provides grants to local agencies or nonprofits to assist individual households and assist multiple home ownership units, including single family subdivisions. Generally, HCD provides these moneys as loans payable after 20 years, but HCD may convert loans into grants after the homeowner has occupied the home for more than 10 years, with 10% of the original principal reduced for each year until fully converted into a grant. THIS BILL provides that loans funded by the CalHOME Program Disaster Assistance for Imperial County used for owner-occupied manufactured homes shall instead be due and payable in 10 years, with 20% of the original principal to be forgiven annually for each year beyond the fifth year that the homeowner continuously occupies the home. FISCAL EFFECT: According to FTB, AB 2136 results in revenue losses of $7,000 in 2009-10, and gains of $4,000 in 2010-11, and $3,000 in 2011-12. BOE estimates one-time property tax revenue losses of $78,000. COMMENTS: AB 2136 - V.M. Perez Page 5 A. Purpose of the Bill The author provided the following statement: AB 2136 is a tax relief bill intended to assist the people of Imperial County in the wake of the Sierra El Mayor earthquake. AB 2136 supplements a number of existing provisions in state tax law that can be helpful both to local jurisdictions and to individuals after a natural disaster. The provisions of the bill would: a. Backfill local government for the temporary loss of property taxes due to any property reassessments claimed by local property owners; b. Ensure that property owners still qualify for the homeowner's property tax exemption, even if their principal residence was temporarily damaged or destroyed by the quake; c. Enable taxpayers to carry forward their losses due to the disaster for five years, not just in the year of loss. This provision would apply as well to small business owners related to carry forward net operating losses; and d. Remove the 25% local government match requirement for recovering federal assistance in covering certain public infrastructure costs. By allowing special tax treatment for losses sustained as a result of the Sierra El Mayor earthquake, AB 2136 will help to ease some of the burden on Imperial County residents. AB 2136 - V.M. Perez Page 5 B. A Better Way Through last year, the Legislature has amended Revenue and Taxation Code 218 25 times for separate disasters to ensure that Assessors may not deny homeowners' exemptions for disaster-related reasons, added 45 code sections to allow for excess disaster losses for both the Personal Income Tax Law and the Corporation Tax Law, and enacted more than 100 sections providing for the first year backfill of local property tax losses and procedures therein resulting from disaster reassessments. The Legislature always litters the code with these provisions when disaster strikes, so why not enact a statute which triggers these tax benefits whenever the Governor declares a disaster? Efforts to mandate consistency have stalled. In 2005-06, AB 3039 (Houston) and SB 1607 (Machado) attempted to change this statute to provide statewide protection, thereby ensuring that future disaster-specific measures were not necessary. The Assembly Revenue and Taxation Committee held AB 3039, and deleted the relevant provision from SB 1607, which was subsequently enacted. Additionally, the Governor directed the Office of Emergency Services and the Office of Planning and Research to work with the Legislature to enact standard purpose legislation when he signed a disaster-specific bill (AB 18, La Malfa, 2005). The Legislature has previously enacted statewide legislation in response to a flurry of local jurisdiction-specific bills, notably in the areas of transaction and use taxes (SB 566, Scott, 2003), and disputes over property tax allocation errors (AB 169, Wiggins, 2001). However, SB 1494 (Committee on Revenue and Taxation) would automatically enact the preclusion of assessors revoking a homeowners' exemption for disaster-affected property, hopefully bringing some sanity to these annual rituals. C. The CalHOME Program AB 2136 - V.M. Perez Page 5 Traditionally, disaster relief bills only include the three tax provisions, and sometimes the Natural Disaster Assistance Act provisions. However, AB 2136 shortens the timeline for owner-occupied mobilehomes that receive CalHOME loans to covert to grants by half. HCD provides the following information on this proposal: "The CalHome program is an HCD-administered Prop 1C bond-funded program that provides grants to local public agencies and nonprofit developers to assist individual households through deferred-payment loans. In response to the earthquake that damaged homes in Imperial County in April, HCD issued a $10 million over-the-counter (first come/first served until funds are depleted) Notice of Funding Availability (NOFA) on May 6. The funds made available through the NOFA are to be used for lower-income owner-occupied rehabilitation or reconstruction of conventional and manufactured homes damaged in the April 4 earthquake in Imperial County. HCD does not make direct assistance to homeowners in the CalHome program, rather local jurisdictions apply to HCD and then make grants and loans to the homeowners. To date, HCD has awarded $1.5 million to the County of Imperial for its CalHome Program Disaster Assistance for Imperial County Grant for 36 households and $1,320,000 to the City of Calexico for 26 households. The maximum subsidy amount to each homeowner is $60,000. The NOFA specifies that financial assistance provided to an individual household to rehabilitate or repair, or replace manufactured housing located in a mobilehome park and not permanently affixed to a foundation shall be in the form of a conditional grant due and payable in 20 years, with 10 percent of the original principle to be forgiven annually for each additional year beyond the tenth year that the manufactured home is owned and continuously occupied by the borrower. The proposed amendments to AB 2136 (V. Perez) alter the terms of the grant to due and payable in 10 years, with 20 percent of the original principal to be forgiven AB 2136 - V.M. Perez Page 5 annually for each additional year beyond the fifth year that the manufactured home is owned and continuously occupied by the borrower. HCD has made the awards to the jurisdictions noted above but has not executed the Standard Agreement (contract). In recognition of the proposed amendments, HCD would provide for terms that could be altered by later enacted statute." D. When Disaster Strikes The Committee will also hear AB 1662 (Portantino), AB 1690 (Chesbro), and AB 1766 (Gaines) at its June 23, 2010 hearing, which enacts disaster tax relief provisions for wildfires for other natural disasters. Support and Opposition Support:Regional Council of Rural Counties; California State Legislature Rural Caucus; Board of Supervisors of the County of Imperial; California State Association of Counties; Regional Council of Southern California Association of Governments; City of El Centro Oppose:None received. --------------------------------- Consultant: Colin Grinnell > AB 2136 - V.M. Perez Page 5