BILL ANALYSIS
REVISED
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 49 - Dutton
Amended: May 6, 2009
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Extends Period to Qualify for California House
Purchase Tax Credit; Removes $100 million Limit
on 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
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for the credit, which the FTB allocates on a first-come,
first-served basis (SBx2 15, Ashburn).
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 enacted as part of last year's
budget (AB 1452, Committee on Budget).
THIS BILL pushes back the end date for house purchases
to qualify for the credit from March 1, 2010 to December 1,
2010; for purchases made between these dates must be
executed by enforceable contract prior to 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 removes the current restriction of $100
million on total credits. Because FTB no longer must
certify and allocate credits under an uncapped tax credit,
the measure removes provisions in existing law guiding
FTB's process for receiving certifications, allocating
credits, and resolving disputes, and instead requires
taxpayers to retain the certification and provide it to FTB
upon request.
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FISCAL EFFECT:
According to FTB, SB 49 results in revenue losses of
$18 million in 2009-10, $20 million in 2010-11, and $18
million in 2011-12.
COMMENTS:
A. Purpose of the Bill
According the author: California is facing an economic
crisis. Unemployment rates have reached a 26 year high. The
housing industry is also being hit hard by declining sales
and record foreclosures. California's housing industry
accounts for 11% of the state's output and new housing
construction contributes nearly $40 billion per year to the
California economy and supports over 266,000 jobs
statewide. Providing tax credits for new homes will
increase the number of new homes sold, thus providing a
needed lift to the economy.
The tax credit has been successful so far. As of
early April, a total of $30,559,124 tax credits have been
claimed. If the current cap remains in effect, the credits
will be depleted as early as June 2009. Removing the cap
will allow more homebuyers to take advantage of the tax
credit and allow the tax credit to continue to help
revitalize California's housing market.
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 April 29th, FTB received 4,880
applications requesting $47.4 million in tax credits,
although FTB cautions that these figures are based on
claims amounts, not the amount of credit applied. FTB
accepts applications only by fax, and has not yet sent
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notifications to taxpayers of credit allocations because it
must first develop a system to capture and verify
application information, allocate credits, and send
letters. Taxpayers may only claim the credit after FTB
allocates it. SB 49 removes this restriction, thereby
allowing taxpayers to claim the credit without the
certification, negating the need for a certification and
allocation process; instead, taxpayers will claim the
credit on their returns, keep the certification, and the
credit will be treated like any other uncapped tax credit.
The measure also lifts the $100 million limit on credits
and extends the deadlines, thereby allowing all taxpayers
purchasing new homes in 2009 and most of 2010 to qualify.
C. 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
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
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housing construction generates approximately $1.95 in total
economic activity.
D. 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
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
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she sells the house within three years.
E. 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),
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,
necessitating federal conservatorship of the GSEs. The
U.S. Treasury now funds the GSEs' guarantee. 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 less than $1.5 billion 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
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lending and housing markets and to improve overall
conditions in private credit markets," according to its
March 18th and April 29th 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 Bank is
dominating purchasing on the GSE MBS market.
Given existing tax subsidies, GSE-spurred liquidity, the
federal GSE backstop, and the Federal Reserve printing
money to pour more than one trillion into the U.S. mortgage
financing market, will yet another tax reduction actually
accomplish anything more than rewarding purchasers for a
decision they would make anyway? The Committee may wish to
consider whether another tax credit is merited given the
unprecedented scale of government intervention in the
housing market.
F. Of Free Markets
After a tumultuous period, California real estate
markets are showing signs of life. Statewide, median house
sales prices have declined approximately 50% from the peak
in mid-2007, and far more in other areas. News reports
indicate that particularly among lower-priced houses in
select markets that buyers are emerging according to news
reports, supporting long-standing economic theory that
posits as prices fall, quantity demanded increases.
Increasing foreclosures add to supply, further pushing
house prices down and increasing measures of housing
affordability. Even with the price changes in housing
markets in recent years, markets again show that they work,
and that the best incentive for house purchasing is low
prices.
With housing markets finally clearing and setting
prices to guide future transactions, what is the problem
that SB 49 seeks to address? The bill increases demand for
houses by giving buyers an $8,000 subsidy (shifting the
demand curve to the right); just as a tax credit for buying
apples would increase apple prices (producers can charge
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more knowing that the government is subsidizing buyers) and
decrease orange prices (as the substitute product must now
lower prices to compete with the subsidized product.)
Buyers could demand lower house prices without the credit.
Housing tax credits then serve as little more than
subsidies from the taxpaying public to prospective house
purchasers, allowing house prices to clear at amounts above
what markets will currently bear. While home sellers (and
their neighbors) benefit from higher prices, is there
sufficient gain to the general public to justify the costs?
Does the benefit to existing homeowners in the form of
high prices justify the costs of the credit? The Committee
may wish to consider whether SB 49 leads to windfalls for
house sellers at a time of a severe fiscal stress.
Support and Opposition
Support:California Bankers Association
California Chamber of Commerce
California Association of Realtors
Oppose:California Tax Reform Association
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Consultant: Colin Grinnell