BILL ANALYSIS
SB 401
Page 1
Date of Hearing: April 7, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 401 (Wolk) - As Amended: April 6, 2010
Policy Committee: Revenue and
Taxation Vote: 5-3
Urgency: Yes State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill (a) exempts from state income taxes the amount of debt
on principal residences that is discharged by lenders; (b)
excludes from state income taxes federal grants that are made
in-lieu of renewable energy tax credits; and (c) conforms
numerous other provisions of California law to changes made in
federal income tax law from 2005 to 2008.
FISCAL EFFECT
As shown in the accompanying table, the bill will result in
decreases in tax revenues and partly offsetting increases in
interest and penalties. FTB estimates a net revenue loss of
$21.8 million in 2009-10, $14 million in 2010-11, and $15
million in 2011-12, and $5.5 million in 2012-13.
SB 401 Revenue Impact
(In millions of dollars)
------------------------------------------------------------------
| |2009-1| 2010-11| 2011-12| 2012-13|
| | 0| | | |
|----------------------+------+-----------+-----------+------------|
|Tax Provisions | -23.4| -20.6| -21.6| -12.5|
|----------------------+------+-----------+-----------+------------|
|Penalty & Interest | 1.6| 6.6| 6.6| 7.0|
|Provisions | | | | |
|----------------------+------+-----------+-----------+------------|
| Total, All | -21.8| -14.0| -15.0|-5.5 |
|Provisions | | | | |
------------------------------------------------------------------
SB 401
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SUMMARY (Continued)
Specifically, this bill:
1)Extends through 2012, provisions allowing taxpayers to exclude
from income the amount of mortgage debt on their principal
residence that has been discharged by a lender (for example,
through a "short sale"). The bill also raises the amount of
debt that can be excluded from $250,000 to $500,000.
2)Excludes from income taxation receipts of federal grants
authorized by the American Recovery and Reinvestment Act
(ARRA) for qualified renewable energy investments in 2009 and
2010.
3)Increase penalties for failure to file partnership and
S-corporation returns.
4)Increases, from 14 years to 18 years, the age of minor
children whose unearned income (such as interest or dividends
on investment) is taxed based on their parents' tax rate.
5)Indexes to inflation the gross income limitations on certain
retirement savings incentives.
6)Lengthens, from 18 to 36 months, the period after taxes are
due in which the FTB may contact taxpayers regarding tax
deficiencies and still collect interest on unpaid balances.
7)Modifies rules involving contributions to funds to cover
nuclear facility decommissioning costs.
8)Reduces the age for early withdrawal penalties from retirement
plans for public safety employees and excludes from gross
income reimbursements received by volunteer emergency
personnel.
9)Conforms California to numerous other changes in federal law
adopted between 2005 and 2008.
COMMENTS
1)Purpose . The bill is intended to provide tax relief to
homeowners adversely affected by the mortgage meltdown, to
increase the economic viability of renewable energy projects,
SB 401
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and, more generally, to narrow significant differences that
have emerged between state and federal income tax law in
recent years.
FTB indicates that conforming to federal tax law is desirable
because it makes the state tax system less confusing for the
taxpayer and easier for the FTB to administer.
2)Background - discharge of mortgage debt . Current federal and
state laws generally require that debt discharged by a lender
be included in the taxpayer's gross income. The theory behind
this inclusion is that, since the loan was not included in the
taxpayer's income when it is was initially provided, the
discharge of the repayment obligation results in the taxpayer
having received a cash benefit that was never subject to
income taxation.
There are several exceptions to this general rule. For
example, a discharge is not included in a taxpayer's income
when it is related to a bankruptcy or insolvency (i.e. a
situation where the taxpayer's liabilities exceed his or her
assets). It is also excluded when the discharge is related to
a foreclosure following a loan default on an original first
mortgage loan that has not been refinanced. (Discharges of
refinanced loans or second loans are not eligible for the
exclusion.)
Federal changes made in 2007 allowed solvent taxpayers to
exclude, on their federal income tax returns, discharges on
loans of up to $2 million ($1 million for married taxpayers
filing separately). The exclusion applies to discharges for
original, refinanced, and second mortgages occurring between
January 1, 2007 and January 1, 2009. In 2008, federal
legislation was enacted that extended the exemption until
January 1, 2013.
SB 1055 (Machado), Chapter 282/2008 partially conformed
California to the 2007 federal change, providing an exclusion
of up to $250,000 from California income taxation for
discharges made through January 1, 2009. This bill conforms to
the 2008 federal law by extending the state exclusion until
January 1, 2013. It applies retroactively to debt discharges
made in 2009 and expands the amount that can be excluded under
California law from $250,000 to $500,000.
SB 401
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3)Background - renewable energy credits . Federal law allows an
income tax credit for renewable energy projects, such as
solar, wind, geothermal, and biomass. (California has no
comparable credit.) Given the credit is not refundable, it
only has value to investors who are reasonably certain they
will have future income and tax liabilities against which to
apply them, and the recent economic downturn has reduced that
confidence. In response to this problem, ARRA - signed by
President Obama in February 2009, included a provision
authorizing the Secretary of Treasury to provide grants in
lieu of the credit to developers placing renewable energy
projects into service during 2009 or 2010. The value of these
grants is that, unlike income tax credits, they have monetary
value whether or not the owner of the project has tax
liabilities.
Congress exempted the grants from federal income taxes, though
they did require the basis of the property to be reduced by
50% of the grant value. There is no comparable exemption for
California taxes, however, and proponents of this provision
assert that the taxability of these grants may jeopardize the
economic viability of some projects. This bill excludes these
grants from income for state tax purposes.
4)Background - federal conformity . Although there are many
exceptions, California's personal income tax and corporation
tax laws are generally patterned after federal law. The state
does not automatically conform to federal law. Rather, in most
cases, state legislation is needed to conform to federal law
changes.
In the 1980s through the early 1990s, the state enacted
conformity legislation almost every year. However, since the
mid-1990s, state conformity has taken place less frequently -
in 1997, 1998, 2001, and 2005. Over the past five years,
significant differences have emerged between state and federal
law. The lack of conformity can be attributed to several
factors, some involving fiscal concerns, and others involving
policy related issues. This measure would narrow differences
between state and federal law, although lack of conformity
would remain in certain areas, such as tax treatment of health
savings accounts and accelerated depreciation for various
business investments.
SB 401
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5)Previous legislation . This bill is identical to AB 32 X8
(Wolk), except for a provision that would have conformed
California to the federal 20% penalty on erroneous refund
claims. AB 32 X8 was vetoed by the governor on March 25, who
objected to the erroneous refund penalty provision.
6)Amendments . The April 6 amendments address two issues. First,
this bill is not keyed a tax levy, therefore it will take
effect January 1, 2011. The April 6 amendments make the bill's
provisions effective for tax years beginning on or after
January 1, 2010 unless otherwise specified (identical to AB 32
X8). Second, the amendments provide that conformity provisions
related to certain corporate distributions are applicable for
distributions occurring on or after January 1, 2010,
regardless of the tax year of the companies involved.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081