BILL ANALYSIS Ó
AB 428
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 428
(Nazarian) - As Amended May 12, 2015
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Income taxes: credit: seismic retrofits
SUMMARY: Allows a credit equal to 30% of a "qualified
taxpayer's" "qualified costs" incurred for "seismic retrofit
construction", as specified. Specifically, this bill:
1)Allows the credit for taxable years beginning on or after
January 1, 2016, and before January 1, 2021.
2)Defines a "qualified taxpayer" as an owner of a "qualified
building" located in California. A taxpayer that owns a
proportional share of a "qualified building" may claim the
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credit based on the taxpayer's share of the "qualified costs".
3)Defines "qualified costs" as costs paid or incurred by the
qualified taxpayer for any completed "seismic retrofit
construction" on a "qualified building", including any
engineering or architectural design work necessary to permit
or complete the "seismic retrofit construction". "Qualified
costs" shall not include any of the following:
a) Maintenance, including abatement of deferred or
inadequate maintenance, and correction of violations
unrelated to the "seismic retrofit construction";
b) Repair, including repair of earthquake damage;
c) "Seismic retrofit construction" required by local
building codes as a result of addition, repair, building
relocation, change of use, or occupancy;
d) Other work or improvement required by local building or
planning codes as a result of the intended "seismic
retrofit construction";
e) Rent reductions or other associated compensation,
compliance actions, or other related coordination involving
the qualified taxpayer and any other party, including a
tenant, insurer, or lender;
f) Replacement of existing building components, including
equipment, except as needed to complete the "seismic
retrofit construction";
g) Bracing or securing nonpermanent building contents;
h) The offset of costs, reimbursements, or other costs
transferred from the qualified taxpayers to others; or,
i) Amounts paid to the jurisdiction with authority for
building code enforcement for issuing the certification
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required by this bill.
4)Defines "seismic retrofit construction" as alteration of a
"qualified building" or its components to substantially
mitigate seismic damage. Seismic retrofit construction shall
be for work performed voluntarily, and for which qualified
costs were paid or incurred, on or after January 1, 2016.
Seismic retrofit construction shall include the following:
a) Anchoring the structure to the foundation;
b) Bracing cripple walls;
c) Bracing hot water heaters;
d) Installing automatic gas shutoff valves;
e) Repairing or reinforcing the foundation to improve the
foundation's integrity against seismic damage;
f) Anchoring fuel storage; and,
g) Installing an earthquake-resistant bracing system for
mobile homes registered with the California Department of
Housing and Community Development.
5)Defines a "qualified building" as a building that has been
certified as an "at-risk property" by "the local building code
enforcement" for the area within which the building is
located. A qualified building specifically includes a mobile
home registered by the Department of Housing and Community
Development.
6)Defines an "at-risk property" as a building deemed hazardous
and in danger of collapse in the event of a catastrophic
earthquake, including soft story buildings, nonductile
concrete residential buildings, and pre-1994 concrete
residential buildings.
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7)Provides that, to be eligible for the credit, the following
must apply:
a) The qualified taxpayer must obtain certification from
the appropriate jurisdiction with authority for building
code enforcement, upon a review of the building, that the
completed construction satisfies the definition of seismic
retrofit construction. The certification shall identify
what part of the completed construction, if any, is not
seismic retrofit construction. Upon request of the
Franchise Tax Board (FTB), the qualified taxpayer must
provide a copy of the certification to the FTB.
b) The jurisdiction with authority for building code
enforcement in which a qualified building is located has
entered into an agreement with the state to provide
certifications and to not seek reimbursement for any costs
incurred in providing those certifications.
8)Requires the credit amount allowed to be claimed by a
qualified taxpayer at the rate of 1/5th of the credit amount
for the taxable year in which the credit is allowed, and
one-fifth of the credit amount for each of the subsequent four
taxable years.
9)Provides that, in cases where the credit amount exceeds the
taxpayer's tax liability, the excess credit amount may be
carried over to the following taxable year, and succeeding
four taxable years, until the credit has been exhausted.
10)Provides that, for purposes of computing the credit, the
qualified costs shall be reduced by any grant provided by a
public entity for the seismic retrofit construction.
11)Provides that this credit shall be in lieu of any other
credit or deduction that the qualified taxpayer may otherwise
claim with respect to qualified costs.
12)Allows the credit under both the Personal Income Tax (PIT)
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Law and the Corporation Tax (CT) Law.
13)Provides that Revenue and Taxation Code (R&TC) Section 41
shall not apply to the credit.
14)Takes immediate effect as a tax levy.
15)Sunsets the credit provisions on December 1, 2021.
EXISTING LAW:
1)Allows various tax credits under both the PIT Law and the CT
Law. These credits are generally designed to encourage
socially beneficial behavior or to provide relief to taxpayers
who incur specified expenses.
2)Allows taxpayers engaged in a trade or business to deduct
expenses considered ordinary and necessary in conducting that
trade or business.
3)Requires any bill authorizing a new credit to contain all of
the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve;
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in the bill; and,
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives. The requirements shall include the specific
data and baseline measurements to be collected and remitted
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in each year the credit is in effect, for the Legislature
to measure the change in performance indicators, and the
specific taxpayers, state agencies, or other entities
required to collect and remit data. (R&TC Section 41.)
FISCAL EFFECT: The FTB estimates that this bill will reduce
General Fund revenues by $1.4 million in fiscal year (FY)
2015-16, by $5.2 million in FY 2016-17, and by $9.1 million in
FY 2017-18.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
The recent earthquakes, which shook Southern California
cities [in] 2014, remind us that an earthquake can strike
at any given moment and it is imperative that we ensure
our structures are suitable to withstand a catastrophic
earthquake. According to the Southern California
Earthquake Center, California has a 99.7% chance of
having a magnitude 6.7 or larger earthquake during the
next 30 years, and the likelihood of an even more
powerful quake of magnitude 7.5 or greater in the next 30
years is 46%. It is imperative that we take every
precaution to make sure that human life and property is
saved in the event of a catastrophic earthquake. This
measure will improve California's resilience against
earthquakes, saving the public money that would otherwise
have been required for disaster relief.
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2)Proponents of this bill note the following:
We all know that the cost to retrofit a building is very
expensive. While older buildings were constructed
according to building codes in place at the time, new
studies have found that some of these buildings may not
survive a strong earthquake. Your bill will help and
encourage property owners to have work done to their
buildings to ensure they are safe. Your bill is
important not only to property owners, but also to
tenants who live in these buildings.
3)Committee Staff Comments
a) What is a "tax expenditure" ? Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures" since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues).
b) How is a tax expenditure different from a direct
expenditure ? As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. While this affords taxpayers greater financial
predictability, it can also result in tax expenditures
remaining a part of the tax code without demonstrating any
public benefit. Second, there is generally no control over
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the amount of revenue losses associated with any given tax
expenditure. Finally, it should also be noted that, once
enacted, it takes a two-thirds vote to rescind an existing
tax expenditure absent a sunset date, effectively resulting
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of their cost or efficacy, without a
supermajority vote.
c) What would this bill do ? This bill would allow a credit
equal to 30% of a qualified taxpayer's qualified costs
incurred for seismic retrofit construction. According to
the United States Geological Survey, there is a 99.7%
chance that a major earthquake of 6.7 in scale will strike
California in the next 30 years. This bill's tax credit is
designed to lower the overall cost for property owners to
improve the seismic safety of their buildings. Proponents
note that such action, in turn, could save countless lives
in the event of a catastrophic earthquake, and would reduce
the demand for state and local emergency services by
hopefully minimizing structural damage. Older concrete
structures are particularly vulnerable to earthquake
damage; last year, the author noted that recent research
has identified 1,500 concrete buildings that are
seismically vulnerable in the Los Angeles area alone.
d) Implementation considerations : Committee staff has
identified certain implementation concerns with this bill's
current language. Committee staff is available to work
with the author's office to resolve these and any other
concerns that may be identified. These issues include the
following:
i) This bill currently requires a taxpayer to obtain a
"certification" from the "appropriate jurisdiction with
authority for building code enforcement." This
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certification, in turn, must attest to the fact that the
completed construction satisfies the statutory definition
of "seismic retrofit construction." The certification
must also identify what part of the completed
construction, if any, is not seismic retrofit
construction. This bill does not, however, currently
require this certification to verify a building's
"at-risk" status prior to construction, which may ease
administration of the credit.
These provisions raise a number of additional issues.
First, this bill provides little definitional guidance
for identifying the "appropriate jurisdiction" with
building code enforcement authority. Additional
ambiguity is created by this bill's definition of a
"qualified building", which is deemed one that has been
certified as an at-risk property by the local "building
code enforcement" for the area within which the building
is located. The author may wish to consider appropriate
amendments clarifying which entities will have
certification authority.
ii) This bill defines an "at-risk property" as a
building deemed hazardous and in danger of collapse in
the event of a catastrophic earthquake, including, but
not limited to, soft-story buildings, nonductile concrete
residential buildings, and pre-1994 concrete residential
buildings. This language may create ambiguity regarding
which building types potentially qualify for this
designation. On one hand, this language would appear to
vest local building code entities with unfettered
discretion to designate any building as "at-risk" as long
as it is deemed in danger of collapse in the event of an
earthquake. On the other hand, references to specific
building types such as "pre-1994" concrete residential
buildings may suggest that concrete buildings constructed
after 1994 do not qualify.
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iii) This bill currently specifies that seismic retrofit
construction must be for work performed "voluntarily"; it
is not entirely clear what this term means. If a local
government were to enact an ordinance requiring certain
seismic safety improvements for specified buildings,
would compliance with this ordinance be considered
"voluntary"? What if the ordinance gave all property
owners three years to comply? Would improvements
completed before the ordinance's operative date be
considered "voluntary"? The author may wish to consider
amendments clarifying these issues, especially given that
tax credits are generally allowed, as a matter of
legislative grace, to encourage action that otherwise
would not occur.
e) R&TC Section 41 shall not apply : On September 29, 2014,
Governor Brown signed into law SB 1335 (Leno), Chapter 845,
Statutes of 2014, which added R&TC Section 41. SB 1335
recognized that the Legislature should apply the same level
of review used for government spending programs to tax
preference programs, including tax credits. Thus, Section
41 requires any bill introduced on or after January 1, 2015
that allows a new credit to contain specific goals,
purposes, and objectives that the tax credit will achieve.
In addition, Section 41 requires detailed performance
indicators for the Legislature to use when measuring
whether the tax credit meets the goals, purposes, and
objectives so-identified.
The present bill provides that R&TC Section 41 shall not
apply to this credit. The Committee may wish to consider
the appropriateness of this Section 41 exemption. Critics
of a Section 41 exemption might argue that the exemption
exacerbates one of the primary problems inherent in
crafting tax expenditure measures - namely, it is often
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unclear what objectives the Legislature is aiming to
achieve.
f) Prior legislation :
i) AB 1510 (Nazarian), of the 2013-14 Regular Session,
would have allowed a credit equal to 30% of a "qualified
taxpayer's" "qualified costs" incurred for "seismic
retrofit construction". AB 1510 was held on the Assembly
Appropriations Committee's Suspense File.
ii) AB 1756 (Scott), of the 1999-2000 Regular Session,
would have allowed a credit equal to 55% of the amount
incurred for seismic retrofit construction on residential
dwellings built prior to 1979. AB 1756 was held on the
Assembly Committee on Appropriations' Suspense File.
iii) SB 677 (McPherson), of the 2001-02 Regular Session,
would have allowed a credit equal to an unspecified
percentage of the final cost of seismic retrofitting, as
specified. SB 677 was never heard by the Senate
Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION:
Support
California Apartment Association
Western Manufactured Housing Communities Association
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Opposition
None on file
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098