BILL ANALYSIS Ó AB 428 Page 1 Date of Hearing: May 27, 2015 ASSEMBLY COMMITTEE ON APPROPRIATIONS Jimmy Gomez, Chair AB 428 (Nazarian) - As Amended May 12, 2015 ----------------------------------------------------------------- |Policy |Revenue and Taxation |Vote:|9 - 0 | |Committee: | | | | | | | | | | | | | | ----------------------------------------------------------------- Urgency: Yes State Mandated Local Program: NoReimbursable: No SUMMARY: This bill allows a tax credit under the personal income tax and corporate tax laws, for tax years beginning on or after January 1, 2016 and before January 1, 2021, equal to 30% of a qualified taxpayer's costs incurred for seismic retrofit construction. In summary, this bill: 1)Defines a "qualified taxpayer" as an owner of a qualified building located in California; and allows a taxpayer that AB 428 Page 2 owns a proportional share of a qualified building to claim the credit based on the taxpayer's share of the costs incurred for seismic retrofit construction. 2)Defines a "qualified building" as a building that has been certified by the local building code enforcement authority for the area within which the building is located as an "at-risk property," which is further defined as a building, including certain mobile homes, deemed hazardous and in danger of collapse in the event of a catastrophic earthquake, and permits the Franchise Tax Board (FTB) to request a copy of that certificate. 3)Defines "seismic retrofit construction" as specified changes or additions to the structure of a qualified building to mitigate seismic damage, and excludes from the definition activities performed to bring a qualified building into compliance with local building codes. 4)Provides that, to be eligible for the credit: a) The qualified taxpayer must obtain certification from the appropriate jurisdiction with authority for building AB 428 Page 3 code enforcement, upon a review of the building, that the completed construction satisfies the definition of seismic retrofit construction. 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. 5)Requires the credit amount allowed to be claimed by a qualified taxpayer at the rate of one-fifth of the credit amount for the taxable year in which the credit is allocated, and one-fifth of the credit amount for each of the subsequent four taxable years. 6)Provides that the credit shall be in lieu of any other credit or deduction the taxpayer may otherwise claim with respect to the qualified costs. AB 428 Page 4 FISCAL EFFECT: 1)Potentially significant GF costs to Franchise Tax Board (FTB) to administer the changes to forms and systems. 2)Estimated GF revenue decreases of $1.4 million, $5.2 million, and $9.1 million in FY 2015-16, FY 2016-17, and FY 2017-18, respectively. COMMENTS: 1)Purpose. According to the author, this measure will improve California's preparedness for earthquakes, saving taxpayers money that would otherwise be required for disaster relief. 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%. Proponents of the bill argue the cost of retrofitting buildings can be very expensive, and this bill will encourage owners of older properties to upgrade safety features, protecting both owners and tenants from future earthquakes. 2)Opposition. The California Tax Reform Association (CTRA) notes that property owners are already strongly incentivized AB 428 Page 5 to retrofit their buildings in order to preserve the value of their investment. CTRA argues since an earthquake would likely cause a total loss to property owner, there is no need for an additional tax credit. Such credit would only reward activity that would otherwise have been undertaken. 3)Is Section 41 Already Doomed? Tax credits are often used to encourage or influence socially beneficial behavior, and provide relief to taxpayers who incur expenses from desired behavior. Tax credits are often more appealing than tax deductions as the taxpayer may take the same credit regardless of income. This is particularly true among corporate taxpayers. This bill ignores the requirements of Section 41 of the revenue and taxation code, authorized just last year in SB 1335 (Leno), Statutes of 2014, which requires tax credits to articulate specific goals, purposes, and objectives for the credit, as well as establish performance indicators to measure the credit's success in achieving those goals. While the policy goals of this bill may be laudable, there is no indication to suggest 30% of qualified expenses is the appropriate credit to achieve the desired increase in seismic upgrades, and that taxpayers seeking the credit would not have performed the upgrades anyway. In addition, there are no metrics proposed with which to evaluate whether the credit is achieving its aims. Ensuring the Legislature conducts some objective and dispassionate evaluation of tax credits was the goal of SB 1335, and the committee might wish to consider whether this is precisely the type of tax credit for which Section 41 ought to apply. 4)Prior legislation. This bill is substantially similar to AB 1510 (Nazarian) of last year. AB 1510 was held on the Suspense File of this committee. AB 428 Page 6 Analysis Prepared by:Joel Tashjian / APPR. / (916) 319-2081