BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 428 |Hearing |7/1/15 |
| | |Date: | |
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|Author: |Nazarian |Tax Levy: |Yes |
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|Version: |6/17/15 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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INCOME TAXES: CREDIT: SEISMIC RETROFITS
Allows a credit equal to 30% of a qualified taxpayer's qualified
costs incurred for seismic retrofit construction.
Background and Existing Law
California law allows various income tax credits, deductions,
and sales and use tax exemptions to provide incentives to
compensate taxpayers that incur certain expenses, such as child
adoption, or to influence behavior, including business practices
and decisions, such as research and development credits. The
Legislature typically enacts such tax incentives to encourage
taxpayers to do something that but for the tax credit, they
would not do. The Department of Finance is required to annually
publish a list of tax expenditures.
Existing law requires the reassessment of property, based on the
fair market value, upon a change in ownership, or on new
construction. The determination of fair market value is known
as the base year value and is adjusted annually for inflation,
which may not exceed 2% per year. Newly constructed or new
construction includes additions to the real property, or the
alteration of the real property that amounts to a rehabilitation
or conversion of the property to a different use since the
preceding lien date. The assessor is required to determine the
added value of the new construction when completed and add that
AB 428 (Nazarian) 6/17/15 Page 2
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amount to the assessed value of the property. In general, if
the new construction replaces existing improvements, the value
attributable to the existing improvements is deducted from the
base year value of the property. In 2010, voters approved
Proposition 13, which excludes from the definitions of newly
constructed and new construction, the construction or
reconstruction of seismic retrofitting components of an existing
structure.
Proposed Law
Assembly Bill 428 allows a credit equal to 30% of a qualified
taxpayer's qualified costs incurred for seismic retrofit
construction. The yearly maximum amount is $12 million per
year, plus any carryover of unused funds from the prior year.
To obtain the credit, a 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. Each jurisdiction with authority for
building code enforcement in which a qualified building is
located must enter into an agreement with the state to provide
certifications and to not seek reimbursement for any costs
incurred in providing those certifications. A taxpayer must
then request and be granted an allocation of the credit from the
Franchise Tax Board (FTB). To request an allocation, the
taxpayer must sign and submit to FTB an application to receive a
credit for the retrofit construction, and provide a copy of the
certification. Upon receipt of the application and
certification, FTB shall notify the taxpayer of the amount of
credit allocated. Upon request of FTB, the qualified taxpayer
must provide a copy of the certification to FTB. The bill
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 credit based on the
taxpayer's share of the qualified costs.
Qualified costs are defined 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
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seismic retrofit construction. Qualified costs shall not
include any of the following:
Maintenance, including abatement of deferred or
inadequate maintenance, and correction of violations
unrelated to the seismic retrofit construction;
Repair, including repair of earthquake damage;
Seismic retrofit construction required by local building
codes as a result of addition, repair, building relocation,
change of use, or occupancy;
Other work or improvement required by local building or
planning codes as a result of the intended seismic retrofit
construction;
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;
Replacement of existing building components, including
equipment, except as needed to complete the seismic
retrofit construction;
Bracing or securing nonpermanent building contents;
The offset of costs, reimbursements, or other costs
transferred from the qualified taxpayers to others; or,
Amounts paid to the jurisdiction with authority for
building code enforcement for issuing the certification
required by this bill.
AB 428 defines seismic retrofit construction as alteration of a
qualified building or its components to substantially mitigate
seismic damage. Seismic retrofit construction refers only to
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:
Anchoring the structure to the foundation;
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Bracing cripple walls;
Bracing hot water heaters;
Installing automatic gas shutoff valves;
Repairing or reinforcing the foundation to improve the
foundation's integrity against seismic damage;
Anchoring fuel storage; and,
Installing an earthquake-resistant bracing system for
mobile homes registered with the California Department of
Housing and Community Development.
The bill 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.
AB 428 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,
non-ductile concrete residential buildings, and pre-1994
concrete residential buildings.
The credit amount allowed is one-fifth 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. 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. This credit shall be in
lieu of any other credit or deduction that the qualified
taxpayer may otherwise claim with respect to qualified costs and
Section 41 does not apply to the credit.
As a tax levy, AB 428 takes effect immediately, and applies to
taxable years beginning on or after January 1, 2017, and before
January 1, 2022.
State Revenue Impact
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FTB estimates that this bill will reduce General Fund revenues
by $700,000 in fiscal year 2016-17, by $2.7 million in 2017-18,
and by $4.6 million in 2018-19.
Comments
1. Purpose of the bill. According to the author, "AB 428
accomplishes three goals; it saves lives, protects property, and
creates jobs. 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."
2. Incentive? Generally, tax expenditures are enacted to
encourage socially beneficial behavior that would not take place
without a financial incentive. AB 428 seeks to encourage
property owners to improve the seismic safety of homes and
apartment buildings. According to structural engineer Chris
Poland in an interview with KQED, seismic retrofits would cost
an average of $10,000 to $20,000 per apartment unit in San
Francisco. Given the high cost property owners would have to
pay for seismic improvements, even after benefiting from the
credit, it is unclear whether the tax incentive ultimately
encourages new behavior or rewards behavior that was going to
occur regardless.
3. Lifesaver. 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. Improving the
seismic safety of homes and apartment buildings could save
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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.
4. A new 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). This bill would create new tax expenditure, costing
the general fund almost $100,000 dollars in foregone revenue
each year. The tradeoff for providing new tax expenditure,
resulting in revenue losses, is higher taxes or reductions to
other services or programs.
5. How is 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. This can offer taxpayers greater certainty,
but 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 the amount of revenue losses
associated with any given tax expenditure. Finally, once
enacted, it takes a two-thirds vote to rescind an existing tax
expenditure absent a sunset date. This effectively results in a
"one-way ratchet" whereby tax expenditures can be conferred by
majority vote, but cannot be rescinded, irrespective of their
efficacy, without a supermajority vote.
6. Section 41 shall not apply. On September 29, 2014, Governor
Brown signed SB 1335 (Leno, 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 income tax credit to contain specific goals,
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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. This 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.
7. Prior legislation:
AB 1510 (Nazarin), 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.
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
Appropriations Committee's Suspense File.
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.
Assembly Actions
Assembly Revenue and Taxation9-0
Assembly Appropriations 17-0
Assembly Floor 78-0
Support and
Opposition (6/24/15)
Support : Apartment Association of Greater Los Angeles;
Apartment Association of Orange County; Berkeley Mayor, Tom
Bates; Building Owners and Management Association of Los
Angeles; California Apartment Association; California League of
Cities; California Southern Cities Apartment Association; City
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of Berkeley; City of Burbank; City of Los Angeles; City of
Martinez; City of West Hollywood; Coalition for Economic
Survival; East Bay Rental Housing Association; League of
California Cities; Los Angeles Business Council Institute; Los
Angeles Mayor, Eric Garett; Nor Cal Rental Property Association;
North Valley Property Owners Association; Oakland Mayor, Libby
Schaaf; Rent Stabilization Board of the City of Berkeley; San
Francisco Mayor, Ed Lee; San Diego County Apartment Association;
Santa Barbara Rental Property Association; Santa Monica Mayor,
Kevin McKeown; State Farm Mutual Automobile Insurance Company;
Structural Engineers Association of California; Western Center
on Law & Poverty; Western Manufactured Housing Communities
Association.
Opposition : Unknown.
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