BILL ANALYSIS Ó
AB 476
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 476
(Chang) - As Amended March 25, 2015
SUSPENSE
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Taxation: homeowners' exemption and renters' credit
SUMMARY: Increases the homeowners' property tax exemption and
the renters' credit amounts. Specifically, this bill:
1)Increases the homeowners' property tax exemption from $7,000
to $25,000, beginning with the lien date for 2016-17 fiscal
year (FY).
2)Requires a county assessor, for the 2017-18 FY and each fiscal
year thereafter, to adjust the amount of the homeowners'
exemption by the percentage change in the Housing Price Index
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for California for the first three quarters of the prior
calendar year, as specified.
3)Increases the nonrefundable renter's tax credit for taxable
years beginning on and after January 1, 2016, according to
filing status of the individual as follows:
a) From $60 to $214 for individual taxpayers filing single,
or married filing separate, with an adjusted gross income
of $39,182 or less.
b) From $120 to $428 for married couples filing joint
returns, heads of household, and surviving spouses with an
adjusted gross income of $78,363 or less.
4)Requires the Franchise Tax Board (FTB) to adjust annually the
amount of the renter's credit for inflation, beginning with
the 2017 taxable year, based upon the California Consumer
Price Index.
5)Makes technical, non-substantive changes to the renters'
credit provisions.
6)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Provides that all property is taxable, unless otherwise
provided by the California Constitution or federal laws
[Section 1(a), Article XIII, California Constitution].
2)Limits ad valorem taxes on real property to 1% of the full
cash value of that property and limits future annual increases
in assessed values to the rate of inflation, not to exceed 2%,
as long as the property remains under the same ownership
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(Proposition 13).
3)Exempts from property taxation the first $7,000 of assessed
valued of an owner-occupied principal place of residence
(usually referred to as the "homeowners' exemption") [Section
3(k), Article XIII, California Constitution].
4)California Constitution, Article XIII, Section 25, requires
the state to reimburse each local government for the revenue
loss from the homeowners' exemption. The Constitution
establishes the minimum amount of the homeowners' exemption,
but permits statutory increases under certain conditions.
5)Authorizes the Legislature to increase the amount of the
homeowners' exemption if both of the following requirements
are satisfied:
a) Local governments are reimbursed for the revenue loss,
and,
b) Benefits to renters, currently provided via the renters'
income tax credit, are increased by a comparable amount.
[Section 3(k), Article XIII, California Constitution.]
6)Allows a nonrefundable credit for qualified renters in the
following amounts:
a) $60 for single and married filing separate with an
adjusted gross income (AGI) of $37,768 or less; and,
b) $120 for married or registered domestic partners filing
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jointly, heads of household, or surviving spouses with an
AGI of $75,536 or less.
7)Requires the FTB to adjust annually for inflation the amount
of the AGI used for purposes of calculating the renters'
credit. (R&TC Section 17053.5).
8)Allows an individual, under the California Personal Income Tax
(PIT) Law, to deduct real property taxes if that taxpayer
reports itemized deductions in a taxable year. The PIT Law
allows a renters' credit to qualified taxpayers.
9)Requires the Legislature to provide increases in benefits to
qualified renters that are comparable to the average increase
in benefits allowed to homeowners under the homeowners'
property tax exemption.
FISCAL EFFECT: The State Board of Equalization (BOE) staff
estimates that this bill would result in an annual General Fund
(GF) revenue loss of $1.07 billion (from the increase in the
state reimbursement for the homeowners' exemption). In
addition, the FTB staff estimates that this bill would result in
an annual GF revenue loss of $340 million in FY 2016-17, and
$220 million in FY 2017-18.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"The current homeowners' exemption in California is $7,000.
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This is taken off the value of a homeowner's primary
residence, amounting to $70 annually off of your property tax
bill, or one percent. As of 1972, when the homeowner's
exemption was last changed, the median California home price
was approximately $21,000. Today, it is nearly $425,000 and
climbing. Clearly this benefit to taxpayers has not kept up
with the price of homes.
"Since 1985, there have been at least 30 bills introduced into
the state Legislature attempting to increase the exemption
amount, either for all homeowners or for certain groups (such
as seniors or first-time home buyers) or to index it to
inflation. All have failed.
"Beginning with the 2015-16 fiscal year, the exemption would
increase from $7,000 to $25,000. This would increase the
annual exemption every homeowner would receive from $70 (1% of
exemption) to $250. Some would argue that this increase is
not necessary because Proposition 13 already saves homeowners
thousands of dollars every year. However, property taxes
remain high because of local bond debt and special taxes -
especially special parcel taxes -which do not count against
Proposition 13's one percent cap.
"According to the non-partisan Tax Foundation, California ranks
19th out of 50 states in per capita property tax collections.
We would argue there is much more government can do to bring
increased property taxes under control. This is especially
true considering California ranks at or near the top of a
number of major tax categories including income, sales, and
gas taxes. With California experiencing a revenue surplus in
the billions of dollars, and the highest General Fund budget
since before the recession, the time seems right for broad
based tax relief. With homeowners constituting a majority of
California's population, an increase in the exemption
represents sound public policy.
"The proposed bill would also annually index the homeowner's
exemption to the House Price Index for California as
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determined by the federal Housing Finance Agency to ensure
that current and future homeowners can also benefit from the
full value of the homeowners' exemption."
2)Arguments in Support . The proponents argue that the time "is
right for tax relief?that supports the greatest number of
taxpayers" and that, "while Proposition 13 continues to
provide necessary property tax relief for all homeowners, more
is needed." They assert that inflation, "as well as bonds and
voter-approved parcel taxes, have added additional burdens to
homeowners' tax bills." Thus, the proponents believe that,
given "California's homeownership base and increased General
Fund revenues, increasing the homeowners' exemption represents
appropriate public policy."
3)One of the Lowest Property Tax Burden for Owner-Occupied
Housing in the Nation . Proposition 13, passed by the voters
in 1978, was designed to provide real property tax relief by
imposing a set of interlocking limitations upon the assessment
and taxing powers of state and local governments. Proposition
13 generally limits the maximum amount of any ad valorem tax
on real property to no more than 1% of the property's full
cash value, as adjusted for the lesser of inflation or 2% per
year<1>. Proposition 13 also requires cities, counties, and
special districts to obtain approval of two-thirds of their
qualified electors in order to impose an undefined class of
"special taxes."<2> Consequently, California homeowners bear
a low property tax burden in comparison to homeowners in other
states: California ranks 34th for property taxes paid as a
percentage of owner-occupied housing value. The effective
property tax rate on owner-occupied housing (which is
calculated as total real property taxes paid divided by total
home value) amounts to 0.81% in California. In contrast, that
rate is 2.38% in New Jersey, 1.64% in New York, and 1.90% in
Texas. Hawaii has the lowest rate of 0.28%.
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<1> California Constitution, Section 1 of Article XIII A.
<2> California Constitution, Section 4 of Article XIII A.
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4)Homeowners' Property Tax Exemption . In addition to
Proposition 13, the California Constitution provides for a
property tax homeowners' exemption, which amounts to annual
tax relief for homeowners of almost $75. The exemption, which
reduces the taxable value of a home, may be claimed only by a
taxpayer who owns and occupies a home as his/her principal
residence. According to the BOE staff, in fiscal year
2013-14, the homeowners' exemption was claimed by 5.2 million
property owners.
The amount of the exemption was set at $7,000 in 1974, prior to
the passage of Proposition13, and has remained unchanged since
then. Clearly, the amount of tax relief due to the
homeowners' exemption was more valuable in 1974. However, it
may be argued that the need for the homeowners' exemption was
made obsolete by the passage of Proposition 13 because
protections against rising property taxes are now built into
the tax system.
5)The Value of the Homeowners' Exemption: Who Benefits the
Most? Since the homeowners' exemption is set at a fixed
amount, the real benefit of this exemption varies depending on
the assessed value of the house. For example, under this
bill, a taxpayer who owns a house with the assessed value of
$100,000 would see an 18% reduction in his/her property tax
bill. In contrast, the same exemption would result in a 4.5%
reduction in the property tax burden imposed on a taxpayer
whose house is identical, yet assessed at $400,000. In light
of the acquisition value system created by Proposition 13, the
increase of the exemption amount from $7,000 to $25,000 would
disproportionately benefit taxpayers who have owned their
houses for a longer period of time, i.e. those with the lower
assessed value. The Committee may wish to consider whether
the state should provide yet another General Fund subsidy that
would mostly benefit those taxpayers, regardless of their
income.
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6)One of the Most Subsidized Assets . In addition to protections
guaranteed by Proposition 13, owner-occupied housing is also
heavily subsidized by the federal and state governments.
Existing federal and state income tax laws allow deductions
from income for mortgage interest on the first and second
homes and exclude from income up to $500,000/ $250,000 of gain
on the sale of a principal residence. Tax preferences that
encourage homeownership also include deductibility from income
of property taxes for state and federal tax purposes.
Homeownership is also encouraged by the non-taxability of the
housing services that are received by the owner, as well as by
the exclusion from income of the cancellation of indebtedness
income made temporarily available as part of the recent
economic stimulus packages. Furthermore, both state and
federal laws provide a special tax treatment of assets
inherited after the owner dies. Thus, if the heir sells the
asset, the capital gain is calculated based on the asset's
"stepped-up" value when the owner died, not its value when the
owner bought that asset. Although this preferential tax
treatment is not limited to owner-occupied housing, the
"step-up basis" treatment of capital gains significantly
affects housing transactions.<3> Originally, this
preferential tax treatment was justified as a way to avoid
double taxation of capital gains on inherited property, but
California removed its taxes on inherited property in 1982.
Finally, the applicability of the federal estate tax has also
been recently limited.<4>
Homeownership is clearly a public goal because similar income
tax benefits are not afforded to any other asset class.
--------------------------
<3> Housing-Related Tax Expenditure Programs, a Presentation to
the Assembly Revenue and Taxation Committee, prepared by the
Legislative Analyst's Office, March 18, 2013, page 9.
<4> Ibid.
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According to the CRS report,<5> some analysts argue that this
preferential tax treatment of housing encourages households to
over-invest in housing and invest less in business ventures
that might contribute more to the nation's productivity and
output. The Committee may wish to consider whether an
increase in the amount of the homeowner's tax exemption is
warranted in light of the myriad of other types of tax relief,
both state and federal, afforded to home ownership.
7)Indexing . This bill requires the county assessor to index the
amount of the homeowners' exemption every year by the
percentage change in the House Price Index, as specified. The
proposed adjustment would provide on-going property tax
reductions, even if values of houses in California soar, while
an adjustment to the assessed value of a house would remain
subject to the 2% constitutional inflation cap. The Committee
may wish to consider whether indexing the homeowners'
exemption amount without a corresponding annual adjustment to
the assessed value is justified, given the existence of
Proposition 13 limitations on the assessment of real property
in the state.
8)Renters' Credit . The Personal Income Tax (PIT) law allows an
eligible individual who rents his/her principal residence to
reduce his/her state income tax with a tax credit. The
renters' credit was suspended for the 1993 through 1997
taxable years, but was reinstated beginning with the 1998
taxable year. The credit eligibility is based on the
taxpayer's AGI and his/her filing status. AGI amounts are
indexed annually for inflation. For the 2015 tax year, a
credit of $120 is allowed for married taxpayers filing joint
returns; heads of household and surviving spouses with an AGI
of $75,536 or less; and $60 for other individuals (single or
married/RDP filing separately) with an AGI of $37,768 or
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<5> Congressional Research Services, The Mortgage Interest and
Property Tax Deductions: Analysis and Options, Mark P.
Keightley, p.17.
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less.<6> The renters' credit is nonrefundable.
9)The Constitutional Requirement . The $7,000 homeowners'
exemption amount prescribed by the California Constitution is
the minimum exemption amount, which means that it may be
increased by the Legislature. However, the California
Constitution requires the Legislature to provide an equivalent
increase in the amount of the renters' credit whenever the
homeowners' exemption amount is increased. Furthermore, the
state is required by the Constitution to reimburse local
governments for the property tax revenue loss due to the
homeowners' exemption. In fact, this exemption is the only
property tax exemption for which the state fully reimburses
local governments.
REGISTERED SUPPORT / OPPOSITION:
Support
B. Dutton, Assessor-Recorder-County Clerk, San Bernardino County
California Apartment Association
California Association of Realtors
Contra Costa Taxpayers Association
D. Harkey, State Board of Equalization, Member
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<6> The California Constitution requires the State Legislature
to provide a comparable increase in benefits to qualified
renters wherever it proposes to increase the homeowner's
exemption, as provided by Article XIII, Section 3(k) of the
California Constitution. The current exemption amount is the
first $7,000 of the full value of a dwelling occupied as the
owner's principal residence on the January 1 lien date from
property taxation. The Legislature may increase the size of the
homeowners' exemption; but if it does so, it must also: (a)
increase the rate of state taxes in an amount sufficient to pay
for the increased cost of state subventions to local
governments, and (b) provide a comparable increase in benefits
to qualified renters.
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Fullerton Taxpayers Association
G. Runner, State Board of Equalization, Member
Habitat for Humanity California
Howard Jarvis Association
Humboldt County Taxpayers League
Kern County Taxpayers Association
KernTax Fact Through Research
Long Beach Taxpayers Association
Napa County Taxpayers Association
National Tax-Limitation Committee
Orange County Taxpayers Association
Placer County Taxpayers Association
San Diego Tax Fighters
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Opposition
California Tax Reform Association
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098