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%.  




          ---------------------------
          <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  



          ---------------------------
          <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


          ---------------------------
          <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