BILL ANALYSIS Ó
AB 585
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 585
(Melendez) - As Amended March 16, 2015
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Outdoor Water Efficiency Act of 2015: personal income
tax credits: outdoor water efficiency.
SUMMARY: Allows a tax credit, under the Personal Income Tax
(PIT) Law, equal to 25% of the amount paid or incurred during
the taxable year by a "qualified taxpayer" for "water-
efficiency improvements" for outdoor landscapes on "qualified
real property" in California, not to exceed $2,500 per taxable
year. Specifically, this bill:
1)Contains the following legislative findings:
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a) The 2014 water year, ending on September 30, was the
third driest based on the 119-year long statewide
precipitation record;
b) Temperatures in the first nine months of 2014 were
record breaking - 4.1 degrees above the 20th century
average across the state;
c) Responding to these unprecedented dry and hot
conditions, the United States (U.S.) Drought Monitor
classified more than 80% of California in an "extreme"
drought condition, with 58% of California in an
"exceptional" drought, the highest condition;
d) On January 17, 2014, the Governor called upon retail
water providers throughout California to reduce residential
per capita water use by 20% as compared to 2013 levels;
e) Outdoor water use accounts for the highest percentage of
regional water use;
f) Landscape design, installation, maintenance, and
management can and should be water efficient. The use of
water-efficient landscapes contributes to the state's
efforts to increase the reliability of its water supplies;
g) Municipalities and local water agencies are tasked with
enforcing water conservation ordinances to eliminate water
waste and restrict outdoor water use; and,
h) It is the Legislature's intent to provide an income tax
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credit for the purchase of outdoor water use efficiency
improvements during the exceptional drought that California
is facing.
2)Allows the PIT credit for taxable years beginning on or after
January 1, 2015, and before January 1, 2021.
3)Defines a "qualified taxpayer" as the owner of any "qualified
real property".
4)Defines "qualified real property" as either "multifamily
residential real property" or "single-family [residential]
real property".
5)Defines "multifamily residential real property" as any real
property that is improved with, or consisting of, a building
containing more than one unit that is intended for human
habitation, or any mixed residential-commercial buildings or
portions thereof that are intended for human habitation.
Multifamily residential real property includes residential
hotels but does not include hotels and motels that are not
residential hotels.
6)Defines "single-family residential real property" as any real
property that is improved with, or consisting of, a building
containing not more than one unit that is intended for human
habitation.
7)Defines "water efficiency improvements" as expenditures by the
qualified taxpayer to meet the requirements of any of the
following:
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a) A local water-efficient landscape ordinance adopted or
in effect pursuant to Government Code (GC) Section
65595(c);
b) A local landscape regulation or restriction on the use
of water adopted pursuant to Water Code (WC) Section 353 or
Section 375; or,
c) A water-efficient landscape program that is developed
and implemented by a regional or local water agency for the
specific purpose of reducing water use.
8)Provides that Revenue and Taxation Code (R&TC) Section 41
shall not apply to the credit allowed by this bill.
9)Provides that this bill's provisions shall remain in effect
until December 1, 2021, unless the drought state of emergency
declared by the Governor on January 17, 2014, is terminated
before that date, in accordance with GC Section 8629. In that
event, this bill's provisions shall remain in effect only
until midnight on the first day of the first calendar quarter
beginning more than 60 days after the date of the termination
of the state of emergency, or until December 1, 2021,
whichever is earlier.
10)Takes immediate effect as a tax levy.
EXISTING LAW:
1)Allows various tax credits under the PIT Law. These credits
are generally designed to encourage socially beneficial
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behavior or to provide relief to taxpayers who incur specified
expenses.
2)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
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.)
3)Provides, for taxable years beginning on or after January 1,
2014, and before January 1, 2019, a gross income exclusion for
amounts received as a rebate, voucher, or other financial
incentive issued by a local water agency or supplier for
participation in a turf removal water conservation program.
4)Provides that, on or before January 1, 2010, every city,
county, or city and county shall adopt one of the following:
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a) A water efficient landscape ordinance that is, based on
evidence in the record, at least as effective in conserving
water as the updated model ordinance adopted by the
Department of Water Resources pursuant to law; or,
b) The updated model ordinance, as specified. (GC Section
65595(c).)
5)Authorizes the governing body of a public water supply
distributor, whether publicly or privately owned, to declare a
water shortage emergency condition to prevail within the
distributor's service area whenever it determines that the
ordinary requirements of water consumers cannot be satisfied
without depleting the distributor's water supply, as
specified. (WC Section 350.) Further provides that, when a
governing body has declared the existence of an emergency
water shortage, it shall adopt such regulations and
restrictions on the delivery of water as will in its sound
discretion conserve the water supply for the greatest public
benefit, as specified. (WC Section 353.)
FISCAL EFFECT: The Franchise Tax Board (FTB) estimates General
Fund revenue losses of $86 million in fiscal year (FY) 2015-16,
$95 million in FY 2016-17, and $110 million in FY 2017-18.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
Due to the severity of this unprecedented drought, it is
imperative that all [Californians] conserve water. This
has been echoed by our local, state and federal officials.
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In response, Californians up and down the state have taken
it upon themselves to implement water conservation
strategies, including the installation of drought friendly
landscaping. However, many of these water conscious
efforts are expensive and cost-prohibitive to those who
wish to partake.
In order to further encourage these efforts and extend
water saving methods to everyone, AB 585 provides a tax
credit for individuals who go above and beyond the mandated
water conservation.
2)Proponents of this bill note the following:
Now that California is in the fourth year of a drought and
the state's way of life is threatened, it is important that
we encourage residents to take action to better conserve
water. AB 585 is a positive step toward encouraging the
change we need by providing incentives to install
water-efficient drip systems, plant drought-tolerant
landscapes, and remove lawns and replace them with patios
or low-water landscaping. [We estimate] that low water use
landscapes require 60-80 percent less water than
traditional turf landscapes during the hottest times of the
year.
3)The FTB notes the following implementation and policy concerns
in its staff analysis of this bill:
a) "This bill lacks a certification process. Typically,
credits involving areas for which the department lacks
expertise are certified by another agency or agencies that
possess the relevant expertise. The certification language
would specify the responsibilities of both the certifying
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agency and the taxpayer. It is recommended that this bill
be amended to include a certifying agency.
b) "Operative dates for tax credits are generally allowed
on a taxable year basis. This bill would provide an
operative date that would be based on a conditional event.
This language creates ambiguity that would be impracticable
to administer.
c) "The bill should be amended to provide an operative date
that is tied directly to expenditures paid or incurred
during a calendar quarter or prior to a calendar date.
d) "It is unclear if the $2,500 cap would apply to the
amount of credit per taxable year to a qualified taxpayer
or costs eligible for a credit per taxable year. The
absence of clarity could lead to disputes with taxpayers
and would complicate the administration of this credit.
e) "Because the bill fails to specify otherwise, the $2,500
annual cap on the credit would apply to each owner of a
qualified property. For example, a qualified property
owned by two qualified taxpayers could generate a credit of
up to $5,000. If this is contrary to the author's intent,
the bill should be amended to specify that the $2,500 per
year is per property.
f) "This bill uses terms that are undefined, i.e.,
'residential hotels,' and 'outdoor landscapes.' The absence
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of definitions to clarify these terms could lead to
disputes with taxpayers and would complicate the
administration of this credit.
g) "The definition of 'water-efficiency improvement' could
be broadly interpreted. For example, the language of the
bill states that a credit shall be allowed to meet a
'locally adopted regulation or restriction.' If a city
requires that its residents only water one day a week and a
resident installs a timer to meet that ordinance, is that a
qualified improvement? It is recommended that the bill be
amended to clearly express the author's intent."
4)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) California's drought enters its fourth year : California
is currently facing a fourth year of severe drought. The
Sierra Nevada snowpack, which provides roughly 30% of the
state's water supply, is currently at its second-lowest
level on record. The Federal Government has informed
farmers for the second year in a row that it will not be
providing any water from its Central Valley Project
reservoir system. State regulators, in turn, recently
voted to impose a new round of water conservation rules,
including severe restrictions on landscape watering.
According to climate change simulations, droughts are only
likely to increase in both frequency and severity.
d) Where does our limited water go ? According to the
Public Policy Institute of California, California
agriculture is largely dependent on irrigation, which
accounts for roughly 80% of the state's human water use.
Households and non-farm businesses, in turn, account for
about 20% of human water use in California. Major
metropolitan regions in Southern California and the Bay
Area are still relatively well supplied, owing to
significant investments in conservation, infrastructure,
and supply diversification. In the northern and central
parts of California, however, communities without diverse
water supplies have faced dramatic cutbacks in water use,
with some communities receiving emergency supplies from the
state. One important key to conservation is reducing the
amount of water used for landscaping, which currently
accounts for roughly 50% of all urban water use.
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e) Keep calm and carry forward : Statutes allowing new
credits are typically drafted to include standard "carry
forward" provisions. These provisions state that, in cases
where there is no further tax liability to offset for a
given taxable year, the taxpayer may carry forward the
remaining credit amount for a specified number of years.
The author may wish to consider amendments adding such a
provision.
f) R&TC Section 41 shall not apply : On September 29, 2014,
Governor Brown signed 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 income tax 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.
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. Advocates of
the exemption may argue that obtaining useful performance
data (e.g., year-over-year increases in water conservation
expenditures) would be cumbersome in light of the
relatively modest per-taxpayer financial subsidy proposed.
Critics of a Section 41 exemption, however, might argue
that the carve-out exacerbates one of the primary problems
inherent in crafting tax expenditure measures - namely, it
is often unclear what objectives the Legislature is aiming
to achieve and how it plans to measure the attainment of
such objectives.
g) What exactly are we incentivizing ? Generally, tax
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credits are provided as a matter of
legislative grace to encourage socially beneficial behavior
that likely would not occur
absent a financial incentive. This bill, in turn, would
allow a credit for costs incurred to comply with the law
(e.g., a local water efficiency landscape ordinance). In
addition, because this bill applies to taxable years
beginning on or after January 1, 2015, this bill would be
providing a credit for behavior that had already taken
place before this bill's enactment. The Committee may wish
to consider the policy implications of providing such an
incentive.
h) Double-dipping : This bill would allow a credit for
costs that may currently be deductible as business
expenses. Generally, a credit is allowed in lieu of a
deduction in order to
eliminate multiple tax benefits for the same item of
expense.
i) Technical amendments : Committee staff suggests the
following technical amendments to this bill:
i) On page 2, in line 32, strike "not exceed" and
insert "not to exceed"; and,
ii) On page 3, in line 4, strike "single-family" and
insert "single-family residential".
j) Related legislation : The following related bills have
been introduced in the current legislative session:
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i) AB 603 (Salas) would allow a tax credit, under the
PIT Law and the Corporation Tax Law, equal to $2 per
square foot of conventional lawn removed from a
"qualified taxpayer's" property. AB 603 is pending on
this Committee's Suspense File.
ii) AB 1139 (Campos) would, for taxable years beginning
on or after January 1, 2015, allow a credit to a taxpayer
participating in a lawn replacement program, as defined,
in an amount equal to $2 per square foot of conventional
lawn removed from the taxpayer's property, up to $50,000
per taxable year, as provided. AB 1139 is currently a
two-year bill.
REGISTERED SUPPORT / OPPOSITION:
Support
Association of California Water Agencies
California Apartment Association
California Landscape Contractors Association
California Municipal Utilities Association
City of Santa Monica
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East Valley Water District
Eastern Municipal Water District
Irvine Ranch Water District
Metropolitan Water District of Southern California
San Diego County Apartment Association
Santa Clara Valley Water District
Sierra Club California
Southwest California Legislative Council
Western Municipal Water District
Opposition
None on file
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Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098