BILL ANALYSIS Ó
AB 697
Page 1
Date of Hearing: May 4, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 697
(Chu) - As Amended March 26, 2015
Majority Vote. Tax levy. Fiscal committee.
SUBJECT: Personal income tax: credits: senior citizen renters
SUMMARY: Allows an income tax credit to low-income seniors in
an amount equal to the increase in rent of a qualified
residence, as specified. Specifically, this bill:
1)Allows an income tax credit under the Personal Income Tax
(PIT) Law to a qualified taxpayer in an amount equal to the
increase in rent of a qualified residence paid or incurred by
the qualified taxpayer for the taxable year as compared to the
previous taxable year.
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2)Defines a "qualified taxpayer" as a person that meets all of
the following requirements:
a) He or she is 62 years of age or older;
b) He or she rents a qualified residence as his/her primary
residence, is named on the lease of that residence and has
rented that residence for a period of 12 months or more;
and,
c) His or her combined annual household income is $50,000
or less, more than one-third of which is spent on rent.
3)Defines a "qualifying residence" as a property that is located
in the County of Alameda, the City and County of San
Francisco, the County of Ventura, and the County of Santa
Clara.
4)Applies to taxable years beginning on or after January 1,
2016, and before January 1, 2019.
5)Allows any unused credit to carry over eight years until
exhausted.
6)Disallows the credit if a renter's credit has been claimed by
a taxpayer pursuant to Revenue and Taxation Code (R&TC)
Section 17053.5.
7)Contains legislative findings and declarations relating to the
fact that a growing numbers of homeless senior citizens are
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being priced out of their homes.
8)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Allows a nonrefundable income tax credit for qualified renters
in the following amounts:
a) $60 for single or married filing separately with an
adjusted gross income (AGI) of $37,768 or less; and,
b) $120 for married filing jointly, head of household, or
qualified widow or widower with an AGI of $73,536 or less.
(R&TC Section 17053.5.)
2)Defines a "qualified renter" as an individual who satisfies
both of the following requirements:
a) Is a California resident for all or part of the tax
year; and,
b) Rented and occupied California premises constituting his
or her principal place of residence for at least 50% of the
taxable year.
3)Excludes from the definition of a "qualified renter" certain
individuals who otherwise would qualify. For example, an
individual who, for more than 50% of the taxable year, rented
and occupied premises which were exempt from property taxes
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would not qualify as a qualified renter. Similarly, a person
who has been granted the homeowner's property tax exemption
during the taxable would not be eligible to claim the existing
renter's credit.
4)Requires the Legislature to provide increases in benefits to
qualified renters that are comparable to the average increase
in benefits provided to homeowners under the homeowner's
property tax exemption. (California Constitution, Article
XIII, Section 3(k)).
5)Requires any new tax credit legislation introduced on or after
January 1, 2015, to include specific goals, purposes,
objectives, and performance measures. (R&TC Section 41).
FISCAL EFFECT: The FTB staff estimates that this bill will
result in an annual General Fund revenue loss of $26 million in
fiscal year (FY) 2015-16, $56 million in FY 2016-17, and $70
million in FY 2017-18.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"AB 697 is a pilot program that will provide necessary data on
how our State can lessen the effects of the rising costs of
housing. California continues to be at the top of list of the
least affordable states to reside in. This demonstration
project will allow stakeholders to ascertain if a tax credit
is an effective means to assist low-income senior citizens in
reducing some of the financial burden that occurs with a rent
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increase."
2)Arguments in Support . The proponents of this bill support this
bill's approach to help elderly low-income tenants. They
argue that a tax credit is needed to "put money back into the
pockets of those who need it."
3)Arguments in Opposition . The opponents argue that this bill
"violates principles of good tax policy" and the "Equal
Protection Clause of the United States Constitution, which
requires each state to provide equal protection under the law
to all people within its jurisdiction." The opponents do not
believe that a tax credit may be provided to taxpayers of "one
county and not to similarly situated taxpayers in other
counties simply on the basis of their location." The
opponents state that they will remove their opposition "if the
bill is amended to provide the same rent moratorium and tax
credit to taxpayers who meet the criteria specified in the
bill in every county."
4)The Purpose of This Bill . According to the author's office,
the rising cost of housing continues to be a problem for many
individuals, especially low-income senior citizens. Thus,
this bill is intended to create a pilot program to determine
if a tax credit is an effective means to assist low-income
senior citizens who often have difficulty paying for expenses
such as healthcare costs, food and transportation. Only four
counties would participate in the pilot program: the County
of Alameda, the City and County of San Francisco, the County
of Ventura, and the County of Santa Clara.
5)Tax Expenditures . 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
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determinable cost associated with each (in the form of
foregone revenues).
As noted by the FTB staff, tax expenditures are often adopted
because the Legislature hopes that the incentives will alter
the behavior of taxpayers. "However, it is very difficult to
know if a tax expenditure has been calibrated properly for
achieving its desired goal. For example, if a tax credit
intended to encourage additional investments of a specific
type is set too high, the credit may have the effect of
diverting investment from other projects that would be more
beneficial to the economy. Another possibility is that a tax
expenditure may be adopted on equity grounds to offset some
cost peculiar to a particular group of taxpayers, but it may
also induce behavioral changes. For example, the Renter's
Credit was designed to offset the perceived inequities in tax
treatment between renters and homeowners. However, the
Renter's Credit actually offers renters an incentive to
continue renting their home rather than buying it. As a
result, this credit undermines the mortgage interest deduction
and other tax expenditures that were designed specifically to
encourage home ownership." (California Income Tax
Expenditures, FTB 2010 Report, pp. 21-22.)
6)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 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
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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.
7)Existing Renter's Credit . Existing law provides an income tax
credit to low-income taxpayers who rent their primary
residence. Since 1999, the credit has been nonrefundable.
There is no comparable federal credit. The amount of the
credit is $60 for single, married filing separately, and head
of household filers with incomes not exceeding the California
AGI limitation, currently $37,768. The credit amount is $120
for married filing jointly and qualified widowers provided
that their AGI does not exceed $75,536. The renter's credit
was originally enacted in 1972 as part of a comprehensive
property tax reform program. The credit was intended to
equalize property taxes between renters and homeowners by
providing a benefit directly to the renter. The Committee may
wish to consider amending the existing renter's credit program
instead of creating a new tax credit. For example, the
Committee may wish to increase the amount of the renter's
credit for qualified seniors who rent in designated counties.
8)Alternative Approach . While this bill's tax credit is
designed to help the most vulnerable segment of California
residents, it is not clear whether that the proposed incentive
would achieve this goal. Seniors 65 years of age or older,
with AGI of $18,238 or less, are not required to pay
California income tax and are unable to utilize any tax
credit. Consequently, the proposed nonrefundable credit would
not benefit seniors who have little or no state income tax
liability. However, almost any tax expenditure program could
simply be replaced with a direct expenditure program. Thus,
the Committee may wish to consider whether the state could
subsidize rent paid by qualified seniors by making direct
payments to them, equivalent to the tax savings that would
have been available under the credit, instead of the tax
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credit.
9)Rent Control in California . Fifteen cities in California have
rent control ordinances (Berkeley, Beverly Hills, Campbell,
East Palo Alto, Fremont, Hayward, Los Angeles, Los Gatos,
Oakland, Palm Springs, San Francisco, San Jose, Santa Monica,
Thousand Oaks, and West Hollywood). These ordinances are most
common in cities with large populations and low vacancy rates,
where tenants may have difficulty finding affordable housing.
Local rent control ordinances specify how much a landlord can
increase the rent of an existing tenant. Generally, under
local rent control ordinances, a landlord can increase a
tenant's rent once every 12 months by the allowable annual
rent increase without filing a petition with the local rent
board.
Historically, the state has invested in the construction,
preservation, and rehabilitation of affordable housing for low
and moderate-income households. The funding sources to
support construction of affordable housing have drastically
diminished over the last five years. With the elimination of
redevelopment agencies and the exhaustion of state housing
bonds, California has reduced its funding for the development
and preservation of affordable homes by 79% - from
approximately $1.7 billion per year to nearly nothing. While
the goal of this bill is admirable, it will likely do nothing
to increase the supply of affordable housing for seniors.
Furthermore, it is unclear whether the credit may achieve its
objective if conditions in the rental market are favorable to
landlords. Under these market conditions, landlords may be
able to increase rents by an amount equal to the Renter's
Credit, leaving no benefit to the renters. The Committee may
wish to consider whether a better investment of the General
Fund monies required to fund this bill's tax credit would be
to provide funding for the construction of new affordable
units.
10)Deductibility of State Income Tax . State income taxes are
deductible for federal income tax purposes. Thus, for those
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who itemize deductions, up to 40% of the state income tax
would effectively be borne by the Federal Government in the
form of reduced federal income tax payments. Thus, a tax
credit or deduction on the state level generally translates
into an increased amount of federal income taxes paid by
Californians. By decreasing the state income tax obligation
of seniors, this bill would effectively subsidize the federal
coffers.
11)R&TC Section 41 : 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
that is introduced on or after January 1, 2015 and allows a
new PIT 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.
In its current form, this bill does not specify the goals,
purposes, objectives or performance measures of the proposed
credit program and, thus, is not in compliance with the
requirements of R&TC Section 41. The Committee may wish to
consider asking the author to comply with Section 41
requirements.
12)Equal Protection Clause . The opponents question the
constitutionality of this bill under the Equal Protection
Clause of the XIV Amendment of the United States Constitution,
which prohibits any state from denying to "any person within
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its jurisdiction the equal protection of the laws." The Equal
Protection clause reaches well beyond racial classifications,
targeting a broad range of discriminatory legislation and has
played a significant role in challenges to state and local
taxes.
The tax laws are full of distinctions and classifications. For
example, state legislatures have created several income tax
brackets based on the taxpayer's income, enacted lower tax
rates of tax for capital gains in comparison to ordinary
income, and provided an exclusion from sales tax for purchases
of intangible property, among others. The Equal Protection
Clause does not necessarily prohibit state legislatures from
drawing distinctions among classes of individuals or property.
However, it requires that the distinctions rationally further
a legitimate state interest unless a classification scheme
implicates the exercise of a fundamental right or categorizes
persons on the basis of an inherently suspect characteristic.
Practically speaking, a state tax statute would be upheld if a
plausible policy reason exists for the classification, the
classification is used to further the statutory goal and it is
not so tenuous as to be arbitrary or irrational. In this
case, this bill would create a tax credit program available to
seniors with a specified AGI who live in certain designated
counties. The proposed tax credit pilot program is intended
to help low-income senior renters remain in their homes and
designates counties based on the average fair market rent.
Clearly, the state government has a legitimate interest in
protecting the most vulnerable segment of its population and
the distinction drawn between the low-income seniors living in
the most expensive counties in California and those living
elsewhere in the state cannot be said to be arbitrary or
irrational.
13)FTB's Implementation Concerns . In its current form, this
bill's tax provisions lack sufficient detail to enable the FTB
to administer the credit. For example, the credit is based on
the "increase in rent". This bill may be interpreted to allow
several people residing in the same household to claim the
full amount of the credit for the same "rent increase."
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Furthermore, it is not readily apparent what "combined annual
household income" means. Is it the amount of AGI or taxable
income? What type of "property" is eligible for the credit?
A mobile home, vacant land, or property that has been granted
a homeowners' exemption? FTB staff has identified these and
other technical considerations that would need to be addressed
before this tax credit program could be effectively
implemented.
14)Related Legislation .
a) AB 1229 (Campos) would create a credit equal to the
amount of foregone rent pursuant to the Senior Citizen Rent
Increase Exemption program. AB 1229 is pending hearing by
this Committee.
b) AB 476 (Chang) would increase the homeowners' exemption
from $7,000 to $25,000 of the full value of a dwelling and
increase the renter's credit for qualified renters, as
provided. AB 476 is pending hearing by this Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
Apartment Association of Orange County
Apartment Association, California Southern Cities
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East Bay Rental Housing Association
Nor Cal Rental Property Association
North Valley Property Owners Association
Opposition
California Taxpayers Association (oppose unless amended)
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098