BILL ANALYSIS Ó
AB 1736
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 1736
(Steinorth) - As Amended May 3, 2016
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Personal income taxes: deduction: homeownership
savings accounts
SUMMARY: Creates a homeownership savings account (HSA) under
the same rules as apply to the Individual Retirement Account
(IRA) and allows a deduction for contributions made by qualified
individuals to the HSA, as specified. Specifically, this bill:
1)Allows a deduction equal to the amount contributed in the HSA
by a qualified taxpayer in any taxable year commencing on or
after January 1, 2017, not to exceed:
a) $20,000 for qualified taxpayers who are married
filing a joint return, a head of household and surviving
spouses, as defined.
b) $10,000 for qualified taxpayers filing a return
other than those specified.
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2)Defines a "Homeownership Savings Account" as a trust that
meets all of the following requirements:
a) Is designated as a HSA by the trustee;
b) Is established for the exclusive benefit of any
qualified taxpayer establishing the account where the
written governing instrument creating the account
provides for the following:
i. All contributions to the account are
required to be in cash; and
ii. The account is established to pay,
pursuant to applicable requirements and limitations,
for the qualified homeownership savings expenses of
a qualified taxpayer establishing the account.
c) Is, except as otherwise provided, subject to the
same requirements and limitations as an IRA established
under Section 408 of the Internal Revenue Code, relating
to individual retirement accounts, and any regulations
adopted thereunder.
d) Is established by a qualified taxpayer who has a
gross income of 80 percent or less than the area median
income.
e) Is the only homeownership savings account
established by the qualified taxpayer.
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3)Excludes from gross income, for each taxable year beginning on
or after January 1, 2017, any income accruing to a HSA during
the taxable year.
4)Specifies that any withdrawals for other than qualified
expenses shall be included in income of the payee or
distributee for the taxable year in which the payment or
distribution is made, unless the payment or distribution is
used to pay for the homeownership savings expenses of a
qualified taxpayer who established the account.
5)Defines a "qualified homeownership savings expense" as
expenses, including a down payment or closing costs, paid or
incurred in connection with the purchase of a qualified
taxpayer's principal residence in California for use by that
taxpayer who established the HSA.
6)Defines a "qualified taxpayer" as any individual, or
individual's spouse, who has never had an ownership interest
in a principal residence subject to the contribution allowed
by this section.
7)Provides that the term "trustee" has the same meaning as it
has under Section 408 of the IRC, relating to traditional
IRAs.
8)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW:
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1)Provides for two types of IRAs: traditional IRAs and Roth
IRAs. Limits the amount of qualified contributions to both
traditional and Roth IRAs to the smaller of $5,500 ($6,500 for
taxpayers 50 years of age or older), or the taxpayer's taxable
compensation for the year.
2)Allows an income tax deduction for contributions (other than a
rollover contribution) made only to a traditional IRA.
Contributions made a Roth IRA are subject to tax.
3)Provides that amounts held in a traditional IRA are generally
included as income when withdrawn, except to the extent the
withdrawal is a return of nondeductible contributions.
Withdrawals are subject to an additional tax of 10% if
withdrawn prior to age 59 , with some exceptions.
Specifically, the taxpayer is not subject to the early
withdrawal tax if the withdrawal is used for first-time
homebuyer expenses of up to $10,000.
4)Allows an exclusion from gross income for any qualified
distribution from a Roth IRA.
5)Allows various deductions and exclusions in computing taxable
income and provides that an individual may elect to claim
itemized deductions for a taxable year in lieu of the standard
deduction.
EXISTING STATE LAW:
1)Provides that federal changes to Part I of Subchapter D of
Chapter 1 of IRC Sections 401 through 420, inclusive, relating
to pension, profit-sharing, stock bonus plans, other employee
benefit plans, and IRC Section 457, relating to deferred
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compensation plans of state and local governments and
tax-exempt organizations, automatically apply without regard
to taxable years to the same extent as applicable for federal
income tax purposes. All federal changes made to those IRC
sections are automatically adopted by California without
regard to the specified date.
2)Provides that a distribution from a 401(k) plan, a qualified
annuity plan under IRC Section 403(a), a tax-sheltered annuity
under IRC Section 403(b), an eligible deferred compensation
plan under IRC Section 457, or an individual retirement
arrangement under IRC Section 408 is included in income for
the year distributed.
3)Imposes a penalty equal to 2%, instead of the federal rate of
10%, of the amount includible in income on early withdrawals
from those plans, unless an exemption applies, in conformity
with the federal tax law.
1)Allows various deductions and exclusions in computing taxable
income under the Personal Income Tax (PIT) law and generally
conforms to the federal rules that apply to itemized
deductions.
2)Specifies that the California Housing Finance Agency (CalHFA)
may provide down payment assistance in the form of deferred
payment, low-interest, and junior mortgage loans, which are
designed to reduce principle and interest payments to make
financing affordable for first time low and moderate income
homebuyers. In most cases, CalHFA programs may be used in
conjunction with other first-time homebuyer programs,
including programs offered by nonprofit entities.
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FISCAL EFFECT: The Franchise Tax Board (FTB) staff estimates
that this bill will result in an annual revenue loss of $220
million in the fiscal year (FY) 2017-18 and $450 million in FY
2018-19.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"The dream of owning a home is the foundation our middle class
is built on. I am firmly committed to keeping that dream
alive. AB 1736 presents an innovative solution to enable
first-time homebuyers to save more of their hard-earned money
and put it towards their very first home. The benefits of
homeownership are clear, and this bill will make those
benefits more attainable for families across California. In
turn, the state will be able to retain more workers and
businesses alike, and encourage the construction of more
needed homes."
2)Agreements in suppor t: According to the Building Industry
Association, data recently released by Beacon Economic shows
California ranks 49th in homeownership and last in overall
housing affordability. "While an average California home cost
$440,000, homebuyers need additional tools to attain the
American Dream. As the state grapples with a housing
affordability crisis, AB 1736 will allow first-time homebuyers
to save more of their own money in order to attain the
benefits of homeownership."
3)Arguments in Opposition : According to the California Tax
Reform Association, "This bill provides little or no help to
those struggling to buy a home in California's expensive
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housing market. By allowing a deduction, it provides the
greatest benefits to those who are better off, that is, are in
the higher tax brackets in our progressive tax system. In
fact, since it has no income limitation it merely provides a
tax shelter for those with substantial income, but even with
such a limitation it would still provide disproportion
benefits to the well-off who can save the most and are at
least in need of help in buying a home. "
4)Tax-Advantaged Savings Accounts and Retirement Plans .
Congress has authorized several kinds of retirement savings
plans that qualify for reduced or deferred income taxes to
encourage workers to save for retirement. A qualified
retirement plan, such as a 401(k) plan or an IRA, allows a
worker to save for retirement by investing a portion of
his/her wages while deferring current income taxes on the
original investment and earnings until withdrawal. All
qualified contributions are invested on a pre-tax basis and
not taxed until the money is withdrawn. With the enactment of
the Roth provisions, participants in qualified IRA plans may
elect to deposit some or all of their wages in a designated
brokerage account, commonly known as a Roth IRA. Qualified
distributions from a designated Roth account are tax free,
while contributions are made on an after-tax basis (i.e.,
income tax is paid or withheld on the contributions in the
year contributed).
5)Exceptions to the Early Withdrawal Penalty . Existing federal
tax law imposes a 10% withdrawal penalty on early
distributions made from a qualified retirement or annuity
plan, a 403(b) annuity, or an IRA to a taxpayer under the age
of 59, unless an exception applies. California imposes a
similar penalty but at the rate of 2% of the amount
includible in income on early withdrawals from those plans.
However, recognizing that some significant events might
require people to withdraw money from their retirement
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accounts earlier than expected, Congress has provided for a
waiver of the early withdrawal penalty in some situations, to
which California has conformed. An exception applies to
distributions that are (a) used for the health insurance
premiums of an unemployed individual (in the case of IRA
distributions only); (b) used for medical expenses; (c) made
to a beneficiary (or to the estate of the employee) on or
after the date of the employee's death; (d) made to an
employee who separates from service at age 55 or older; (e)
made to individuals called to active duty; or (f) used for
first-time home purchases (in the case of IRA distributions
only).
6)The "First-Time Home Buyer" Exception . Both federal and state
laws already authorize penalty-free withdrawals of a limited
amount of IRA funds for first-time homebuyers. The definition
of "first-time homebuyer" is broad and includes not only to
the taxpayer's very first home purchase, but also applies in
the case of a taxpayer whose spouse has not owned a principal
residence at any time during the past two years even if the
taxpayer himself/herself would not qualify as the first home
buyer. Furthermore, a taxpayer does not have to purchase the
residence for himself/herself. The taxpayer may also qualify
for the exemption if he/she is helping his/her child,
grandchild or parent to buy a home.
In the case of a traditional IRA, the maximum amount of IRA
funds that may be withdrawn without the penalty is $10,000.
In the case of a Roth IRA, this limitation applies only to the
amount of earnings withdrawn from the account because one can
always withdraw his/her contributions to a Roth tax- and
penalty-free. The $10,000 limitation applies on an individual
basis, which means that both the taxpayer and his/her spouse
may qualify individually for the homebuyer exemption,
potentially doubling the amount of money they can withdraw
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from IRA accounts.
In light of the existing waiver under both federal and state
laws allowing a penalty-free distribution of funds from
qualified individual retirement accounts, the Committee may
wish to consider whether this bill is necessary.
7)High-Income Taxpayers Benefit More Than Low-Income Taxpayers .
The proposed deductions for contributions to HSAs would
disproportionately benefit taxpayers in higher tax brackets
because the "value" of a deduction varies with the marginal
tax rate (or tax bracket) of the taxpayer. Thus, when a
taxpayer who is in the 30% tax bracket deducts a $100
contribution, his/her tax is reduced by $30. On the other
hand, if the taxpayer is in a 20% bracket, a $100 contribution
deducted from his/her gross income would reduce his/her tax
liability only by $20. Because of the progressive rate
structure of the tax system, taxpayers in higher tax brackets
benefit more from income deductions than individuals in lower
tax brackets. This effect is magnified in the case of HSAs:
a higher income taxpayer, with presumably a greater ability to
purchase a house, would receive a greater tax benefit than the
lower income taxpayer.
8)Existing Tax Incentives for Homeowners . Existing law heavily
subsidizes owner-occupied housing. Tax preferences that
encourage homeownership include: deductibility from income of
mortgage interest on first and second homes for state and
federal purposes; deductibility from income of property taxes
for state and federal tax purposes; and exclusion from income
of certain capital gains on the sale of a home for state and
federal tax purposes. For example, taxpayers may deduct
interest payments on up to $500,000 single/$1 million joint of
indebtedness used to purchase a first and second home.
Taxpayers may also deduct interest payments on up to $100,000
in home improvement loans. In addition, taxpayers may exclude
up to $250,000 single/$500,000 joint in income resulting from
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the sale of their principal residence. The Department of
Finance estimates that these tax benefits resulted in more
than $7.2 billion in foregone revenue in fiscal year (FY)
2014-15.
Homeownership is also encouraged by the non-taxability of the
housing services that are received by the owner. In fact,
according to the Congressional Research Service report, some
analysts argue that this preferential tax treatment encourages
households to over-invest in housing and invest less in
business investments that might contribute more to the
nation's productivity and output.
9)Tax Expenditures . Each year, more and more interest groups
are seeking ways to increase funding through alternative
means, such as tax credits and other tax incentives. However,
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, which can offer
taxpayers greater certainty but can also result in tax
expenditures remaining a part of the tax code in perpetuity
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
generally takes a two-thirds vote to rescind an existing tax
expenditure. 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.
10)Tax Subsidy vis-à-vis Grant Program: Is the Tax Code the Best
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Way to Subsidize Homeownership? Although well intentioned,
this bill represents an attempt to use the tax code to
accomplish a public policy objective that may be more
efficiently addressed through a direct outlay of state funds.
This bill proposes a tax subsidy to taxpayers to help them
achieve the dream of homeownership. The FTB staff estimates
that this bill would eventually result in an annual GF revenue
loss of $450 million.
As discussed in the Housing and Community Development
Committee's analysis of this bill, the California Housing
Finance Agency (CalHFA) operates the California Homeowner
Downpayment Assistance Program (CHDAP) and provides homebuyers
between 3% and 6% in downpayment assistance secured as a
second mortgage on the home. The program operates as a
revolving loan; when a home is sold, CalHFA is repaid allowing
the funds to go to another homebuyer. There is approximately
$150 million available in CHDAP at this time. The program can
provide downpayments to individuals that make up to 120% of
the area median income (AMI) and just recently raised its
income limits to 140% of AMI in high-cost areas. CalHFA
operates independently of the state General Fund and derives
the funding for its downpayment assistance program from the
sale of bonds. The Committee may wish to consider whether
expanding the CHDAP program to include more homebuyers would
be a better vehicle to subsidize homeownership.
Alternatively, given the shortage of affordable housing in
California, the Committee may wish to consider whether a
priority should be given to affordable housing, rather than
individual homeownership.
11)Double Benefit . This bill would allow taxpayers to make
tax-deductible contributions to, and receive tax-free
withdrawals from, a HSA as long as the funds are used for
qualified expenses. In contrast, a traditional IRA allows
tax-deductible contributions, but imposes a tax on
distributions. And while qualified distributions from Roth
IRAs are tax-free, contributions to these accounts are
taxable. The Committee may wish to consider whether this
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preferential tax treatment of savings for homeownership, but
not retirement, is justified and whether either the
contributions to, or distributions from, an HSA should be
taxable.
12)Lack of Conformity . Conformity with federal law reduces
taxpayer errors and eases tax filing and administration. This
bill would create a state and federal difference, which adds
complexity to the tax return as the income excluded or
deferred by this bill is still subject to federal income tax.
In the absence of similar federal treatment, taxpayers and
banks will need to keep separate accounting of the deposits
and withdrawals for state and federal tax purposes.
13)Absence of a Sunset Date : In its current form, this bill's
proposed tax expenditure lacks an automatic sunset provision.
This Committee has a longstanding policy favoring the
inclusion of sunset dates to allow the Legislature
periodically to review the efficacy and cost of such programs.
The author may wish to consider the addition of an
appropriate sunset provision.
14)Definition of "Qualified Taxpayer ." This bill defines a
"qualified taxpayer" as an individual or his/her spouse that
has never had an ownership interest in a principal residence
subject to the contribution allowed by this section. It is
unclear to Committee staff whether this definition is intended
to apply to individuals who have never owned a principal
residence in their lives or to individuals who have never used
HSA moneys to purchase a principal residence. The Committee
may wish to consider limiting the application of this bill
only to the former category of individuals.
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15)Double Referred : This bill was referred to both the Assembly
Committee on Housing and Community Development and this
Committee. This bill passed the Committee on Housing and
Community Development with amendments on 7-0 vote.
REGISTERED SUPPORT / OPPOSITION:
Support
California Building Industry Association
California Council for Affordable Housing
County of San Bernardino
Habitat for Humanity California
League of California Cities
Western Manufacturing Housing Communities Association
Opposition
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None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098