BILL ANALYSIS Ó AB 1736 Page 1 Date of Hearing: May 18, 2016 ASSEMBLY COMMITTEE ON APPROPRIATIONS Lorena Gonzalez, Chair AB 1736 (Steinorth) - As Amended May 12, 2016 ----------------------------------------------------------------- |Policy |Housing and Community |Vote:|7 - 0 | |Committee: |Development | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | |Revenue and Taxation | |9 - 0 | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | | | | | | | | | | | | | | | ----------------------------------------------------------------- Urgency: No State Mandated Local Program: NoReimbursable: No SUMMARY: This bill creates a homeownership savings account (HSA) and allows a deduction for contributions made by qualified individuals to the HSA. Specifically, this bill: AB 1736 Page 2 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 and before January 1, 2019, 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. 2)Allows the deduction only if a budget measure specifically appropriates moneys to the Franchise Tax Board (FTB) to administer the HSA deduction. 3)Excludes income withdrawn from the HSA from gross income of the taxpayer if those funds are used to pay for homeownership savings expenses. 4)Specifies that a HSA is subject to the same requirements and limitations as an Individual Retirement Account (IRA), except as otherwise noted, and that it must be established by a qualified taxpayer whose gross income is less than or equal to 80 percent of the area median income and must pay for homeownership savings expenses. 5)87Defines 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. AB 1736 Page 3 FISCAL EFFECT: General Fund cost pressures of approximately $90 million in FY 2017-18 and $110 million in FY 2018-19. COMMENTS: 1)Purpose. According to the author, AB 1736 will help first-time homebuyers save more for their first home. This bill is intended to make the benefits of homeownership more attainable for families across California. 2)Background on tax-advantaged savings accounts and retirement plans. Congress has authorized several kinds of retirement savings plans that qualified 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 or her wages while deferring current income taxes on the original investment and earnings until money is withdrawn. 3)Existing homeownership benefits. Both federal and state laws already authorize penalty-free withdrawals of a limited amount of IRA funds for first-time homebuyers. In the case of a traditional IRA, the maximum amount of IRA funds that may be withdrawn without the penalty is $10,000. On top of these existing IRA benefits, the federal and state tax codes provide significant incentives for homeownership. For example, California spends approximately $4.2 billion on the home mortgage interest deduction. 4)Double Benefit. This bill allows taxpayers to make AB 1736 Page 4 tax-deductible contributions to, and receive tax-free withdrawals from, an 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. Analysis Prepared by:Luke Reidenbach / APPR. / (916) 319-2081