BILL ANALYSIS Ó
AB 2040
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2040
(Melendez) - As Amended April 6, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Outdoor Water Efficiency Act of 2016: 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, as specified. Specifically, this
bill:
1)Contains the following legislative findings:
a) The 2014 water year, ending on September 30, was the
third driest based on the 119-year long statewide
precipitation record;
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b) Temperatures in the first nine months of 2014 were a
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) Californians can achieve water efficient landscapes by
installing a combination of drought-tolerant live plants;
warm season turf varieties, which require 25% less water
compared to cool season turf; soaker or drip-irrigation
hoses; a moisture control for a sprinkler or irrigation
system; mulch and soil; a rain barrel or an alternative
rain and moisture collection system; a permeable ground
cover surface that allows water to reach underground
basins, aquifers, or water collection points; plant and
grass seeds coated with a water-saving surfactant; and a
water saving surfactant;
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h) Municipalities and local water agencies are tasked with
enforcing water conservation ordinances to eliminate water
waste and restrict outdoor water use; and,
i) It is the Legislature's intent to provide an income tax
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, 2016, and before January 1, 2021.
3)Provides that, for each "qualified real property", the credit
shall not cumulatively exceed $2,500 for all taxable years.
4)Defines a "qualified taxpayer" as the owner of any "qualified
real property".
5)Defines "qualified real property" as a principal residence of
the qualified taxpayer, within the meaning of Internal Revenue
Code Section 121, in this state.
6)Defines "water-efficiency improvements" as expenditures
voluntarily paid or incurred by the qualified taxpayer that
are certified by the appropriate regional or local water
agency as water-efficient improvements compatible with any of
the following:
a) A local water-efficient landscape ordinance of a
regional or local water agency adopted or in effect at the
time the improvements are made;
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b) The state water-efficient landscape statutes adopted or
in effect at the time the improvements are made; 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.
7)Provides that "water-efficiency improvements" do not include
improvements performed to bring landscaping into mandatory
compliance with a local water-efficient landscape ordinance or
state law.
8)Requires a qualified taxpayer to:
a) Obtain certification of the water-efficiency
improvements from the appropriate regional or local water
agency after completion of those improvements; and,
b) Retain a copy of the certification and, upon request,
provide a copy of the certification to the Franchise Tax
Board (FTB).
9)Provides that this credit shall be in lieu of any other credit
or deduction that the qualified taxpayer may otherwise claim
with respect to the amounts paid or incurred for
water-efficiency improvements for outdoor landscapes on
qualified real property in this state.
10)Provides that, in cases where the credit amount exceeds the
taxpayer's tax liability, the excess credit amount may be
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carried over in the following year, and succeeding three
taxable years, if necessary, until the credit has been
exhausted.
11)Provides that Revenue and Taxation Code (R&TC) Section 41
shall not apply to the credit allowed by this bill.
12)Provides that this bill's provisions shall remain in effect
until December 1, 2021.
13)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
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
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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:
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. (Government
Code 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. (Water Code Section 350.) Further provides that,
when a governing body has declared the existence of an
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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. (Water Code Section 353.)
FISCAL EFFECT: The FTB estimates General Fund revenue losses of
$75 million in fiscal year (FY) 2016-17, $65 million in FY
2017-18, and $75 million in FY 2018-19.
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. 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 [2040] provides a tax
credit for individuals who go above and beyond the mandated
water conservation.
2)This bill is supported by the League of California Cities,
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which notes the following:
Californians have experienced four years of historic
drought conditions, and, with the statewide snowpack at
only 87%, a fifth year looms. Last year, the State Water
Resources Control Board (SWRCB) imposed, for the first
time, a mandatory statewide water conservation standard of
25%. In early 2016, the SWRCB extended the conservation
rule, with some modest changes, until October.
Even though the state as a whole was able to meet the
ambitious goal of saving 1.2 million acre feet of water,
many cities struggled to reduce water consumption to the
required level. Those cities having the most difficultly
conserving water, under threat of significant fines, often
were those that are home to large commercial or industrial
facilities that require large amounts of water to operate.
Residents of those communities were expected to conserve
water at higher levels to compensate for the water demand
of key commercial and industrial facilities important to
their local economies.
AB 2040 would provide property owners with a significant
incentive to improve outdoor water efficiency, while also
helping cities and other water suppliers meet the State's
mandatory water conservation standard. Outdoor water use
is often the single highest use of potable water, and it is
also the easiest to reduce. Providing a tax credit of up
to $2,500 would induce property owners to replace high
water demand plants with more drought-tolerant landscaping
that will yield long-term water savings.
3)This bill is opposed by the California Tax Reform Association,
which notes the following:
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This bill could arguably help continue the watering of
landscapes that would otherwise be abandoned, for example,
by giving a break for a system of watering large lawns
somewhat more efficiently. There is not even a requirement
that overall water use be lowered to receive the credit.
We believe that the tens of million[s] of dollars in this
bill could better be directly invested by water districts
in promoting conservation. The one tax change that is
needed with regard to water is in Proposition 218, so that
higher usage can be reflected in higher water rates, rather
than the state giving an open-ended tax credit with
questionable net results.
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 : California is currently facing a
historically severe drought. Seven of the nine years since
2007 have been dry. California has also experienced record
warmth during this period, increasing negative impacts to
the mountain snowpack and cold-water fisheries. 2014 and
2015 were, respectively, the warmest and second-warmest
years in 121 years of statewide average temperature
records.
While this has been the wettest year since the drought
began in 2012, one marginally improved season does not
compensate for four prior years of water scarcity. Parts
of northern California remain at below-average
precipitation and all of southern California is well below
average. Although water storage is recovering in some of
the large Sacramento Valley reservoirs, this is not the
case for the San Joaquin Valley. Groundwater levels
throughout the state dropped to historic levels during the
past four years and as much as 100 feet below previous
historic lows in parts of the San Joaquin Valley. Finally,
as of today, the statewide snowpack stands at 89% of the
April 1 average, the time of maximum historical snow
accumulation.
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
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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.
e) 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.
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f) What exactly are we incentivizing ? Generally, tax
credits are provided as a matter of
legislative grace to encourage socially beneficial behavior
that likely would not occur
absent a financial incentive. Because this bill applies to
taxable years beginning on or after January 1, 2016, 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.
g) Related legislation :
i) AB 585 (Melendez) would have allowed a PIT credit to
a taxpayer for water-efficient improvements to outdoor
landscapes. AB 585 was held on the Assembly Committee on
Appropriations' Suspense File.
ii) AB 603 (Salas) would have allowed a tax credit,
under the PIT Law and the Corporation Tax Law, equal to
25% of the costs paid or incurred by a taxpayer to
replace conventional lawn on the taxpayer's property, as
specified. AB 603 was held on the Assembly Committee on
Appropriations' Suspense File.
REGISTERED SUPPORT / OPPOSITION:
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Support
A-G Sod Farms, Inc.
California Apartment Association
California Association of Nurseries and Garden Centers
California Municipal Utilities Association
California Retailers Association
City of Lakewood
Consumer Specialty Products Association
League of California Cities
Nursery Growers Association
Scotts Miracle-Gro Company
West Coast Turf
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Opposition
California Tax Reform Association
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098