BILL ANALYSIS Ó
AB 2392
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2392
(Nazarian) - As Introduced February 18, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Income taxes: credit: seismic retrofits
SUMMARY: Allows a credit equal to 30% of a "qualified
taxpayer's" "qualified costs" incurred for "seismic retrofit
construction," as specified. Specifically, this bill:
1)Allows the credit for taxable years beginning on or after
January 1, 2017, and before January 1, 2022.
2)Defines a "qualified taxpayer" as an owner of a "qualified
building" located in California. A taxpayer that owns a
proportional share of a "qualified building" may claim the
credit based on the taxpayer's share of the "qualified costs."
3)Defines "qualified costs" as costs paid or incurred by the
qualified taxpayer for any completed "seismic retrofit
construction" on a "qualified building," including any
engineering or architectural design work necessary to permit
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or complete the "seismic retrofit construction" less the
amount of any grant provided by a public entity for the
"seismic retrofit construction". "Qualified costs" shall not
include any of the following:
a) Maintenance, including abatement of deferred or
inadequate maintenance, and correction of violations
unrelated to the "seismic retrofit construction";
b) Repair, including repair of earthquake damage;
c) "Seismic retrofit construction" required by local
building codes as a result of addition, repair, building
relocation, change of use, or occupancy;
d) Other work or improvement required by local building or
planning codes as a result of the intended "seismic
retrofit construction";
e) Rent reductions or other associated compensation,
compliance actions, or other related coordination involving
the qualified taxpayer and any other party, including a
tenant, insurer, or lender;
f) Replacement of existing building components, including
equipment, except as needed to complete the "seismic
retrofit construction";
g) Bracing or securing nonpermanent building contents;
h) The offset of costs, reimbursements, or other costs
transferred from the qualified taxpayers to others; or,
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i) Amounts paid to the jurisdiction with authority for
building code enforcement for issuing the certifications
required by this bill.
4)Defines "seismic retrofit construction" as alteration of a
"qualified building" or its components to substantially
mitigate seismic damage. Seismic retrofit construction shall
be for work performed, and for which qualified costs were paid
or incurred, on or after January 1, 2017. Seismic retrofit
construction shall include the following:
a) Anchoring the structure to the foundation;
b) Bracing cripple walls;
c) Bracing hot water heaters;
d) Installing automatic gas shutoff valves;
e) Repairing or reinforcing the foundation to improve the
foundation's integrity against seismic damage;
f) Anchoring fuel storage; and,
g) Installing an earthquake-resistant bracing system for
mobile homes registered with the Department of Housing and
Community Development.
5)Provides that seismic retrofit construction does not include
construction performed to bring a building into compliance
with local building codes.
6)Defines a "qualified building" as a building that has been
certified as an "at-risk property," as specified. A qualified
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building specifically includes a mobile home registered by the
Department of Housing and Community Development.
7)Defines an "at-risk property" as a building deemed hazardous
and in danger of collapse in the event of a catastrophic
earthquake, including soft story buildings, nonductile
concrete residential buildings, and pre-1994 concrete
residential buildings.
8)Provides that, to be eligible for the credit, the following
must apply:
a) The qualified taxpayer must, prior to construction,
obtain certification from the appropriate jurisdiction with
local building code enforcement authority that the building
is an at-risk property.
b) The qualified taxpayer must obtain certification from
the appropriate jurisdiction with authority for building
code enforcement, upon a review of the building, that the
completed construction satisfies the definition of seismic
retrofit construction. The certification shall identify
what part of the completed construction, if any, is not
seismic retrofit construction, and specify a dollar amount
of qualified costs.
c) The qualified taxpayer must request and be granted an
allocation of the credit from the Franchise Tax Board
(FTB). To request an allocation, the taxpayer shall sign
and submit to the FTB an application to receive a credit
for the seismic retrofit construction and provide a copy of
the certification.
d) The jurisdiction with authority for building code
enforcement in which a qualified building is located has
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entered into an agreement with the state to provide
certifications and to not seek reimbursement for any costs
incurred in providing those certifications.
9)Requires the credit amount allowed to be claimed by a
qualified taxpayer at the rate of one-fifth of the credit
amount for the taxable year in which the credit is allocated,
and one-fifth of the credit amount for each of the subsequent
four taxable years.
10)Provides that, in cases where the credit amount exceeds the
taxpayer's tax liability, the excess credit amount may be
carried over to the following taxable year, and succeeding
four taxable years, until the credit has been exhausted.
11)Provides that the total amount of credit that may be
allocated shall not exceed the sum of the following:
a) $12 million for the 2017 calendar year and each calendar
year thereafter; and,
b) The amount of previously unallocated credits allowed.
12)Requires the FTB, upon receipt of the credit application, to
notify the taxpayer of the amount, if any, of the credit
allowed and to allocate the credit to qualified taxpayers on a
first-come-first-served basis.
13)Requires the taxpayer to claim the credit on a timely filed
original return.
14)Provides that the FTB's determination with respect to the
allocation of the credit, and whether a return has been timely
filed, may not be reviewed in any administrative or judicial
proceeding.
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15)Provides that this credit shall be in lieu of any other
credit or deduction that the qualified taxpayer may otherwise
claim with respect to qualified costs.
16)Authorizes the FTB to prescribe rules, guidelines, or
procedures necessary or appropriate to carry out the purposes
of administering the credit.
17)Allows the credit under both the Personal Income Tax (PIT)
Law and the Corporation Tax (CT) Law.
18)Provides that, for purposes of complying with Revenue and
Taxation Code (R&TC) Section 41, the Legislature finds and
declares all of the following with respect to the credits:
a) The specific goals, purposes, and objectives that the
tax credits will achieve are as follows:
i) Leveraging $60 million in private investment;
ii) Creating thousands of engineering or construction
jobs; and,
iii) Mitigating seismic damage to save lives.
b) The detailed performance indicators for the Legislature
to use when measuring whether the credits meet those
specific goals, purposes, and objectives are as follows:
i) The amount of private sector investment enabled by
allocation of the tax credits;
ii) The number of engineering and construction jobs
created as a result of this investment; and,
iii) The estimated number of lives saved by the seismic
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retrofitting of buildings facilitated by the tax credits.
c) The data collection requirements to enable the
Legislature to determine whether the tax credits are
meeting, failing to meet, or exceeding those specific
goals, purposes, and objectives are as follows:
i) To assist the Legislature in measuring whether the
tax credits meet the goals, purposes, and objectives
specified, the Legislative Analyst shall review the
effectiveness of the tax credits and may request
information from the FTB and any state governmental
entity with authority relating to the seismic retrofit
construction of at-risk properties; and,
ii) Requires the FTB and any state governmental entity
with authority relating to the seismic retrofit
construction of at-risk properties to provide the
Legislative Analyst any data requested by the Legislative
Analyst.
19)Takes immediate effect as a tax levy.
20)Sunsets the credit provisions on December 1, 2022.
EXISTING LAW:
1)Allows various tax credits under both the PIT Law and the CT
Law. These credits are generally designed to encourage
socially beneficial behavior or to provide relief to taxpayers
who incur specified expenses.
2)Allows taxpayers engaged in a trade or business to deduct
expenses considered ordinary and necessary in conducting that
trade or business.
3)Requires any bill authorizing a new credit to contain all of
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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.)
FISCAL EFFECT: The FTB estimates that this bill would reduce
General Fund revenues by $0.8 million in fiscal year (FY)
2016-17, by $2.7 million in FY 2017-18, and by $4.7 million in
FY 2018-19.
COMMENTS:
1)The author has provided the following statement in support of
this bill:
According to the United States Geological Survey (USGS),
California is one of the most seismically active states in
the U.S. - second only to Alaska. A major earthquake
occurring in California is simply a matter of when, not if.
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The USGS estimates a 99.7% chance that a major earthquake
of 6.7 in scale will strike California in the next 30
years. With less than 12% of homes covered with earthquake
insurance, as reported by the Department of Insurance,
recovery from a disaster of a major temblor will be even
more costly than financial losses of past earthquakes in
California. This bill will provide Californians with a
reasonable incentive to retrofit at-risk homes and
businesses by providing a tax credit equal to 30% of the
qualified costs to seismically retrofit the at-risk
building, as defined.
2)This bill is supported by the California Association of
Realtors, which notes the following:
AB 2392 (Nazarian) will help incentive more Californians to
retrofit their homes before it's too late. This bill
provides a substantial incentive for homeowners to make the
investment and be proactive about retrofitting their homes.
The high cost of retrofits is the biggest hurdle to
homeowners to take action in advance of the next big
earthquake. AB 2392 (Nazarian) will help save lives and
protect property while minimizing losses and allowing
Californians to return to their normal lives after an
earthquake.
3)This bill is opposed by the California Tax Reform Association,
which notes the following:
Property owners have every incentive to earthquake-proof
their property, since it would otherwise be lost. Thus a
substantial amount of this tax credit will be used for
activity which otherwise would take place. The problem is
for those who cannot afford the necessary work and who
generally cannot make sufficient use of a tax credit. For
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those property owners, the revenue loss in this bill, and
more, would be far better directed to a zero-interest
revolving loan fund.
4)The FTB notes the following technical consideration in its
staff analysis of this bill:
To provide clarity for the department and taxpayers, it is
recommended the bill be amended to specify an ordering rule
for claiming the carryover credits in regards to the
one-fifth usage requirement. For example, if a taxpayer
can use one-fifth of the credit in year one, but carries
over half of the credit from year one to year two, would
the taxpayer have to use the remaining credit carried over
from year one in year two? Or would the taxpayer use the
one-fifth of the credit allowed in year two first[?]
5)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
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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.<1> 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) What would this bill do ? This bill would allow a credit
equal to 30% of a qualified taxpayer's qualified costs
incurred for seismic retrofit construction. According to
the United States Geological Survey, there is a 99.7%
chance that a major earthquake of 6.7 in scale will strike
California in the next 30 years. This bill's tax credit is
designed to lower the overall cost for property owners to
improve the seismic safety of their buildings. Proponents
note that such action, in turn, could save countless lives
in the event of a catastrophic earthquake, and would reduce
the demand for state and local emergency services by
hopefully minimizing structural damage. Older concrete
structures are particularly vulnerable to earthquake
damage; the author has noted that recent research has
identified 1,500 concrete buildings that are seismically
vulnerable in the Los Angeles area alone.
d) Implementation considerations : Committee staff has
identified certain implementation concerns with this bill's
current language. Committee staff is available to work
with the author's office to resolve these and any other
--------------------------
<1> It should be noted that this bill does limit potential
revenue losses by capping the credit amount at $12 million per
calendar year.
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concerns that may be identified. These issues include the
following:
i) This bill provides little definitional guidance for
identifying the "appropriate jurisdiction" with building
code enforcement authority. Additional ambiguity is
created by this bill's definition of a "qualified
building", which is deemed one that has been certified as
an at-risk property by the appropriate jurisdiction with
local building code enforcement authority. The author
may wish to consider appropriate amendments clarifying
which entities will have certification authority.
ii) This bill defines an "at-risk property" as a
building deemed hazardous and in danger of collapse in
the event of a catastrophic earthquake, including, but
not limited to, soft-story buildings, nonductile concrete
residential buildings, and pre-1994 concrete residential
buildings. This language may create ambiguity regarding
which building types potentially qualify for this
designation. On one hand, this language would appear to
vest local building code entities with unfettered
discretion to designate any building as "at-risk" as long
as it is deemed in danger of collapse in the event of an
earthquake. On the other hand, references to specific
building types such as "pre-1994" concrete residential
buildings may suggest that concrete buildings constructed
after 1994 do not qualify.
e) R&TC Section 41 compliance : On September 29, 2014,
Governor Brown signed into law 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
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that allows a new 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 identifies three separate goals the tax credit is
seeking to attain. First, the tax credit seeks to leverage
$60 million in private investment. Second, the credit
seeks to create thousands of engineering or construction
jobs. Finally, the credit seeks to mitigate seismic damage
to save lives. In connection with this last goal, this
bill identifies the following performance indicator for the
Legislature to use when assessing credit efficacy - namely,
the "estimated number of lives saved by the seismic
retrofitting of buildings facilitated by the tax credits."
While Committee staff appreciates that completion of
seismic retrofit construction will increase safety in the
event of a future earthquake, it is not clear how an
assessment of lives saved can be made absent such a
catastrophe.
In addition, this bill calls for the Legislative Analyst to
review the effectiveness of the credits, and grants the
Legislative Analyst the power to request relevant
information from the FTB and any other state governmental
entity. This bill, however, does not specify the date by
which the Legislative Analyst shall complete this review.
In addition, there is no language requiring a report of
this review to be provided to the Legislature. This
Committee may wish to consider amendments requiring the
preparation and issuance of such a report by a date
certain.
f) Suggested technical amendments : Committee staff
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suggests adoption of the following technical amendments:
i) On page 5, in line 14, after "section" insert "and
section 23650";
ii) On page 5, in line 20, insert "qualified" before
"taxpayer";
iii) On page 8, in line 15, strike "his or her" and
insert "its";
iv) On page 8, in line 39, after "section" insert "and
section 17053.50"; and,
v) On page 9, in line 6, insert "qualified" before
"taxpayer".
g) Related legislation : AB 428 (Nazarian) would have
allowed a similar credit for seismic retrofits to at-risk
properties. On October 10, 2015, the Governor vetoed AB
428, along with several other tax expenditure bills, noting
the following in his veto message:
Despite strong revenue performance over the past few
years, the state's budget has remained precariously
balanced due to unexpected costs and the provision of new
services. Now, without the extension of the managed care
organization tax that I called for in special session,
next year's budget faces the prospect of over $1 billion
in cuts.
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Given these financial uncertainties, I cannot support
providing additional tax credits that will make balancing
the state's budget even more difficult. Tax credits,
like new spending on programs, need to be considered
comprehensively as part of the budget deliberations.
h) Prior legislation :
i) AB 1510 (Nazarian), of the 2013-14 Regular Session,
would have allowed a credit equal to 30% of a "qualified
taxpayer's" "qualified costs" incurred for "seismic
retrofit construction". AB 1510 was held on the Assembly
Appropriations Committee's Suspense File.
ii) AB 1756 (Scott), of the 1999-2000 Regular Session,
would have allowed a credit equal to 55% of the amount
incurred for seismic retrofit construction on residential
dwellings built prior to 1979. AB 1756 was held on the
Assembly Committee on Appropriations' Suspense File.
iii) SB 677 (McPherson), of the 2001-02 Regular Session,
would have allowed a credit equal to an unspecified
percentage of the final cost of seismic retrofitting, as
specified. SB 677 was never heard by the Senate
Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION:
Support
American Red Cross
Apartment Association, California Southern Cities
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Apartment Association of Orange County
California Apartment Association
California Association of Realtors
City of Santa Monica
East Bay Rental Housing Association
North Valley Property Owners Association
San Diego County Apartment Association
Western Manufactured Housing Communities Association
Opposition
California Tax Reform Association
Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)
319-2098
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