BILL ANALYSIS Ó
AB 2694
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2694
(Lackey) - As Amended April 6, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Taxation: renters' credit
SUMMARY: Increases the renters' credit under the Personal
Income Tax (PIT) Law from $120 to $240 for couples filing joint
returns, heads of household, and surviving spouses, and from $60
to $120 for other individuals. Specifically, this bill:
1)Increases an existing tax credit under the PIT Law that may be
claimed by qualified renters for taxable years beginning
January 1, 2016 as follows:
a) $240 for married couples filing joint returns, heads of
household, and surviving spouses if adjusted gross income
(AGI) is $100,000 or less; or,
b) $120 for other individuals if AGI is $50,000 or less.
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2)Requires the Franchise Tax Board (FTB) to adjust annually the
specified AGI amounts for inflation beginning January 1, 2017.
3)Takes immediate effect as a tax levy.
EXISTING LAW:
1)Allows various tax credits under the PIT Law, generally
designed to encourage socially beneficial behavior or to
provide relief to taxpayers who incur specified expenses.
2)Allows a tax credit for qualified renters as follows:
a) $120 for married couples filing joint returns, heads of
household, and surviving spouses if adjusted gross income
(AGI) is $50,000 or less; or,
b) $60 for other individuals if AGI is $25,000 or less.
3)Requires the FTB to adjust annually the specified AGI amounts
for inflation. For 2016, the AGI limits are $76,518 and
$38,259, respectively.
4)Defines a "qualified renter" as an individual who satisfies
both of the following:
a) Was a resident of this state; and,
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b) Rented and occupied premises in this state which
constituted his or her principal place of residence during
at least half of the taxable year.
5)Specifies that a qualified renter does not include an
individual whose principal place of residence is with another
person who claims him or her as a dependent for income tax
purposes, and other exclusions, as specified.
6)Requires any person claiming the credit to do so under penalty
of perjury.
FISCAL EFFECT: The FTB estimates General Fund revenue losses of
$200 million in fiscal year (FY) 2016-17, $210 million in FY
2017-18, and $210 million in FY 2018-19.
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
Research by the Center on Budget and Policy Priorities
shows that low-income renters are far more likely to pay a
higher share of their income for housing than higher-income
households. While many tax benefits exist for homeowners -
who tend to generally be more affluent - renters lack
similar benefits that reduce their housing cost burden.
California housing costs have increased dramatically over
the past few years which have placed a disproportionately
high burden on working and middle-class families. The
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statewide median rent now exceeds $2,050 for a 2-bedroom,
according to a February 2016 report by Apartment List with
cities like Los Angeles and San Jose rising to over $2600
per month.
Short supplies of subsidized and affordable housing means
that there is little relief for families struggling to cope
with rising rental prices. The high price of housing is a
key contributor to the state's troubling poverty rate,
which the PPIC estimates includes 21% of all Californians
when factoring in housing and other cost of living
expenses. Not only does housing affordability affect
low-income households, but in many urban areas middle-class
families are struggling as well.
California's rental tax credit has not been increased for
over 25 years. Doubling the amount this tax incentive
offers to renters will make it more reflective of the
current housing market, and is a near-term solution that
the Legislature can provide to working and middle-class
families while other potential strategies for expanding
affordable housing will take many years to implement. With
many working multiple-jobs or devoting a disproportionately
high amount of their wages to afford rent, it's clear that
some financial relief is desperately needed now.
2)Arguments in Support : Proponents of this bill state that the
"existing [renters'] credit amount has not increased since
1998, incrementally reducing its value over time" as cost of
living in California has increased, and that "[f]or many
low-income tenant households, the modest sums offered through
this program would equate to one or two weeks' worth of
wages."
3)Arguments in Opposition : Opponents of this bill state that
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the bill should be amended to be revenue neutral. Opponents
acknowledge that "the renters' credit [is] one of the few tax
benefits renters get compared to homeowners." However, "[o]ur
only opposition is a matter of cost, and we urge you to close
one of the many unjustified loopholes, credits, exemptions and
deductions in the tax code to make up for the revenue loss,
approximately 50% of which would be absorbed by our schools
under Proposition 98."
4)What is a "Tax Expenditure" ? Existing law provides various
credits, deductions, exclusions, and exemptions for particular
taxpayer groups. In the late 1960s, United States 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 of them (in
the form of forgone revenues). This bill would increase an
existing tax expenditure program by doubling the amount of the
renters' credit and doubling AGI eligibility limitations for
the credit.
5)Tax Expenditure vs. 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. This can offer taxpayers greater certainty, but it can
also result in tax expenditures remaining 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.
This bill does not include a sunset date. The Committee may
wish to consider including a five-year sunset date on the
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increased renters' credit, especially since market forces may
eventually cause rent prices to level out and eliminate the
need for amplified relief.
6)Affordable Housing Crisis : There is no doubt that California
is in the midst of a serious housing shortage impacting both
homeowners and renters alike. In a recent report, the
Legislative Analyst's Office concludes that facilitating more
private housing development, especially in the state's coastal
urban communities, is the key remedy to help make housing more
affordable for low-income Californians. Existing affordable
housing programs assist only a small proportion of low-income
Californians, with the majority receiving little or no
assistance - expanding such programs to help these households
would be prohibitively expensive and potentially have a
greater impact if the programs were tailored to support
Californians with specialized housing needs.<1>
The author's office contends that absent broader changes to
the state's housing policies, targeted tax incentives as
provided in this bill can help provide relief for households
spending a disproportionate share of their income on housing.
While increasing the amount and scope of the renters' credit
would provide considerable relief to some low-income
individuals, the increase would also put money in the pockets
of individuals who may not notice it. For example, an
increased credit may have greater economic impact for a family
with numerous dependents than a young professional receiving
financial support from family. Additionally, a greater
proportion of renters in regions of California with lower
median incomes and costs of living would become eligible for
the credit compared to renters in regions with higher median
incomes and costs of living where the housing shortage is most
--------------------------
<1> Legislative Analyst's Office, Perspectives on Helping
Low-Income Californians Afford Housing. February 9, 2016.
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pronounced. As a result, it is difficult to estimate the
impact of relief that will be afforded to low-income taxpayers
under this expanded tax expenditure program.
Some economists have argued that tax subsidies for
homeownership, such as the mortgage interest deduction, are
factored into the price of housing and, thus, essentially
inflate the prices of homes. This preferential tax treatment
may encourage households to over-invest in housing and invest
less in business investments that might contribute more to the
nation's productivity and output. Would the tax credit have
a similar impact on the rental market? Would the tax credit
provide taxpayers with meaningful relief or simply increase
rents higher? The Committee may wish to consider narrowing
the scope of the increased credit to direct it towards
individuals with the most need, or as an alternative, funding
a grant program that targets vulnerable renters or supports
other anti-poverty efforts.
7)Related Legislation : SB 1103 (Cannella) increases the
renters' credit to $200 for married couples filing joint
returns, heads of household, and surviving spouses and $100
for other individuals. SB 1103 is pending hearing by the
Senate Committee on Governance and Finance.
AB 476 (Chang) would have increased the renters' credit to
$428 for married couples filing joint returns, heads of
household, and surviving spouses and $214 for other
individuals, and would have provided an increase in the
homeowners' property tax exemption. AB 476 was held on this
Committee's Suspense File.
REGISTERED SUPPORT / OPPOSITION:
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Support
California Apartment Association
California Rural Legal Assistance Foundation
Western Center on Law and Poverty
Opposition
California Tax Reform Association
Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098
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