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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