BILL ANALYSIS Ó AB 2694 Page A 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. AB 2694 Page B 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, AB 2694 Page C 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 AB 2694 Page D 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 AB 2694 Page E 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 AB 2694 Page F 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. AB 2694 Page G 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: AB 2694 Page H 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 AB 2694 Page I