BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 537 |Hearing |5/6/15 |
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|Author: |Cannella |Tax Levy: |Yes |
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|Version: |2/26/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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INCOME TAXES: DEDUCTION: AMOUNTS DUE ON REAL PROPERTY: TAX BILL
Allows taxpayers to deduct the amount due on the taxpayer's real
property tax bill.
Background and Existing Law
Section 1 of Article XIII of the California Constitution
provides that all property is taxable unless explicitly exempted
by the Constitution or federal law. The Constitution limits the
maximum amount of any ad valorem, or according to value, tax on
real property at 1% of full cash value, and precludes
reassessment unless the property is newly constructed or changes
ownership.
The Mello-Roos Community Facilities Act allows counties, cities,
special districts, and school districts to levy special taxes
(parcel taxes) to finance a wide variety of public works,
including parks, recreation centers, schools, libraries, child
care facilities, and utility infrastructure. A Mello-Roos
Community Facilities District (CFD) issues bonds against these
special taxes to finance the public works projects. Like all
special taxes, Mello-Roos Act special taxes require 2/3-voter
approval. If there are fewer than 12 registered voters, the
affected landowners vote.
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In addition to financing public or governmental capital
facilities, Mello-Roos Act special taxes can fund a limited list
of public services: police services, fire protection, recreation
programs, library services, museum operations, park maintenance,
flood protection, hazardous waste cleanup, street and road
maintenance, lighting of parks, parkways, streets, roads, open
space, plowing and removal of snow, graffiti management and
removal.
California conforms to federal law regarding the deductibility
of property taxes. While the tax must be ad valorem for a
taxpayer to deduct it for personal property taxes, federal law
doesn't contain the same requirement for real property taxes,
which has created significant confusion and subsequent
disagreements between taxpayers and the Franchise Tax Board
(FTB). Non-ad valorem assessments may be deductible only if
they are levied "for the general welfare by a property taxing
authority at a like rate on owners of all properties in the
taxing authority's jurisdiction, and if the assessments are not
for local benefits (unless for maintenance or interest charges)"
[Treasury Regulations, Section 1.164-4(a).].
Additional confusion has resulted from counterintuitive language
interpreting the above regulation. The phrase "a like rate" is
not defined in either the Internal Revenue Code or the Treasury
Regulations, but a memorandum issued by the Office of Chief
Counsel of the IRS states that this term "requires that the rate
must uniformly apply based upon an independent variable, such as
property value or parcel or structure size, to be considered
similar or 'like.' When the Franchise Tax Board inquired
whether the state's Fire Prevention Fee was deductible for
federal (and therefore state) purposes, the IRS response
concluded that a "charge of $150 against each structure no
matter how large or small is not levied at a 'like' rate,"
meaning that it can only be 'like' if applied within a certain
property classification. Additionally, amounts assessed only on
specific properties for a local benefit (such as for streets,
sidewalks, and like improvements) cannot be deducted as real
property taxes. In the response regarding the fire fee, IRS
additionally stated that the regulation requires "a real
property tax be levied for the general public welfare and not
for a local benefit to be deductible." Given California's
various means of financing public improvements and services, the
author wants taxpayers to be able to deduct any amount due on a
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local property tax bill.
Proposed Law
Senate Bill 537 allows taxpayers to deduct the amount due on the
taxpayer's real property tax bill as a miscellaneous itemized
deduction. The measure states several legislative findings and
declarations supporting its purposes.
State Revenue Impact
According to FTB, SB 537 results in revenue losses of $3.6
million in 2015-16, $3.8 million in 2016-17, and $4 million in
2017-18.
Comments
1. Purpose of the bill. According to the author, "Under the
Mello-Roos Community Facilities Act of 1982, a local government
may establish a Community Facilities District (CFD), subject to
approval by 2/3 of voters in the CFD, in order to finance public
facilities and services for the district by levying Mello-Roos
special taxes on properties located within district. Most
commonly, local governments use Mello-Roos to ensure that new
developments pay for the schools, roads, parks, libraries,
utilities, emergency services and the like they will require.
Unlike ad valorem property taxes (that is, based on the value of
the property), Mello-Roos and other similar parcel taxes are
generally not tax deductible in California. However, there is
confusion on whether Mello-Roos assessments are deductible from
federal and state income taxes. SB 537 would authorize an
itemized deduction against a taxpayer's personal income tax for
the amount paid on his or her real property tax bill, to include
Mello-Roos and other like assessments."
2. Reverse nonconformity . Generally, when the federal
government changes its tax laws, California must enact its own
conformity legislation to reduce differences between the two
codes. Conformity eases the tax preparation burden on
taxpayers, tax preparers, and tax administration agencies by
reducing differences between the Internal Revenue Code and the
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Revenue and Taxation Code. The Legislature last enacted a bill
conforming to changes through January 1, 2009 (SB 401, Wolk).
SB 537 would reduce confusion for taxpayers resulting from
differences in interpretation over IRS regulations regarding
property related taxes like parcel taxes, and fees, but it may
create a new and different frustration for taxpayers by allowing
a deduction for state purposes that isn't allowed on federal
returns. While California taxpayers will receive a benefit from
SB 537, only Congress or the IRS can change the rules for
federal taxes.
3. Who benefits ? SB 537 clarifies that the deduction for
property taxes for state income taxes includes property-related
taxes, fees, and benefit assessments. As such, taxpayers that
own property or live in areas that rely heavily on Mello-Roos,
parcel taxes and benefit assessments for infrastructure and
public services will be the bill's primary beneficiaries.
4. Inequality . In some communities, service charges for
garbage collection, sewer, and water are collected on the
property tax bill, but in others, service providers send
separate bills. As such, SB 537 would allow a deduction for a
charge for one of these services for taxpayers in some areas,
but not for others.
Support and
Opposition 4/30/15
Support : Howard Jarvis Taxpayers' Association
Opposition : Unknown.
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