BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1149 |Hearing |4/27/16 |
| | |Date: | |
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|Author: |Stone |Tax Levy: |Yes |
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|Version: |2/18/16 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Personal income taxes: deduction: individual home ownership
savings accounts
Creates "individual homeownership savings accounts," and allows
two tax benefits for taxpayers who create them.
Background
The Internal Revenue Code creates several forms of tax-preferred
individual accounts, such as Health Savings Accounts, Qualified
Tuition Programs, and Individual Retirement Accounts (IRAs).
While California law does not automatically conform to changes
to federal tax law, it does automatically conform to changes
made to Subchapter D - Deferred Compensation, etc., which
includes retirement accounts such as traditional and Roth IRAs.
For everything else, the Legislature must affirmatively conform
to federal changes. Conformity legislation is introduced either
as stand-alone legislation to conform to specific federal
changes, like the Regulated Investment Company Modernization Act
(AB 1423, Perea, 2011), or as one omnibus bill that provides
that state law conforms to federal law as of a specified date,
currently January 1, 2015 (AB 154, Ting, 2015).
California conforms to two types of IRAs: traditional, and Roth.
Other than rollovers, taxpayers can generally deduct
contributions to traditional IRAs in the year they make them,
but must include distributions in taxable income in the year
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received in most cases. Federal law limits the amounts a
taxpayer can contribute to a traditional IRA to $5,500 per year;
however, limits for other plans, such as a 401(k), are
considerably higher. Taxpayers cannot deduct contributions to
Roth IRAs; however, taxpayers need not include distributions in
taxable income in most cases. Taxpayers younger than age 59 ,
or as a result of death or disability, who receive traditional
IRA distributions for nonqualified purposes must include the
income for tax purposes, and pay an additional federal (10%),
and state (2.5%) penalty. However, federal law contains several
exceptions to the penalty, including a one-time distribution of
$10,000 for first-time homebuyers for the qualified acquisition
cost of a residence.
California law allows various income tax credits, deductions,
and sales and use tax exemptions to provide incentives to
compensate taxpayers that incur certain expenses, such as child
adoption, or to influence behavior, including business practices
and decisions, such as research and development credits. The
Legislature typically enacts such tax incentives to encourage
taxpayers to do something that but for the tax credit, they
would not do. The Department of Finance must annually publish a
list of tax expenditures; according its most recent report, the
Department estimates tax expenditures result in $57 billion in
foregone revenue in 2015-16.
California allows taxpayers to deduct expenses incurred for
certain activities or purchases up to a certain amount in one of
two ways. First, taxpayers can claim deductions from total
gross income, known as "above-the-line" deductions, for
specified expenses, such as student loan interest, IRA
contributions, or alimony paid, among others, to calculate
adjusted gross income. After that, state law gives taxpayers a
choice to either claim the standard deduction, or itemized
deductions for other expenses, such as business expenses, higher
education expenses, mortgage interest, and other miscellaneous
deductions that exceed 2% of adjusted gross income, among
others, to determine taxable income. Taxpayers will usually
itemize when these itemized deductions exceed the standard
deduction ($4,044 single/$8,088 joint in 2015).
Seeking to assist individuals who want to save money to purchase
a home, the author wants to create new tax-preferred accounts to
help first-time homebuyers purchase residences.
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Proposed Law
Senate Bill 1149 creates "individual homeownership savings
accounts," and allows taxpayers two tax benefits similar to
traditional IRAs commencing in the 2017 taxable year. The bill
defines individual homeownership savings accounts as a trust
that is:
Designated by the trustee as such an account,
Established for the exclusive benefit of any qualified
taxpayer establishing the account where the written
governing instrument creating the account provides that all
contributions must be made in cash, and that the account is
established to pay for the qualified home ownership
expenses of a qualified taxpayer,
Is subject to the same requirements and limitations set
by Section 408 of the Internal Revenue Code, or any
regulations, for individual retirement accounts, and
Is the only individual homeownership savings account
established by the qualified taxpayer.
SB 1149 excludes from gross income any income accruing during
the taxable year to the account, as defined, under the same
conditions as Section 408 of the Internal Revenue Code imposes
on traditional IRAs. The measure also allows an itemized
miscellaneous deduction equal to the amount a taxpayer
contributes to the account, limited to $30,000 per taxable year
(joint, head of household, surviving spouses)/$15,000 (all
others), so long as the deduction exceeds 2% of the taxpayer's
adjusted gross income. To be eligible, a taxpayer or their
spouse must not hold a present ownership interest in a principal
residence during the preceding three-year period ending on the
date of the purchase of the residence, and have annual income of
less than $100,000 (joint, head of household, surviving
spouses)/$50,000 (all others). The Franchise Tax Board (FTB)
must adjust these amounts annually for inflation as measured by
the California Consumer Price Index.
The bill also provides that withdrawals must be included in
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income in the taxable year in which the payment or distribution
is made, unless it is made to pay for the taxpayer's individual
home ownership savings expenses, which the measure defines as
expenses, including a down payment or mortgage payment paid or
incurred in connection with the purchase of the qualified
taxpayer's principal residence in California for use by the
taxpayer creating the account.
State Revenue Impact
According to FTB, SB 1149 results in revenue losses of $80
million in 2017-18, and $160 million in 2018-19, increasing by
$80 million per year indefinitely.
Comments
1. Purpose of the bill . According to the author, "the housing
crisis in California is in full bloom, and low-to-middle income
individuals across the state are being affected by the lack of
affordable housing. More than 90% of California families
earning less than $35,000 per year spend more than 30% of their
income just on housing. As a result more and more people find
themselves renting a home, instead of chasing the American
Dream. SB 1149 was devised as a way to help people accumulate
savings towards a down payment on a house - which is crucial as
home ownership is a key way for a family to develop and transfer
wealth between generations. Currently, the only option for
renters available to them from a tax perspective is the renters'
tax credit - $60 for individuals and $120 for the head of a
household or married filing jointly. SB 1149 establishes
individual home ownership savings accounts. This bill will
allow for qualified deductions of up to $30,000 for those filing
jointly and $15,000 for those filing individually. By allowing
people a special account to put away pre-tax money towards a
home, SB 1149 will enable middle and low income individuals an
opportunity to build savings towards a home."
2. Will it work ? Tax benefits intended to subsidize specific
purchases do two things: First, they may reward behavior that
would have occurred without the subsidy, so-called "deadweight
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loss." Some taxpayers will save funds to purchase a house
without any additional incentive, so the bill will give these
taxpayers a windfall benefit equal to taxes not paid, providing
no marginal benefit. Second, the bill may alter decisions at
the margin; the exclusion and deduction may spur individuals to
create and contribute to an account, and subsequently purchase a
residence, thereby increasing benefits from community ownership
statewide. A successful tax incentive creates more economic
activity at the margin than its deadweight loss, but no tax
benefit has yet conclusively demonstrated that its benefits
outweigh its costs. Another possible outcome for the measure's
tax subsidy is to increase house prices because taxpayers would
have less income subject to tax as a result of the measure's tax
benefits, which the Legislative Analyst's Office found could be
a result of the state's mortgage interest deduction. The
Committee may wish to consider whether the bill's benefits will
outweigh its deadweight loss.
3. Double benefit . Both traditional and Roth IRAs offer tax
advantages; however, taxpayers can choose to enjoy one tax
benefit, but not two, either by allowing deductions for
contributions (traditional) or an exclusion from income for
withdrawals (Roth). However, SB 1149 provides both a deduction
and exclusion, so long as withdrawn funds are used to help the
taxpayer buy a home, providing a double benefit. The measure's
exclusion from tax on both the front and back ends would set a
precedent in state tax law only for home ownership savings. The
Committee may wish to consider whether both benefits are
necessary for the measure to accomplish its goal.
4. New tax expenditure . Enacting a new tax exemption results
in foregone revenue, which requires cuts in spending or higher
taxes, all else equal. Tax credits do not pay for themselves:
the state's last effort of "dynamic revenue analysis" indicates
that while dynamic effects are definitely present and visible,
their effects are generally relatively modest.<1>
The Committee may wish to consider whether the benefits
resulting from this incentive are worth the tradeoff of cuts in
spending or taxes on other activities.
5. Reverse nonconformity . Generally, when the federal
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<1> "Whatever Happened to Dynamic Revenue Analysis in
California?" John David Vasche, prepared for the Federation of
Tax Administrators, September, 2006.
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government changes its tax laws, California catches up by
enacting its own legislation the following year to reduce
differences between the two codes, thereby easing the tax
preparation burden on taxpayers, tax preparers, and the
Franchise Tax Board. SB 1149 would enact an income exclusion
and deduction for contributions to individual homeownership
savings accounts which wouldn't have similar treatment, which
would increase the difference between state and federal, and
potentially confuse affected taxpayers. The Committee may wish
to consider whether the measure's savings incentives are worth
the lack of conformity it creates.
6. Current subsidies . SB 1149 would add an additional tax
benefit to subsidize home ownership above and beyond those found
in existing law. In the United States, federal and state
governments offer substantial tax subsidies for owning or
selling a home, such as:
Mortgage Loan Interest: Taxpayers may deduct interest
payments on up to $500,000 single/$1 million joint of
indebtedness used to purchase a first and second home.
Taxpayers may also deduct interest payments on up to
$100,000 in home improvement loans.
Capital Gains Exclusion: Taxpayers may exclude up to
$250,000 single/$500,000 joint in income resulting from the
sale of their principal residence.
Deductibility of Property Taxes: Taxpayers may deduct
property taxes and some other real estate taxes from
federal income, although California's low property tax
rates limit the benefit for Californians compared to
residents of other states.
Excluded Imputed Rent. Unlike returns from other
investments, the return on homeownership-called "imputed
rent"-is excluded from taxable income. In contrast,
landlords must count as income the rent they receive, and
renters may not deduct the rent they pay.
Property tax. The California Constitution limits taxes
to 1% of assessed value, which is generally the purchase
price plus annual inflation, capped at 2%, and precludes
assessors from revaluing property unless it's newly
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constructed or changes ownership. The Constitution also
allows a homeowners' exemption that subtracts $7,000 per
year in taxable value.
7. Suggested amendments . FTB and Committee Staff recommend
amendments to:
Use "qualified individual home ownership development
expenses" and "individual homeownership savings expenses"
consistently, utilizing the definition for the former.
Specifying the individual paragraphs of Internal Revenue
Code 408 which should apply to homeownership savings
accounts,
Refine the definition of "qualified taxpayer" to
preclude each spouse from opening an account and take
advantage of the tax benefits.
Add "claw back" provisions if the taxpayers sells or
ceases to occupy the property,
Delete the term "a qualified taxpayer who is married
filing a joint return," and instead use "qualified
taxpayers filing a joint return"
Add "within the meaning of Section 121 of the Internal
Revenue Code" after the term "principal residence."
Delay the inflation adjustment until the taxable year
following the first taxable year after the measure is
effective.
Support and
Opposition (4/21/16)
Support : California Association of Realtors, California
Building Industry Association.
Opposition : Unknown.
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