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 |6/8/16 |
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|Author: |Stone |Tax Levy: |Yes |
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|Version: |6/1/16 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Personal income taxes: credit: principal residence
Enacts a first-time homebuyer tax credit.
Background
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.
Several years ago, the Legislature authorized tax credits for
taxpayers purchasing homes. Taxpayers purchasing a home between
March 1, 2009, and March 1, 2010 that had never been previously
occupied could claim a tax credit equal to the lesser of 5% of
the purchase price or $10,000 (SBx2 15, Ashburn, 2010). SBx2 15
authorized $100 million in tax credits, which the Franchise Tax
Board (FTB) allocated on a first-come, first-served basis. The
following year, the Legislature extended the SBx2 15 credit,
with some modifications, and also allowed a credit for
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first-time homebuyers (AB 183, Caballero, 2016). AB 183
authorized $100 million each for new homes and first-time
homebuyers, as defined, which FTB again allocated on a
first-come, first-served basis. FTB fully allocated both
credits by August, 2011, and both expired on December 1, 2014.
Taxpayers could claim the credit under the following
requirements, among others:
Taxpayers could only claim the credit in equal amounts
over the three taxable years commencing with the taxable
year in which he or she purchased the home,
Taxpayers could only claim the credit for one residence,
The credit applied to single-family residences, attached
or unattached, for which the taxpayer was eligible for the
homeowner's exemption from property tax,
To qualify as a first-time homebuyer, the taxpayer or
their spouse must not have had an ownership interest in a
residence for the three-year period before the purchase,
and submits an certification to FTB stating that he or she
is a first-time homebuyer,
The taxpayer must occupy the residence for at least two
years after purchase, or else the credit was cancelled and
recaptured,
Seeking to assist first-time homebuyers purchase homes in the
state, the author wants to authorize credits similar to those
authorized by SBx2 15 and AB 183.
Proposed Law
Senate Bill 1149 enacts a tax credit for first-time homebuyers
of homes that have never previously been occupied, similar to
SBx2 15 and AB 183. First-time homebuyers purchasing a
qualifying residence between January 1, 2017, and January 1,
2020 can claim a credit against the Personal Income Tax equal to
5% of the purchase price or $10,000, whichever is less.
Taxpayers must apply the credit in equal amounts over the three
taxable years commencing with the taxable year in which he or
she purchased the home, and are allowed a credit only for the
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purchase of one home.
The bill only allows taxpayers to claim the credit for purchases
of attached or detached single-family residences to be their
principal place of residence, that have never been previously
occupied, and for which he or she is eligible for the
homeowners' exemption from property tax. Sellers must provide
buyers with a certification that the home has never previously
been occupied within one week of sale, which the taxpayer must
submit as part of their tax return to FTB to qualify for the
credit. Taxpayers must occupy the residence for two years after
the date of purchase; if not, the credit is cancelled, and the
taxpayer is liable for any credit on previous returns.
The measure defines "first-time homebuyer" as:
An individual, or their spouse, who has not had an
ownership interest in a residence for the three-year period
before the purchase, and submits an certification stating
that he or she is a first-time homebuyer, and
A taxpayer with adjusted gross income that does not
exceed $50,000 (single)/$100,000 (joint) over the same
three-year period, unlike the previous credits which
taxpayers could claim regardless of their income.
SB 1149 authorizes $100 million in credits, and directs FTB to
allocate credits on a first-come, first-served basis upon
receiving the certification. Taxpayers may only claim credits
on timely filed original returns, and cannot claim one if the
seller is related to them, using the Internal Revenue Code's
definition, or if they are listed as a dependent on another
taxpayer's return. The measure also contains several provisions
to assist FTB's implementation of the credit, such as:
Apportions the credit equally for married taxpayers
filing separately,
Allocates the credit in the same manner as the
percentage of ownership when two unmarried taxpayers
purchase a qualified residence,
Provides that FTB's determination of the date a
certification is received, or whether a return is timely
filed, cannot be reviewed in any administrative or judicial
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proceeding, must be treated as a mathematical error, and
allows FTB to assess any disallowance as a deficiency
assessment,
Allows FTB to prescribe rules, guidelines, and
procedures to implement the credit, which are exempt from
the Administrative Procedures Act.
The measure also provides that Section 41 of the Revenue and
Taxation Code does not apply to its credit, and sunsets on
December 1, 2023.
State Revenue Impact
Pending.
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 does not try to reinvent the wheel and is
adapted from and inspired by the homeownership tax credit from 6
years ago. A qualified first-time home buyer will upon the
close of escrow qualify for a credit of up to $10,000 or 5% of
the purchase price, whichever is the lesser. The bill also
retains income restrictions, $50,000 for an individual filer and
$100,000 for a married couple filing jointly. In order to
minimize costs this bill has a three year sunset. This bill may
not solve all of our problems with making housing affordable for
more families, but it is definitely a step in the right
direction. SB 1149 is a help to lower income and middle class
families in helping them achieve the dream of home ownership."
2. Will it work ? Tax benefits intended to subsidize specific
purchases do two things: First, they may reward behavior that
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would have occurred without the subsidy, so-called "deadweight
loss." Some first-time homebuyers will purchase a residence
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 credit may spur individuals to purchase a
residence, thereby increasing community ownership benefits
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 home prices because taxpayers would
have more disposable income a result of the credit, 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. Benefits of Homeownership . Just as investors want the
companies they hold equity in to do well, homeowners have a
financial interest in the success of their communities. If
neighborhood schools are good, property taxes and crime rates
are low, then the value of the homeowner's principal asset, her
home, will rise. Homeowners become watchful citizens of local
government, not merely to improve their quality of life, but
also to counteract the risk that their home will lose value.
Meanwhile, this vigilance promotes governance that provides
services more efficiently. SB 1149 provides a significant tax
benefit in the form of an income tax credit to assist
income-eligible individuals purchase homes, potentially
enhancing these benefits across the state.
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.
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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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5. Current subsidies . SB 1149 would add an additional tax
benefit to subsidize home purchasing and 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
constructed or changes ownership. The Constitution also
allows a homeowners' exemption that subtracts $7,000 per
year in taxable value.
6. Section 41 shall not apply . In 2014, Governor Brown signed
SB 1335 (Leno, 2014), which added Revenue and Taxation Code §41
to require any bill introduced on or after January 1, 2015, that
allows a new income tax credit to contain specific goals,
purposes, and objectives that the tax credit will achieve. SB
1335 recognized that the Legislature should review tax
expenditure programs in a manner as similar as possible as its
review of spending programs undertaken during the state budget
process. The measure required detailed performance indicators
for the Legislature to use when measuring whether the tax credit
meets the goals, purposes, and objectives. However, SB 1149
provides that SB 1335's requirements do not apply to this
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credit. The Committee may wish to consider the appropriateness
of this exemption.
7. Amendments . To further the author's intent, the measure
should be amended to remove the requirement that the home has
never been previously occupied, and delete the respective
reporting requirement.
Support and
Opposition (6/3/16)
Support : None received.
Opposition : None received.
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