BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 1149 (Stone) - Personal income taxes: credit: principal residence ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: June 15, 2016 |Policy Vote: GOV. & F. 5 - 1 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 1, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: SB 1149 would enact a first-time homebuyer tax credit. Fiscal Impact: The Franchise Tax Board (FTB) estimates that the bill would result in a General Fund revenue loss of $7.6 million in 2016-17, $13 million in 2017-18, and $13 million in 2018-19. FTB's implementation costs have yet to be determined. 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 SB 1149 (Stone) Page 1 of ? taxpayers to do something that would not occur on the natural. The Department of Finance (DOF) annually publishes a list of tax expenditures; according its most recent report, DOF 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 $10,000 or 5 percent of the purchase price (SBx2 15, Ashburn, 2010). SBx2 15 authorized $100 million in tax credits, which 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 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 specified requirements, including the following: 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 SB 1149 (Stone) Page 2 of ? recaptured,. Proposed Law: This bill would enact 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, as defined, purchasing a qualifying residence between January 1, 2017, and January 1, 2020 can claim a credit against the persona income tax equal to 5 percent 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 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 bill would authorize $100 million in credits, and direct 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 provides that Section 41 of the Revenue and Taxation Code does not apply to its credit, and sunsets on December 1, 2023. SB 1149 (Stone) Page 3 of ? Staff Comments: Based on previous new and first-time homebuyer tax credit data, it is assumed the $100 million of available credit would be fully allocated when returns are filed for tax year 2017, the first year available. Taxpayers would be allowed to claim an estimated $33.3 million dollars in credit in 2017, 2018 and 2019. Based on tax return data for the qualified income ranges, the estimated average tax liability is under $1,300. Therefore, it is assumed that 40 percent of the credit would be used each year, resulting in a $13 million annual revenue loss. -- END --