BILL ANALYSIS
AB 765
Page 1
Date of Hearing: May 18, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 765 (Caballero) - As Amended: May 13, 2009
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income tax credit: purchase: principal residence.
SUMMARY : Extends the operative date of qualified principal
residence purchase credit from March 1, 2010 to December 1,
2010. Increases the cap on the total amount of credit from $100
million to $300 million. Specifically, this bill :
1)Extends the time period within which a taxpayer may purchase a
qualified principal residence to qualify for the existing tax
credit from March 1, 2010 until December 1, 2010.
2)Increases the existing cap on the total amount of credit that
may be claimed by taxpayers from $100 million to $300 million.
3)Specifies that purchases of qualified principal residence made
after March 1, 2010 and before December 1, 2010, must be
pursuant to an enforceable contract to purchase the qualified
principal residence executed prior to March 1, 2010.
4)Allows taxpayers to reserve the credit prior to the close of
escrow but requires the taxpayer and seller to jointly sign
and submit to the Franchise Tax Board (FTB) a certification
that they have entered into the sale agreement on or after
March 1, 2009, and before March 1, 2010.
5)Requires FTB to reserve the credit for the taxpayer upon
receipt of the joint certification and notify the taxpayer
about the conditional reservation.
6)Requires the seller to provide a certification of the
qualified principal residence within one week of the close of
escrow instead of the sale of the qualified principal
residence.
7)Takes effect immediately as a tax levy.
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EXISTING LAW :
1)Provides various tax credits designed to provide incentives
for taxpayers that incur certain expenses or to influence
behavior, including business practices and decisions.
2)Authorizes a tax credit for individual taxpayers who purchase
qualified personal residences after March 1, 2009 and before
March 1, 2010.
3)Limits the amount of credit to the lesser of 5% of the
purchase price or $10,000.
4)Provides that the amount of the credit must be applied in
equal amounts over the three successive taxable years
beginning with the taxable year in which the purchase of the
qualified principal residence is made.
5)Defines "qualified home" as a home that has never been lived
in before and serves as the purchaser's primary place of
residence.
6)Requires sellers of homes to provide to the taxpayer and the
FTB a certification that the residence has never been
occupied.
7)Disallows the credit if the taxpayer does not occupy the house
for at least two years immediately following the purchase of
the house, and requires the FTB to collect any underpayments
from the taxpayer.
8)Limits the total amount of credit to $100 million and requires
the FTB to allocate the credit on a first-come, first-served
basis, upon receipt of certification from the taxpayer.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill will result in a revenue loss of $17 million in
fiscal year (FY) 2009-10, $17 million in FY 2010-11, and $14
million in FY 2011-12.
COMMENTS :
1)The author states that, "When legislators passed the tax
credit back in February, we were hopeful it would work to
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stimulate the state's hibernating housing market. Then, as we
all know, home shoppers were sitting on the fence, refusing to
go back into the market. In just two months, more than half
of the credits are gone. At this pace, the credit will run
out early this summer, even though legislators approved the
program for a full year - through March 1, 2010. The tax
credit is doing a lot to restore confidence in California's
housing market. We have been hearing from homebuilders and in
news reports that both traffic and sales are up dramatically
and we've seen a surge in permits for new construction. That's
why I'm pleased to be a joint author of this legislation,
along with Assembly Member Solorio. This legislation is about
job creation and economic stimulus."
2)The proponents of this bill question the effectiveness of the
tax credit for new home purchases and tax policy of
subsidizing new homes instead of foreclosed or other homes on
the market. The opponents argue that taxpayers are already
afforded generous tax benefits for homeownership. Finally,
the opponents believe that the existing tax credit provides a
subsidy to new home developers.
3)Committee staff notes all of the following:
a) Background on the existing California tax credit for
purchases of new homes . In February 2009, the Legislature
enacted a new tax credit of up to $10,000 for taxpayers who
purchase new homes between March 1, 2009 and March 1, 2010.
[SBx2 15 (Ashburn), Chapter 11, Statutes of 2009-10]. As
of May 6th, FTB received 5,668 applications requesting
$54.93 million in tax credits, although FTB cautions that
these figures are based on claim amounts, not the amount of
credit applied. FTB accepts applications only by fax, and
has not yet sent notifications to taxpayers of credit
allocations because it must first develop a system to
capture and verify application information, allocate
credits, and send letters. Taxpayers may only claim the
credit after FTB allocates it. AB 765 allows a taxpayer to
reserve a credit prior to close of escrow, provided that
the taxpayer and seller jointly sign and submit to FTB a
certification stating that they entered into the sale
agreement prior to March 1, 2010. This measure also
increases the aggregate credit amount from $100 million to
$300 million and extends the deadline for purchases of new
homes until December 10, 2010.
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b) Federal tax credit for the first-time homebuyers . The
federal tax credit for purchases of homes was originally
enacted by the Housing and Economic Recovery Act of 2008
(P.L. 110-289) and later was modified by the American
Recovery and Reinvestment Act of 2009. The refundable tax
credit, as originally enacted, was allowed to first-time
homebuyers with certain adjusted gross incomes (AGI), who
purchase homes after April 8, 2008 and before July 1, 2009.
The credit phases out for single taxpayers with AGIs that
exceed $75,000 (or $150,000 for married couples filing
jointly). The maximum amount of credit was the lesser of
$7,500 or 10% of the home's purchase price, but was
increased to $8,000 later for purchases made after December
1, 2008 and before December 1, 2009. In addition, the
credit is no longer required to be recaptured unless the
taxpayer sells the qualified residence within 36 months of
the purchase.
c) Housing market in California . Recent data released by
the Commerce Department shows that new home sales,
nationally, fell only 0.6% to an annual rate of 356,000
units in March, a sign that the free fall in new home sales
may be over. The California Association of Realtors' (CAR)
data indicates that more homes are selling and selling
faster, while fewer homes are coming on the market. In
January 2009, CAR reported an increase in sales of 100.8%
for existing, single-family homes sales in January 2009
compared to January 2008 while the unsold inventory
decreased to 6.7 months from 16.6 months a year ago. This
is the first time since October 2005 that the California
Housing Market has seen existing home sales of over 600,000
homes and a 14% increase over the previous month. News
reports also indicate that, particularly among lower-priced
houses in select markets, buyers are emerging, and
increasing foreclosures add to supply, further pushing
house prices down and making houses more affordable. It
appears that, even with the price changes in housing
markets in recent years, markets again show that they work,
and that the best incentive for house purchasing is low
prices.
d) Foreclosure crisis in California . The number of United
States (U.S.) households faced with losing their homes to
foreclosure, however, jumped 32% in April of 2009, compared
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with the same last year, according to RealtyTrac Inc., an
online foreclosure tracking firm. Lenders filed a record
number of mortgage default notices against California
homeowners during the first three months of this year - one
in every 138 households received a foreclosure filing. The
increase in the number of foreclosures in April is
attributed to the recession and lenders playing catch-up
after a temporary lull in foreclosure activity. Foreclosed
homes represent a majority of the homes on the market. The
National Association of Realtors estimates that 45% of
sales involve foreclosed homes, compared with roughly 10% a
year ago. According to RealtyTrac Inc., nearly 70% of the
foreclosed homes in the firm's database have not been
listed for sale. In many neighborhoods, foreclosed homes
are becoming a source of blight and can present safety
concerns for other residents.
Foreclosures negatively impact a community in which the
foreclosed property is located. A glut of foreclosed homes
for sale depresses home market values for the other owners.
Further, neighboring businesses "often experience a direct
monetary loss from reduced sales and neighborhood landlords
experience a loss or reduction in rental income. Moreover,
the homes left vacant by foreclosure lower the desirability
of the neighborhood since there is often an increase in
crime associated with a vacant house." (The Subpime Lending
Crisis, The Economic Impact on Wealth, Property Values and
Tax Revenues, and How We Got Here, Report and
Recommendations by the Majority Staff of the Joint Economic
Committee, Senator C. Schumer, Chairman, Rep. C. Maloney,
Vice Chair, October 2007).
e) Neighborhood Stabilization Program . As the number of
foreclosed properties has grown, local governments have
become increasingly concerned about the upkeep of abandoned
properties. Banks are absentee owners and, often, are not
even located in the same city or state. Even though they
have a financial interest in the property, they are not
necessarily interested in maintaining properties for the
sake of the community. Last summer, Congress made
available to cities $6 billion for purposes of acquiring
and rehabilitating foreclosed properties. The aim of the
federal effort is to provide funds to help states and local
government to deal with abandoned and foreclosed homes,
reduce blight, and add affordable housing. For example,
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the City of Los Angeles intends to use its $33 million in
federal funds to turn some of the homes into low-income
rental housing and to refurbish others and sell to
low-income and moderate-income families. Los Angeles saw
more than 21,000 foreclosures in 2007 and 2008, and many of
those homes are still on the market. (See, e.g., W.
Heisel, L.A. Starts Buying Foreclosed Homes with Federal
Aid, LA Times, April 9, 2009). Even if all of the $33
million were used to buy foreclosed homes, the city would
be able to purchase only a small fraction of those houses -
300 homes at an average price of $100,000.
f) The homebuyer tax credit and economy. Generally, many
economists across the political spectrum agree that a home
buyer tax credit or interest rate subsidies will do little
to stimulate the economy. For example, with respect to the
federal tax credit for the first-time home buyers, critics
say that most of the benefits are likely to go to those who
would have purchased homes anyway and is unlikely to do
much to increase housing demand. (Center on Budget and
Policy Priorities, April 11, 2008). Others state that, as
a general principle, "an explicit federal subsidy for the
purchase of certain homes is both bad tax policy and bad
housing policy." (D. C. John, The Isakson Tax Credit:
Another Approach that Won't Fix the Mortgage Mess, Web
Memo, The Heritage Foundation, March 31, 2008). The
federal tax credit for first-time homebuyers is expected to
potentially alter "the timing of some home purchases, but
over the long run not [to raise] the total number of new
home buyers in the market." (Gary V. Engelhardt, Economics
Professor, Written testimony before the House Small
Business Committee, June 5, 2008). Finally, some
commentators called the federal tax credit "an implicit
subsidy to homebuilders" that "would keep home prices
artificially high when they probably ought to be falling."
(Tomasz Piskorski, Assistant Professor of Finance and
Economics, Columbia Business school, BusinessWeek Online,
June 6, 2008).
Proponents of the federal tax credit point to similarly
structured subsidies that Congress approved in 1975, giving
qualified buyers a 5% credit and bringing down the interest
rates to 7%. Critics, however, argue that the analogy is
misleading because the U.S. was exiting a recession that
had been induced by oil prices, not a slide in home values.
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(N. Timiraos, Economics Skeptical of Home Buyer Tax Credit
and Other Incentives, Wall Street Journal, Developments).
g) How effective is the California homebuyer tax credit ?
The proponents argue that, because of the original tax
credit enacted in February of 2009, home builders in
California have seen increased sales, have started
construction of new homes, and have hired new employees.
Furthermore, the cancellation rates on sales of new homes
have fallen to 13%, in contrast to the 50% averages months
ago. According to a study done by the Sacramento Regional
Research Institute, the California construction industry
contributes $40 billion per year to the state's economy and
is responsible for 266,000 jobs statewide. The entire
housing industry accounts for 11% of all economic activity
in California. Every dollar spent on new housing
construction in California generates 90 cents in total
economic activity, while each job created through
residential construction supports an additional job. (The
Economic Benefits of Housing in California, A report
prepared by the Sacramento Regional Research Institute and
sponsored by California Homebuilding Foundation, August
2008).
Despite the industry's enthusiasm, some economists say "the
credit is doing little to fix what truly ails California --
one of the nation's largest residential markets -- because
it doesn't encourage the sale of foreclosed houses that are
weighing on prices." (M. Corkery, Tax Credit Gives
California Builders a Lift, Wall Street Journal, April 24,
2009). Indeed, some economists warn that if the tax credit
is extended, it could negatively affect the sale of
existing homes and the housing market overall. For
example, Christopher Thornberg, principal at Beacon
Economics, a Los Angeles-based research firm, argues that
"California has thousands of foreclosed homes that need to
be sold" and that the building of new homes should not be
promoted. (Id.). Similarly, Alan J. Auerbach, Director of
the Burch Center for Tax Policy and Public Finance at the
University of California, Berkley, cited the recently
adopted tax credit as an example of the pitfalls of
targeted tax cuts. He stated that, by providing an
incentive for the purchase of new homes, "this credit will
encourage additional construction, which is probably the
last thing we should be doing right now" and "will
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discourage the purchase of existing, previously occupied
homes, thereby adding to the capital loses that homeowners
have already suffered." (A. Auerbach, California's Tax
System in Crisis and Beyond, A testimony before the
Committee on Revenue and Taxation, California Assembly,
March 23, 2009).
h) Should the existing tax credit be expanded ? Even though
it appears that the California tax credit for the purchase
of new homes has created jobs in the construction industry
and encouraged new construction, the question still remains
as to whether the extension of the credit is warranted.
First, this bill provides a subsidy only to a specific
group of taxpayers - buyers of new homes and, ultimately,
homebuilders. Clearly, a construction industry is very
important to the state's economy. The decline in new home
construction has resulted in the loss of $46 billion in
economic output for California from 2005 to 2009, and more
than 300,000 jobs were lost in housing and its related
sectors. However, one could argue that the high-tech and
manufacturing industries are equally important and
struggling manufacturing companies that are laying off
their workers could equally benefit from a tax credit or
another form of subsidy.
Furthermore, should homebuilders get assistance in selling
houses that, arguably, should not have been built in the
first place? Does California need more new houses at this
point, especially in light of the fact that 16 brand new
homes in a small housing development in San Bernardino
County were demolished just a few weeks ago? It was
reported that Guaranty Bank of Austin acquired those homes
in foreclosure and is destroying them in Victorville City,
about 85 miles northeast of Los Angeles, rather than paying
daily fines to the City of Victorville for failure to
maintain the property. (P. Hong, Housing Crunch Becomes
Literal in Victorville, Los Angeles Times, May 5, 2009).
According to the LA Times article, nearly 250 residential
developments totaling 9, 389 homes have been halted across
the state.
In addition, as the number of foreclosed properties has
grown, local governments have become increasingly concerned
about the upkeep of abandoned properties. The Committee may
wish to consider whether AB 765, by providing an incentive
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to buy new homes, would undermine the efforts of local
governments to sell foreclosed properties.
Further, at the time of a severe fiscal stress, the costs of
existing tax incentives already available to homeowners
should be considered in deciding whether a $10,000 subsidy
for the purchase of a new home is justified. For example,
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. The
Department of Finance (DOF) estimates that this tax benefit
results in more than $5.4 billion in foregone revenue in
fiscal year (FY) 2009-10. In addition, taxpayers may
exclude up to $250,000 single/$500,000 joint in income
resulting from the sale of their principal residence. The
DOF estimates that this tax benefit results in more than
$3.7 billion in foregone revenue in FY 2009-10. Finally,
taxpayers who purchase a house in 2009 may be entitled to
both the federal and state home purchase tax credits.
Finally, a glut of housing, which is expressed in the numbers
of foreclosed homes, is one of the most pressing problems
the economy is facing now. More new homes translate into
higher housing inventories and lower prices of existing
homes. It would take California's economy longer to come
out of recession. The Committee may wish to consider those
additional costs while discussing the benefits of
encouraging the construction of additional housing. The
Committee may also wish to examine the rationale for giving
a huge subsidy only to people who buy new homes and not
renters, and to consider whether the extension of the
homebuyer credit will produce sufficient gain to the
general public to justify its costs.
i) Implementation concerns . The FTB staff identified a
number of implementation concerns, which need to be
resolved if this bill moves out of this committee. It is
the Committee staff's understanding that the author is
working with FTB staff to address those concerns.
j) Related Legislation.
SB 49 (Dutton), introduced in the current legislative
session, is almost identical to this bill. SB 49 was heard
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in the Senate Revenue and Taxation Committee on May 13,
2009 and was placed on the committee's suspense file.
AB 902 (Torres), introduced in the current legislative
session, would allow a maximum credit of $3,000 for the
purchase of a foreclosed property that would be used as the
taxpayer's primary residence. AB 902 is pending in this
Committee.
SBx2 15 (Ashburn), Chapter 11, Statutes of 2009-10, enacted a
homebuyer tax credit for the purchase of qualified
principal residence.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098