BILL ANALYSIS
AB 765
Page 1
ASSEMBLY THIRD READING
AB 765 (Caballero and Solorio)
As Amended May 21, 2009
Majority vote
REVENUE & TAXATION 9-0 APPROPRIATIONS 17-0
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|Ayes:|Charles Calderon, DeVore, |Ayes:|De Leon, Nielsen, |
| |Beall, Coto, Harkey, Ma, | |Ammiano, |
| |Nielsen, Portantino, Fong | |Charles Calderon, Davis, |
| | | |Duvall, Fuentes, Hall, |
| | | |Harkey, Miller, |
| | | |John A. Perez, Price, |
| | | |Skinner, Solorio, Audra |
| | | |Strickland, Torlakson, |
| | | |Krekorian |
|-----+--------------------------+-----+--------------------------|
| | | | |
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SUMMARY : Allows taxpayers to reserve an income tax credit for
the purchase of a qualified home prior to the close of escrow.
Specifically, this bill :
1)Allows a taxpayer 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.
2)Requires FTB to reserve the credit for the taxpayer upon
receipt of the joint certification and to notify the taxpayer
about the conditional reservation.
3)Requires the seller to provide a certification to the FTB
within one week of the close of escrow, instead of one week of
the sale of the qualified principal residence, stating that
the residence has never been occupied.
EXISTING LAW :
1)Authorizes an income tax credit for individual taxpayers who
purchase qualified personal residences after March 1, 2009,
and before March 1, 2010.
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2)Limits the amount of credit to the lesser of $10,000 or 5% of
the purchase price.
3)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.
4)Defines "qualified home" as a home that has never been lived
in before and serves as the purchaser's primary place of
residence.
5)Requires sellers of homes to provide to the taxpayer and the
FTB a certification that the residence has never been
occupied.
6)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.
7)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 : Negligible effect on state costs or revenues.
COMMENTS : The author states that, "When legislators passed the
tax credit back in February, we were hopeful it would work to
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."
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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.
Committee staff notes all of the following: 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.
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,
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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).
The proponents of this credit 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 $0.90
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,
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which is probably the last thing we should be doing right now"
and "will 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).
Related legislation. SB 49 (Dutton) of 2009 would extend the
operative date of this credit until December 1, 2010, and would
remove the $100 million limit on the aggregate amount of the
credit. SB 49 was heard in the Senate Revenue and Taxation
Committee on May 13, 2009, and was placed on the committee's
suspense file.
AB 902 (Torres) of 2009 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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0001033