BILL ANALYSIS
AB 2014
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Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2014 (Torrico) - As Amended: April 8, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income tax: tax credit: energy efficient homes.
SUMMARY : Allows an income tax credit, for taxable years
beginning or after January 1, 2010, for the qualified costs
incurred by an individual taxpayer in improving the energy
efficiency of his/her qualified principal residence.
Specifically, this bill :
1)Authorizes a credit, under the Personal Income Tax (PIT) Law,
against the "net tax," as defined in Revenue and Taxation Code
(R&TC) Section 17039, for the qualified costs paid or incurred
by a taxpayer who has commissioned an energy audit of his/her
qualified principal residence and has made the recommended
energy efficiency improvements to his/her qualified principal
residence.
2)Specifies that the amount of credit shall be the lesser of 50%
of the qualified costs incurred in the taxable year or $1,500.
3)Defines "qualified costs" as costs paid or incurred by a
taxpayer for the repair, rehabilitation, or improvement of a
qualified principal residence made toward bringing the
qualified principal residence in compliance with the
recommendations of the energy audit.
4)Defines "qualified principal residence" as a single-family
residence, whether detached or attached, that is the principal
residence of the taxpayer.
5)Disallows the credit unless the taxpayer provides satisfactory
substantiation to the Franchise Tax Board (FTB), in the form
and manner requested by the FTB, that the energy audit was
conducted and the recommended improvements were made to the
qualified principal residence.
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6)Provides that, if the amount of credit exceeds the "net tax",
the excess may be carried over to reduce the taxpayer's "net
tax" liability in the succeeding years, if necessary, until
the credit is exhausted.
7)Contains legislative findings and declarations regarding
greenhouse gas emissions.
8)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW allows a:
1)Residential Energy Property (REP) Credit to homeowners who
make energy efficient improvements to their existing homes.
The amount of this credit equals up to 30% of the cost of all
qualifying improvements, not to exceed $1,500 for improvements
placed in service in 2009 and 2010. The credit applies to
improvements such as adding insulation, energy efficient
exterior windows and energy-efficient heating and air
conditioning systems.
2)Non-refundable Residential Energy Efficient Property (REEP)
Credit to individual taxpayers who purchased qualified
residential alternative energy equipment, such as solar hot
water heaters, geothermal heat pumps and wind turbines. The
amount of credit equals to 30% of the cost of qualified
property.
EXISTING STATE LAW allows taxpayers engaged in a trade or
business to deduct all expenses that are considered ordinary and
necessary in conducting that trade or business. However,
expenses for purchasing property with a useful life in excess of
a year, or purchases that add to the value or substantially
extend the useful life of property owned by the taxpayer must be
capitalized and depreciated over the recovery period of the
property rather than deducted in the year purchased.
FISCAL EFFECT : According to the FTB staff's estimates, this
bill will result in an annual revenue loss of $160 million in
fiscal year (FY) 2010-11, $90 million in FY 2011-12, and $90
million in FY 2012-13.
COMMENTS :
1)Author's Statement . The author states that, "Energy use in
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buildings is the largest single global warming pollution
source in the United States - accounting for 40% of all
greenhouse gas emissions nationally. More than seventy
percent of California's 13 million residential buildings were
built before the implementation of Title 24 in the early
1980's which established energy efficiency standards for
residential and nonresidential buildings. While Title 24 has
greatly improved efficiency in our new building stock, these
standards have not been implemented in pre- Title 24
construction. Energy savings and greenhouse gas emission
reductions must be implemented in the existing residential
building stock in order for California to adequately combat
climate change.
"AB 2014 will help combat climate change by encouraging energy
audits and the necessary improvements to existing residential
building stock that will help reduce greenhouse gas emissions.
In addition, this bill will help create much needed jobs in
the energy efficiency, green construction, and the home
improvement fields.
"By further promoting the growth of green jobs, AB 2014 joins
the effort to help make California THE state to lead the
nation in the clean energy economy."
2)Background . In 2009, the Governor signed into law AB 758
(Skinner), Chapter 740, Statutes of 2009, that requires the
California Energy Commission (CEC) to develop and implement a
comprehensive program to achieve greater energy savings in
existing residential and nonresidential building stock. It
also requires the California Public Utilities Commission (PUC)
and publicly-owned utilities to implement energy efficiency
programs consistent with the Legislature's intent to encourage
energy savings and greenhouse gas reductions.
3)What is a "Tax Expenditure"? Existing law provides various
credits, deductions, exclusions, and exemptions for particular
taxpayer groups. According to legislative analyses prepared
for prior related measures, United States Treasury officials
and some Congressional tax staff began arguing in the late
1960's that these features of the tax law should be referred
to as "expenditures," since they are generally enacted to
accomplish some governmental purpose and there is a
determinable cost associated with each (in the form of
foregone revenues). This bill would enact a tax expenditure,
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in the form of an energy credit, designed to provide an
incentive to homeowners to commission an energy audit of
his/her principal residence and to make the necessary
improvements to the house for the purpose of reducing
greenhouse gas emissions.
4)Credits vs. Grants . Although well intentioned, this bill
represents an attempt to use the tax code to accomplish a
public policy objective that may be more efficiently addressed
through direct outlay of state funds. California already has
strong energy efficiency standards and programs in place to
directly subsidize energy efficiency and it is questionable
whether a tax credit will encourage a new activity, instead of
rewarding the activity already taking place in the market.
Furthermore, some researchers question the effectiveness of
residential energy credits. For example, a case study
conducted in 1984 suggests that the federal residential tax
credit allowed to taxpayers between 1977 and 1986 for certain
energy conservation and solar devices may not have been
effective in inducing homeowner energy conservation. [A. L.
Murphy, Colby College, citing E. Carpenter and S. T. Chester,
"Are Federal Energy Tax Credits Effective? A Western United
States Survey," The Energy Journal, 5(2): 139-149]. According
to this study, 94% of people who claimed the credit stated
that they would have made the improvement even in the absence
of the credit.
As the Department of Finance notes in its annual Tax Expenditure
Report, there are several key differences between tax
expenditures and direct expenditures. First, tax expenditures
are reviewed less frequently than direct expenditures once
they are put in place, which can offer taxpayers greater
certainty, but it can also result in tax expenditures
remaining a part of the tax code in perpetuity without
demonstrating any public benefit. Secondly, there is
generally no control over the amount of revenue losses
associated with any given tax expenditure. Finally, the vote
requirements for direct expenditures and tax expenditures are
different. While it takes a two-thirds vote to make a
budgetary appropriation, a tax expenditure measure can be
enacted by a simple majority vote. It should also be noted
that, once enacted, it generally takes a two-thirds vote to
rescind an existing tax expenditure. This effectively results
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
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irrespective of their efficacy, without a supermajority vote.
5)Conformity to Federal Law . This bill proposes to create a tax
credit for certain qualified costs of improving the energy
efficiency of one's home. Similar tax incentives already
exist under the federal law, which allows a REP credit to
homeowners who make energy efficient improvements to their
existing homes and a REEP credit to individual taxpayers who
purchase qualified residential alternative energy equipment,
such as solar hot water heaters, geothermal heat pumps and
wind turbines. Whereas the REP credit applies to improvements
such as insulation, energy efficient exterior windows and
energy-efficient heating and air conditioning systems, the
credit proposed by this bill would apply to qualified costs of
improving the principal residence in compliance with the
recommendations of the energy audit. Arguably, the proposed
credit is broader in that it will apply to improvements beyond
the windows, insulation or heating and air conditioning
systems. It is unclear, however, whether the recommended
improvements would include solar water heaters or wind
turbines. As such, this bill would place California out of
conformity with federal law, thereby increasing the complexity
of California tax return preparation.
The lack of conformity to federal tax laws in some areas but not
other areas can be incredibly confusing for taxpayers and may
lead to improper tax reporting. Businesses, generally, prefer
conformity to federal tax laws because it reduces their state
tax compliance costs. The tax practitioners have also argued
that there are significant costs associated with federal
non-conformity. Finally, conformity legislation is important
to state agencies. Conformity eases the burden, and reduces
the costs, of tax administration because the state may rely on
federal audits, federal case law, and regulations. The
Committee may wish to consider whether modified conformity to
federal REP and REEP credits would provide an incentive to
California homeowners to improve the energy efficiency of
their homes, without causing taxpayer confusion or creating an
additional tax compliance burden.
6)Definition of "Qualified Principal Residence ." This bill does
not specify whether a qualified principal residence must be
located in California, which means that, arguably,
non-California residents and part-time residents will be
eligible to claim the credit for improvements made to homes
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located outside of California. Further, this bill does not
require taxpayers claiming the credit to own the residence.
Thus, tenants as well as owners will qualify for the credit.
Finally, this bill does not impose any limitation on the
minimum amount of time that the taxpayer must live in his/her
home before he/she may claim the credit for the improvements
made to that home. The Committee staff suggests that this
bill be amended to include a definition of "qualified
principal residence" similar to the one provided for in
Section 121 of the Internal Revenue Code.
7)On Operative Dates and Sunsets . As currently drafted, this
bill allows tax credits for taxable years beginning on or
after January 1, 2010. This raises two issues. First, tax
credits are typically enacted to encourage specific taxpayer
behavior that ostensibly would not take place absent the
credit. As a tax levy, this bill would become operative upon
enactment. Nevertheless, it is unlikely this bill would be
signed into law before late 2010. Thus, it would give a tax
break for decisions made before the credit became law, thereby
providing an unanticipated benefit instead of an incentive.
To address this issue, the author may wish to amend this bill
to provide that the credit will be allowed for taxable years
beginning on or after January 1, 2011. Second, the author may
wish to include a sunset date to allow the Legislature to
periodically review the efficacy of this tax credit in
incentivizing homeowners' behavior.
8)Unlimited Carryover Period . This bill allows for an unlimited
carryover period, which means that qualified taxpayers may use
the credit to offset their tax liability indefinitely. The
unlimited carryover period creates a large gap between the
time the qualified costs are incurred and the time when the
taxpayer receives the tax benefit and requires FTB to retain
the credit on its forms indefinitely. Committee staff
suggests amending this bill to limit the carryover period to
eight years. Experience has demonstrated that the vast
majority of credits are fully utilized within this period of
time.
9)Implementation Concerns .
a) Committee staff notes implementation concerns as
follows:
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i) There is no direction with respect to certification;
specifically - who certifies, when certification must be
completed, is the taxpayer or FTB provided an actual
certificate, etc.
ii) Lack of clarity as to whether qualified improvements
must be started and completed in the same taxable year.
There is no indication whether the threshold for claiming
a credit is based on costs, or time, or some other
measure, such as percent of completion.
b) The FTB staff identified several implementation problems
with this bill. The Committee staff understands that the
author is working with the FTB to resolve these issues.
i) Since the word "commission" is undefined, it is
unclear if a self-directed online energy survey would be
considered an energy audit. The author may wish to
specify that the energy audit must be conducted by a Home
Energy Rating System professional certified by the CEC.
ii) This bill fails to specify a time limit between the
energy audit and the improvements suggested by the audit.
The author may wish to specify a time period for
completion of corrections as suggested by the energy
audit.
10) Double Referral . This bill was double-referred to the
Assembly Committee on Natural Resources and this committee.
On May 3, 2010, the Natural Resources Committee voted this
bill out on a 7-0 vote. For a more comprehensive analysis of
this bill, please refer to that Committee's analysis.
11)Related Legislation .
AB 155 (Nakanishi), introduced in the 2007-08 Legislative
session, would have allowed a refundable tax credit for
certain costs associated with construction or acquisition of
energy efficient homes. AB 155 was held under submission in
this Committee.
AB 154 (Nakanishi), introduced in the 2007-08 Legislative
Session, would have authorized, in conformity with federal
law, a taxpayer who placed an energy efficient commercial
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building in service during the taxable year to deduct an
amount equal to the cost of the building, subject to specified
restrictions. AB 154 was held under submission in the Assembly
Committee on Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Oksana G. Jaffe / REV. & TAX. / (916)
319-2098