BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SBx6 4 - Ashburn
Introduced: February 22, 2010
Hearing: February 24, 2010 Tax Levy Fiscal: Yes
SUMMARY: Enacts a Tax Credit for Purchasing Qualified
Homes; Authorizes a Tax Credit for First Time
Homebuyers
EXISTING LAW provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
EXISTING LAW authorized a $10,000 tax credit (or 5% of
the purchase price if that amount is lower) for taxpayers
purchasing qualified homes after March 1st, 2009 and before
March 1st, 2010. A qualified home has never been lived in
before and must serve as the purchaser's primary place of
residence. The taxpayer must apply the credit in equal
amounts over the next three tax years, and must return a
certification to Franchise Tax Board (FTB) from the seller
certifying that the house has never been lived in within
one week of the sale. The credit shall be disallowed if
the taxpayer does not occupy the house for three years, and
FTB will collect any underpayments from the taxpayer. The
Legislature appropriated $100 million in credit, which the
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FTB allocated on a first-come, first-served basis (SBx2 15,
Ashburn).
THIS BILL authorizes a $10,000 tax credit (or 5% of
the purchase price if that amount is lower) for taxpayers
purchasing qualified homes between May 1, 2010 and December
31, 2010. Qualified homes can be detached or unattached,
but must be the principle residence of the taxpayer, and
eligible for the homeowners' exemption. The taxpayer must
apply the credit in equal amounts over the next three tax
years, and may only receive one tax credit for purchasing a
qualified home.
THIS BILL allows taxpayers a credit for both new
homes, which have never been lived in before, and existing
homes, but only for first-time buyers, defined as taxpayers
who have not had an ownership interest in a home in the
last three years, unlike SBx2 15 which applied only to new
homes. Taxpayers who received a credit under SBx2 15 are
not eligible for this credit. Additionally, the bill
precludes persons under the age of 18 from claiming the
credit, unless the person is married to someone over the
age of 18, and also prevents taxpayers who are related to
the seller, and individuals who are claimed as dependents
by another taxpayer from claiming the credit.
THIS BILL requires the taxpayer to submit to FTB
a properly executed settlement statement, and a
certification by the seller that the house has never been
occupied in the case of a credit for a previously
unoccupied home, or a certification by the taxpayer that he
or she is a first-time homebuyer for existing home purchase
tax credits. Both certifications must be signed under
penalty of perjury.
THIS BILL allows taxpayers to reserve a credit prior
to the close of escrow for houses never previously
occupied. The buyer and seller may jointly sign and submit
to the FTB a certification that they have entered into an
enforceable contract on and after May 1, 2010 and before
December 31, 2010. FTB must notify the taxpayer of the
reserved credit after receiving the joint certification
pending receipt of the settlement statement within two
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weeks of the close of escrow. The reservation is cancelled
if the taxpayer does not provide the information before
August 16, 2011.
THIS BILL allocates $100 million in credits for
previously unoccupied homes, and $100 million in credits
for first-time homebuyers purchasing existing homes. FTB
allocates credits on a first-come, first-served basis, and
reduces the allocation amount for previously unoccupied
homes by 70% of the value of the credit, and 57% of the
value of the credit for first-time homebuyers purchasing
existing homes to ensure that each credit costs $100
million, not $100 million in allocations. If a first-time
homebuyer purchases a previously unoccupied home, the FTB
shall reduce the allocation from the total of tax credits
for previously unoccupied homes.
THIS BILL also requires FTB to establish a wait list
of taxpayers based on the date certifications and
reservations were received once the tax credits for
previously unoccupied homes is exhausted. FTB shall notify
these taxpayers before December 31, 2011 whether they have
been allocated a credit, and the credit amount. Only
taxpayers on the wait list are allowed to claim the credit
on an amended return.
THE BILL further requires:
If the FTB disallows the credit, the
inclusion of the credit is treated as a
mathematical error.
FTB may issue rules, guidelines, and
procedures to administer the credit.
The credit is not subject to the 50% of
liability cap on applying tax credits enacted as
part of last year's budget (AB 1452, Committee on
Budget).
The credit shall be disallowed if the
taxpayer does not occupy the house for three
years, and FTB will collect any underpayments
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from the taxpayer.
FISCAL EFFECT:
According to FTB, SBx6 4 results in revenue losses to
the state of $6 million in 2-2009-10, $69 million in
2010-11, $67 million in 2011-12, $54 million in 2012-13,
and $4 million in 2013-14.
COMMENTS:
A. Author's Statement
According to the author, "SB 8X 21 authorizes a
$10,000 state tax credit to the buyer of a newly
constructed home and allows a first time homebuyer a
$10,000 tax credit for the purchase of an existing home.
The homebuyer tax credit from 2009 produced results.
Previously reluctant homebuyers returned to the market and
new home sales started to rise once again. That rise
included the construction of new homes which generates jobs
and other economic benefits as well as increased tax
revenues to the state and to local governments.
Newly constructed homes create jobs - up to 3
new jobs for every single home built.
Newly constructed homes generate substantial
tax revenues - $16,000 to the state for each new
home and $3,000 to respective local governments.
Newly constructed homes produce billions in
economic benefit (studies show more than $300,000 in
economic benefit is produced by the construction of
a new home).
Newly constructed homes help stabilize prices
and help arrest the downward spiral of home prices.
Keeping inventory low and incentivizing demand
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is good for the housing markets."
B. The Once and Future Credit
The Legislature enacted SBx2 15 (Ashburn) in February,
providing a tax credit of up to $10,000 for taxpayers
buying previously unoccupied homes between March 1, 2009
and March 1, 2010. FTB allocated 10,000 credits of
$10,000, ceasing on July 2, 2009. SBx6 4 seeks to
reauthorize this credit for purchases made between May 1,
2010 and December 31, 2010 with some changes, and also
allow a $100 million credit for first-time homebuyers to
purchase existing homes. Arguing that the previous credit
stimulated the economy and increased employment, California
homebuilders are seeking additional tax credits.
C. Tax Expenditure Accountability
This credit is capped and allocated within a certain
time period.
The purpose of this credit is to encourage people to
buy homes who would not have otherwise. The committee may
wish to consider a study requirement that looks at housing
purchases in the state before and after the enactment of
this credit to see if it had its desired effect. The
measures could be two fold: (1) Did the number of
previously unoccupied houses within builder's inventory
decrease and by how much? How much did the inventory
decrease in the same period of time without the credit? (2)
Did the number of first time homebuyer's increase before
and after the enactment of the credit?
D. Caught in a Trap
Approximately 300 taxpayers applied but were turned
away by the Franchise Tax Board (FTB) when the credits were
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exhausted in July, 2009. Unlike subsequent home
purchasers, these taxpayers probably factored in the tax
credit when deciding to buy a house. The committee may
wish to consider amending the measure to allocate tax
credits to these tax credits.
E. 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, if property taxes and crime rates are low, then the
value of the homeowner's principal asset--his home--will
rise. William Fischel calls this the "home voter
advantage;" and states that through buying homes,
homeowners become watchful citizens of local government,
not merely to improve their quality of life, but also to
counteract the risk to their largest asset, a risk that
cannot be diversified. Meanwhile, their vigilance promotes
a municipal governance that provides services more
efficiently than do the state or national government.
Furthermore, the federal government recently
apportioned $6.6 billion for new homebuyers in the economic
stimulus package; the intent is to increase homeownership
thereby stimulating the economy by putting more people to
work through the construction and sale of the home.
According to a study by the Association of Realtors, home
buyers also help carry the economy. California's housing
construction contributes $40 billion per year to the
State's economy. Home building, they state, is responsible
for 359,000 jobs statewide and every dollar spent on new
housing construction generates approximately $1.95 in total
economic activity.
F Most Tax Subsidized Asset Class in History?
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In the United State, federal and state government
subsidies for house purchases may be unmatched throughout
the world. Homeownership is clearly a public goal because
similar benefits are not afforded to any other asset class.
Tax subsidies include:
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.
The Department of Finance estimates that this tax
benefit results in more than $5.4 billion in foregone
revenue in 2009-10.
Capital Gains Exclusion: Taxpayers may exclude up
to $250,000 single/$500,000 joint in income resulting
from the sale of their principal residence. The
Department of Finance estimates that this tax benefit
results in more than $3.7 billion in foregone revenue
in 2009-10.
Deductibility of Property Taxes: Taxpayers may
deduct property taxes from federal income, although
California's low property tax rates limit the benefit
for Californians compared to residents of other
states.
Federal and State House Purchase Tax Credits: Both
Congress and the Legislature enacted tax credits for
taxpayers who purchase house in 2009.
Support and Opposition
Support:California Building Industry Association
Oppose:
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Consultant: Colin Grinnell & Gayle Miller