BILL ANALYSIS
SB 401
Page 1
( Without Reference to File )
SENATE THIRD READING
SB 401 (Wolk)
As Amended April 6, 2010
Majority vote
SENATE VOTE :Vote no relevant
REVENUE & TAXATION 5-3 APPROPRIATIONS 9-4
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|Ayes:|Portantino, Beall, Coto, |Ayes:|Fuentes, Ammiano, |
| |Fuentes, Saldana | |Bradford, Coto, De Leon, |
| | | |Hall, Skinner, Solorio, |
| | | |Torlakson |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|DeVore, Harkey, Nestande |Nays:|Conway, Miller, Nielsen, |
| | | |Norby |
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SUMMARY : Changes California's specified date of conformity to
federal income tax law from January 1, 2005 to January 1, 2009,
and thereby, generally conforms to numerous changes made to
federal income tax law during that four-year period.
Specifically, this bill :
1)Extends through 2012, provisions allowing taxpayers to exclude
from income the amount of mortgage debt on their principal
residence that has been discharged by a lender (for example,
through a "short sale"). Increases the amount of debt that
can be excluded from $250,000 to $500,000.
2)Excludes from income taxation receipts of federal grants
authorized by the American Recovery and Reinvestment Act
(ARRA) for qualified renewable energy investments in 2009 and
2010.
3)Increase penalties for failure to file partnership and
S-corporation returns.
4)Increases, from 14 years to 18 years, the age of minor
children whose unearned income (such as interest or dividends
on investment) is taxed based on their parents' tax rate.
SB 401
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5)Indexes to inflation the gross income limitations on certain
retirement savings incentives.
6)Modifies rules involving contributions to funds to cover
nuclear facility decommissioning costs.
7)Reduces the age for early withdrawal penalties from retirement
plans for public safety employees and excludes from gross
income reimbursements received by volunteer emergency
personnel.
8)Provides that Internal Revenue Code (IRC) Section 355 applies,
for state tax purposes, to distributions occurring on or after
January 1, 2010, regardless of the tax year of the companies.
9)Conforms California to numerous other changes in federal law
adopted between 2005 and 2009.
10)Takes effect on or after January 1, 2011, but specifies that
its provisions would be effective for tax years beginning on
or after January 1, 2010, unless otherwise specified.
EXISTING LAW conforms the state's tax code, in many instances,
to provisions contained in the federal IRC. California does not
automatically conform to new federal legislation. Rather,
California may conform to specific enactments at the federal
level or may conform to the IRC as of a specified date. The
last IRC to which California conformed was that in effect as of
January 1, 2005.
FISCAL EFFECT : As shown in the accompanying table, the bill
will result in decreases in tax revenues and partly offsetting
increases in interest and penalties. FTB estimates a net revenue
loss of $21.8 million in 2009-10, $14 million in 2010-11, and
$15 million in 2011-12, and $5.5 million in 2012-13.
SB 401 Revenue Impact
(In millions of dollars)
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| |2009-1| 2010-11| 2011-12| 2012-13|
| | 0| | | |
SB 401
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|----------------------+------+-----------+-----------+------------|
|Tax Provisions | -23.4| -20.6| -21.6| -12.5|
|----------------------+------+-----------+-----------+------------|
|Penalty & Interest | 1.6| 6.6| 6.6| 7.0|
|Provisions | | | | |
|----------------------+------+-----------+-----------+------------|
| Total, All | -21.8| -14.0| -15.0|-5.5 |
|Provisions | | | | |
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COMMENTS :
1)Author's statement . According to the author's office, "SB 401
is a vital measure conforming state tax law to federal tax,
and includes provisions that provide needed relief to
struggling homeowners, ensure that renewable energy projects
are not unduly taxed on federal grants, and provides needed
conformity to federal tax law, easing tax preparation for
taxpayers and tax preparers alike. This measure works to
prevent onerous taxation of distressed Californians who are
already struggling to protect their homes, their largest
investment, as many Californians face foreclosure and are
forced to walk away from their homes; the last thing they
should have to think about is paying taxes on debt they
couldn't repay. This measure puts an end to this onerous
application of tax law. Additionally, since tax credits are
never considered income, taxing renewable energy production
grants would treat the renewable energy production industry
inequitably and would add additional costs onto these projects
need for job creation and energy sustainability. It is
important that we avoid this kind of unnecessary roadblock to
economic growth as our state works to rebuild its financial
prosperity."
2)The importance (and conundrum) of conformity . When changes
are made to the federal income tax law, California does not
automatically adopt such provisions. Instead, state
legislation is needed to conform to most of those changes.
Conformity legislation is introduced either as individual tax
bills to conform to specific federal changes or as one omnibus
bill to conform to the federal law as of a certain date with
specified exceptions, a so-called "conformity" bill.
The last California-federal conformity bill was enacted in 2005
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[AB 115 (Klehs), Chapter 691, Statutes of 2005], and for the
last four years, businesses, tax practitioners and state tax
agencies have been advocating for a new bill to conform state
tax laws to ever-changing federal tax laws. Businesses,
generally, prefer conformity to federal tax laws because it
reduces their state tax compliance costs. The tax
practitioners have argued that there are significant costs
associated with federal non-conformity. Failure to conform to
federal law in some areas may lead to improper tax reporting
to California and extra costs to the taxpayers. As an
example, a taxpayer may roll-over balances in an Archer
Medical Savings Account to a new Health Savings Account
without triggering liability at the federal level, but will
unknowingly face penalties for the transfer since it
constitutes a disqualified distribution for state purposes.
Finally, conformity legislation is also 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.
While state conformity to federal income tax provisions offers
certain advantages and reduces tax compliance costs, it can
also significantly impact state revenues. Thus, it would be
difficult to achieve complete conformity with federal income
tax rules. Often, the Legislature needs to increase tax rates
to find funding to adopt a new or expand an existing credit or
deduction allowed for federal income tax purposes. Tax
credits, deductions, and exemptions are designed to provide
incentives for taxpayers that incur certain expenses or to
influence behavior, including business practices and
decisions. Both the Federal and state governments often use
tax policy to influence taxpayers' behavior. However, federal
tax incentives may not necessarily produce the same effect on
the taxpayer's behavior at the state level, if adopted by the
state government, as they do on the federal level.
Furthermore, unlike the Federal government, California cannot
print money to subsidize its budget. Therefore, the
Legislature must be mindful of fiscal effects of conforming to
federal tax laws, even if those may not trigger significant
fiscal concerns in Congress.
In 2008, AB 1561 (Charles Calderon), a conformity bill, required
a 2/3 vote of the membership in each house. AB 1561 did not
advance from the Senate Floor because it failed to secure 27
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Senate votes. Last year, the Legislature approved AB 1580
(Charles Calderon), but the Governor vetoed it because of a
"single provision inserted at the last minute" that he could
not support. This year, the Legislature, in the 8th
Extraordinary Session, passed SB x8 32 (Wolk), which was
similar to AB 1580, but the Governor also vetoed that bill for
the same reason. The Legislature continues to struggle with
tax conformity and SB 401 represents the most recent attempt
to ease the hardship on taxpayers and tax practitioners by
bringing the two tax codes closer together.
3)Conformity decisions . Full descriptions of each of the
conformity items in SB 401 are included in the FTB's annual
report to the Legislature, "Summary of Federal Income Tax
Changes," that are available on the FTB's Web site.
4)Mortgage debt forgiveness . The Legislature approved SB 1055
(Machado), Chapter 282, Statutes of 2008, which provided
modified conformity to the MFDRA for discharge of mortgage
indebtedness in the 2007 and 2008 tax years. Last year,
Senate Revenue and Taxation Committee held SB 97 (Ron
Calderon), which extended modified conformity to discharge of
mortgage indebtedness in the 2009 and 2010 tax years, and this
Committee held AB 111 (Niello), which would have provided full
conformity to MFDRA. AB 1580, which was vetoed by the
Governor in 2009, would have provided homeowners greater
assistance, not only by extending the mortgage debt
forgiveness provisions until January 1, 2013, but also by
increasing the amount of forgiven mortgage indebtedness
excludable from taxpayer's gross income from $250,000
($125,000 in the case of a married individual/RDP filing a
separate return) to $500,000 ($250,000 in case of a married
individual/RDP filing a separate return). The same mortgage
debt forgiveness provisions were included in SB 32 x8 and,
now, are part of this bill, tying California law to federal
law until 2013. In addition, SB 401, similar to SB 32 x8,
provides for a retroactive application of those provisions for
cancellation of debt income arising from mortgage debt
forgiveness until the 2012 tax year.
5)"Kiddie" tax . SB 401 would conform to federal law by
increasing the age of minor children for purposes of the
"kiddie" tax. This tax requires unearned income (e.g.,
interest, dividends, etc.) of children under a specified age
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to be taxed at the parents' tax rate. The federal law was
initially introduced to address certain practices whereby
wealthy taxpayers would transfer assets like stocks or bonds
to their children, who usually paid tax at a lower rate. In
2005, the federal law was changed to apply to children under
the age of 18, and in 2007, those rules were changed again to
apply to dependent children under the age of 24.
6)Grants for qualified energy property . Federal law allows a
renewable electricity income tax credit for the production of
electricity from qualified energy resources at qualified
facilities. Qualified energy resources, generally, include
wind, biomass, solar energy, geothermal energy, small
irrigation power, municipal solid waste, qualified hydropower
production and marine and hydrokinetic renewable energy. To
be eligible for this credit, electricity produced from the
qualified energy resources at qualified facilities must be
sold by the taxpayer to an unrelated person. The production
tax credit for electricity produced from renewable resources
is generally claimed over a 10-year period and is not
refundable.
In addition to the renewable electricity production tax credit,
under federal tax law, a taxpayer is allowed to claim a credit
for the investment in certain property. The investment tax
credit includes an energy credit that is allowed for certain
qualifying energy property placed in service. The qualifying
energy property includes certain fuel cell, solar, geothermal
power production, small wind energy property, combined heat
and power system, and geothermal heat pump property. The
energy credit is generally equal to 30% of the taxpayer's
basis in qualified fuel cell property, certain solar energy
property, and wind energy property. It is 10% of the
taxpayer's basis in all other types of qualifying energy
property. The investment tax credit may be claimed entirely
in the year the facility is placed in service.
In February of 2009, Congress enacted, and the President signed,
the American Recovery and Reinvestment Act (ARRA), which,
among other things, allows taxpayers to make an irrevocable
election to treat certain qualified property that is part of a
qualified investment credit facility placed in service in 2009
through 2013 as energy property eligible for a 30% investment
credit. The investment tax credit option may be attractive
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to tax investors that are not sure of their tax liability in
the future (the 10-year period). Furthermore, the ARRA
authorizes the Secretary of Treasury to provide a grant to
each person who places in service during 2009 or 2010 energy
property that is either: 1) an electricity production
facility otherwise eligible for the renewable electricity
production credit; or, 2) qualifying property otherwise
eligible for the energy investment tax credit. The grant
amount is up to 30% of the basis of the qualified property.
In other words, a taxpayer that elects to receive the
investment tax credit can also elect to receive a 30% grant
rather than the 30% tax credit. The ability to receive the
credit or grant in the year in which property is placed in
service helps owners to finance the project.
Congress excluded the grant proceeds from a taxpayer's income
but required that the basis of the property be reduced by 50%
of the amount of the grant. In addition, some or all of each
grant is subject to recapture if the grant eligible property
is disposed of by the grant recipient within five years of
being placed in service. The provision also permits
taxpayers to claim the credit with respect to otherwise
eligible property that is not placed in service in 2009 and
2010 so long as construction begins in either of those years
and is completed prior to 2013 (in the case of wind facility
property), 2014 (in the case of other renewable power facility
property eligible for credit under IRC Section 45), or 2017
(in the case of any specified energy property described in IRC
Section 48). Under the program, if a grant is paid, no
renewable electricity credit or energy credit may be claimed
with respect to the grant eligible property. The grant
program was created to help developers of renewable energy
projects to finance these projects. Often, developers seek
investors that are usually allocated 99% of the income, gains,
losses, deductions and tax credits of the project. However,
in the current economic environment the potential investors
may not have enough tax liability to utilize those deductions
and credits. The grant program allows developers to receive a
federal subsidy to continue with the renewable energy
projects.
In absence of an authorized statute, taxpayers must include the
grant proceeds as income for state purposes. SB 401 excludes
these grants from income for 2009 and 2010 tax years because
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an unexpected tax could cause project developers to terminate
or delay the projects, causing job losses and less renewable
power for the state. SB 401 also conforms to federal law by
excluding these grants from taxpayer's income, requiring the
50% basis adjustment, and incorporating the recapture
provisions of Section 1603(f) of the ARRA.
7)Similar legislation . SB 32 x8 (Wolk), introduced in the 8th
Extraordinary Session, is identical to SB 401 but for one
provision - an erroneous refund claim penalty. SB 32 x8 was
passed by both the Assembly and the Senate but was vetoed by
the Governor on March 25, 2010.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0003845