BILL ANALYSIS �
AB 1510
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Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1510 (Nazarian) - As Amended: May 1, 2014
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credit: seismic retrofits
SUMMARY : Allows a credit equal to 30% of a "qualified
taxpayer's" "qualified costs" incurred for "seismic retrofit
construction". Specifically, this bill :
1)Allows, for taxable years beginning on or after January 1,
2015, a credit equal to 30% of a "qualified taxpayer's"
"qualified costs".
2)Defines a "qualified taxpayer" as an owner of a "qualified
building" located in California. A taxpayer that owns a
proportional share of a "qualified building" may claim the
credit based on the taxpayer's share of the "qualified costs".
3)Defines "qualified costs" as costs paid or incurred by the
taxpayer for any "seismic retrofit construction" on a
"qualified building". "Qualified costs" shall not include
ordinary repair or replacement of existing fixtures or items
on or in the "qualified building".
4)Defines "seismic retrofit construction" as changes or
additions to the structure of a "qualified building" to
mitigate seismic damage, including:
a) Anchoring the structure to the foundation;
b) Bracing cripple walls;
c) Bracing hot water heaters;
d) Installing automatic gas shutoff valves;
e) Repairing or reinforcing the foundation to improve the
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foundation's integrity against seismic damage;
f) Anchoring fuel storage; and,
g) Installing an earthquake-resistant bracing system for
mobile homes that is certified by the California Department
of Housing and Community Development.
5)Excludes from the definition of "seismic retrofit
construction" activities performed solely to bring a
"qualified building" into compliance with standard local
building codes.
6)Defines a "qualified building" as a building that has been
certified as an "at-risk property" by the local housing
authority for the area within which the building is located.
7)Defines "at-risk property" as a building deemed hazardous and
in danger of collapse in the event of a catastrophic
earthquake, including soft story buildings, nonductile
concrete residential buildings, and pre-1980 concrete
residential buildings.
8)Provides that, to be eligible for the credit, the following
must apply:
a) The qualified taxpayer must obtain certification from
the appropriate jurisdiction with authority for building
code enforcement, upon a review of the building, that the
building is an at-risk property; and,
b) The jurisdiction with authority for building code
enforcement in which a qualified building is located has
entered into an agreement with the state to provide
certifications and to not seek reimbursement for any costs
incurred in providing those certifications.
9)Requires the credit amount allowed to be claimed by a
qualified taxpayer at the rate of 1/5th of the credit amount
for the taxable year in which the credit is allocated, and
one-fifth of the credit amount for each of the subsequent four
taxable years.
10)Provides that, in cases where the credit amount exceeds the
taxpayer's tax liability, the excess credit amount may be
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carried over to the following taxable year, and succeeding
four taxable years, until the credit has been exhausted.
11)Provides that, for purposes of computing the credit, the
qualified costs shall be reduced by any grant provided by a
public entity for the seismic retrofit construction.
12)Allows the credit under both the Personal Income Tax (PIT)
Law and the Corporation Tax (CT) Law.
13)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits under both the PIT Law and the CT
Law. These credits are generally designed to encourage
socially beneficial behavior or to provide relief to taxpayers
who incur specified expenses.
2)Allows taxpayers engaged in a trade or business to deduct
expenses considered ordinary and necessary in conducting that
trade or business.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates that
this bill would reduce General Fund revenues by $1.4 million in
fiscal year (FY) 2014-15, $5.2 million in FY 2015-16, and by
$8.7 million in FY 2016-17.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
The recent earthquakes, which shook Southern California
cities in March and April of this year, remind us that an
earthquake can strike at any given moment and it is
imperative that we ensure our structures are suitable to
withstand a catastrophic earthquake. According to the
Southern California Earthquake Center, California has a
99.7% chance of having a magnitude 6.7 or larger earthquake
during the next 30 years, and the likelihood of an even
more powerful quake of magnitude 7.5 or greater in the next
30 years is 46%. It is imperative that we take every
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precaution to make sure that human life and property is
saved in the event of a catastrophic earthquake. This
measure will improve California's resilience against
earthquakes, saving the public money that would otherwise
have been required for disaster relief.
2)Proponents of this bill note the following:
We all know that the cost to retrofit a building is very
expensive. While older buildings were constructed
according to building codes in place at the time, new
studies have found that some of these buildings may not
survive a strong earthquake. Your bill will help and
encourage property owners to have work done to their
buildings to ensure they are safe. Your bill is important
not only to property owners but also to tenants who live in
these buildings.
3)Opponents of this bill note the following:
There is already a major incentive to retrofitting a
building - namely protecting a substantial investment in
property. It is highly irrational to have a substantial
investment in a property and not protect it with
appropriate seismic safety, since the entire investment
would be lost in the case of a disaster. And, since these
improvements are being made in some cases, the use of a tax
credit will only pay for activity that will otherwise be
undertaken.
4)The FTB notes the following implementation concern in its
staff analysis of this bill:
The bill states that the credit should be "allocated" but
lacks language necessary to describe an allocation. If it
is the author's intent that [the] credit be claimed in the
year "earned", or when the costs were incurred, it is
recommended [that] the bill be amended to specify when the
credit may be claimed.
5)Committee Staff Comments:
a) What is a "tax expenditure" ? Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S.
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Treasury officials began arguing 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).
b) How is a tax expenditure different from a direct
expenditure ? 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. This can offer taxpayers greater economic
certainty, but it can also result in tax expenditures
remaining a part of the tax code without demonstrating any
public benefit. Second, there is generally no control over
the amount of revenue losses associated with any given tax
expenditure. Finally, it should also be noted that, once
enacted, it takes a two-thirds vote to rescind an existing
tax expenditure absent a sunset date. This effectively
results in a "one-way ratchet" whereby tax expenditures can
be conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority
vote.
c) What would this bill do ? This bill would allow a credit
equal to 30% of a qualified taxpayer's qualified costs
incurred for seismic retrofit construction. According to
the United States Geological Survey, there is a 99.7%
chance that a major earthquake of 6.7 in scale will strike
California in the next 30 years. This bill's tax credit is
designed to lower the overall cost for property owners to
improve the seismic safety of their buildings. Proponents
note that such action, in turn, could save countless lives
in the event of a catastrophic earthquake, and would reduce
the demand for state and local emergency services by
hopefully minimizing structural damage. Older concrete
structures are particularly vulnerable to earthquake
damage, and the author notes that recent research has
identified 1,500 concrete buildings that are seismically
vulnerable in the Los Angeles area alone.
d) Implementation considerations : Committee staff has
identified certain implementation concerns with this bill's
current language. Committee staff is available to work
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with the author's office to resolve these and any other
concerns that may be identified. These issues include the
following:
i) This bill currently requires a taxpayer to obtain a
"certification" from the "appropriate jurisdiction with
authority for building code enforcement". While the
certification would attest to a building's "at-risk"
status, it is not clear what other information, if any,
would need to be included in the certification.
Moreover, this bill provides little definitional guidance
for identifying the "appropriate jurisdiction" with
building code enforcement authority. Additional
ambiguity is created by this bill's definition of a
"qualified building", which is deemed one that has been
certified as at-risk by the local housing authority. The
author may wish to consider appropriate amendments
clarifying which entities will have certification
authority and what the certifications will include.
ii) This bill currently defines "qualified costs" as
costs incurred for any seismic retrofit construction on a
qualified building. Seismic retrofit construction, in
turn, is defined as changes or additions to the structure
of a qualified building to mitigate seismic damage. This
language leaves room for some ambiguity regarding
precisely which costs are covered. For example, would
this bill provide a credit for so-called "soft" costs
incurred for the engineering and architectural reviews
that precede actual construction? It is Committee
staff's understanding that such costs can comprise a
significant component of any seismic retrofitting
project. In addition, would "qualified costs" include
fees paid to the appropriate jurisdiction charged with
issuing "at-risk" certifications? The Committee and
author may wish to adopt appropriate amendment to clarify
these issues.
iii) This bill specifically excludes from the definition
of "seismic retrofit construction" activities performed
solely to bring a qualified building into compliance with
standard local building codes. This raises a set of
interesting questions. Typically, tax credits are
implemented to encourage individuals and businesses to
engage in behavior they might not otherwise undertake
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absent a financial incentive. In line with this general
policy, it would appear that this bill would not cover
seismic improvement projects mandated by law or
applicable building codes. Is this the author's intent?
Moreover, what does it mean to say that activities are
being performed "solely" to bring a building into
compliance with building codes? If a taxpayer spent $1
million to bring an at-risk building to code, and an
additional $10,000 to improve seismic safety beyond code
requirements, what portion of these costs would be
eligible for the credit?
e) Double-dipping : This bill would allow a credit for
seismic retrofitting costs that are currently deductible as
a business expense. Generally, credits are allowed in lieu
of any applicable deductions to eliminate multiple tax
benefits for the same item of expense. The Committee may
wish to consider appropriate amendments addressing this
issue.
f) Absence of a sunset date : In its current form, this
bill's tax credit provisions lack automatic sunset dates.
This Committee has a longstanding policy favoring the
inclusion of sunset dates to allow the Legislature
periodically to review the efficacy and cost of tax
expenditure programs. The Committee may wish to consider
the addition of appropriate sunset provisions.
g) Prior legislation :
i) AB 1756 (Scott), of the 1999-00 Regular Session,
would have allowed a credit equal to 55% of the amount
incurred for seismic retrofit construction on residential
dwellings built prior to 1979. AB 1756 was held on the
Assembly Committee on Appropriations' Suspense File.
ii) SB 677 (McPherson), of the 2001-02 Regular Session,
would have allowed a credit equal to an unspecified
percentage of the final cost of seismic retrofitting, as
specified. SB 677 was never heard by the Senate
Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
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Apartment Association of Greater Los Angeles
California Apartment Association
City of Los Angeles
Santa Barbara Rental Property Association
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098