BILL ANALYSIS �
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Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2537 (Grove) - As Amended: April 1, 2014
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: water-conserving plumbing
fixtures
SUMMARY : Allows, for taxable years beginning on or after
January 1, 2014, a credit equal to 25% of the amount paid or
incurred during the taxable year by a "qualified taxpayer" for
the installation of one or more "water-conserving plumbing
fixtures" by a licensed plumber to replace a "noncompliant
plumbing fixture" on "qualified real property" in California.
Specifically, this bill :
1)Contains the following legislative findings:
a) There is a pressing need to address water supply
reliability issues raised by growing urban and agricultural
areas;
b) There are many water conservation practices that produce
significant energy and other resource savings that should
be encouraged as a matter of state policy;
c) California law requires, for all building alterations or
improvements to a single-family residential property, a
permit applicant to replace all noncompliant plumbing
fixtures with water-conserving plumbing fixtures as a
condition to be issued a certificate of final completion
and occupancy or final permit approval by the local
building department;
d) California law also requires, by January 1, 2019, that
all noncompliant plumbing fixtures in multifamily
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residential real property and commercial real property be
replaced with water-conserving plumbing fixtures; and,
e) In furtherance of the current and ongoing water
conservation efforts throughout the state, it is the intent
of this act to provide financial relief and incentives for
qualified taxpayers replacing or installing
water-conserving plumbing fixtures for residential and
commercial real property.
2)Allows the credit under both the Personal Income Tax (PIT) Law
and the Corporation Tax (CT) Law.
3)Caps the credit at $2,500 per taxable year per "qualified
taxpayer".
4)Defines a "qualified taxpayer" as the owner of any "qualified
real property".
5)Defines a "water-conserving plumbing fixture" as any fixture
that complies with current building standards applicable to a
newly constructed real property of the same type.
6)Defines a "noncompliant plumbing fixture" as any of the
following:
a) Any toilet manufactured to use more than 1.6 gallons of
water per flush;
b) Any urinal manufactured to use more than one gallon of
water per flush;
c) Any showerhead manufactured to have a flow capacity of
more than 2.5 gallons of water per minute; and,
d) Any interior faucet that emits more than 2.2 gallons of
water per minute.
7)Defines "qualified real property" as any of the following:
a) Commercial real property, defined as real property that
is improved with, or consisting of, a building intended for
commercial use, including hotels and motels;
b) Multifamily residential real property, defined as any
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real property that is improved with, or consisting of, a
building containing more than one unit intended for human
habitation, or any mixed residential-commercial buildings
or portions thereof that are intended for human habitation;
or,
c) Single-family residential real property, defined as any
real property that is improved with, or consisting of, a
building containing not more than one unit intended for
human habitation.
8)Excludes from the definition of "qualified real property" any
real property for which water service is permanently
disconnected.
9)Requires the qualified taxpayer to obtain a certification from
a licensed plumber that the plumber installed a
water-conserving plumbing fixture to replace a noncompliant
plumbing fixture on qualified real property in this state.
10)Takes immediate effect as a tax levy.
EXISTING LAW 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.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates General
Fund revenue losses of $300 million in fiscal year (FY) 2014-15,
$230 million in FY 2015-16, and $90 million in FY 2016-17.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
State government constantly hands down mandates and
burdensome requirements on California Taxpayers and local
governments. Rarely, do we pass laws that actually make
complying with the laws this institution passes easier and
cost effective. With California facing one of the driest
years on record, the [L]egislature should encourage
water-conservation and water usage by making it financially
easier for California homeowners to comply with the
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requirements of SB 407 of 2009. With the development and
construction of new water sources and infrastructure light
years away, this measure may make water conservation
efforts at least more affordable for California families.
2)The FTB notes the following implementation concerns in its
staff analysis of this bill:
a) "The bill requires that taxpayers use a licensed plumber
to install the water-conserving item. This would preclude
taxpayers that install the item themselves from getting the
credit for the cost of the water-conserving item installed.
If this is contrary to the author's intent, the bill
should be amended."
b) "Because the bill fails to specify otherwise, the $2,500
annual cap on the credit would apply to each owner of a
qualified property. For example, a qualified property
owned by two qualified taxpayers could generate a credit of
up to $5,000. If this is contrary to the author's intent,
the bill should be amended to specify that the $2,500 per
year is per property."
3)Opponents of this bill note the following:
[C]onserving water is a savings alone to a property owner
and thus there already is a market incentive to save. And,
for those lower-income owners who perhaps could not afford
such measures without the credit, those individuals likely
pay little if no tax, making the credit useful only to
those most able to pay for conservation already.
4)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.
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
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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 exactly are we incentivizing ? Generally, tax
credits are provided as a matter of legislative grace to
encourage socially beneficial behavior that likely would
not occur absent a financial incentive. Because current
law requires that properties be upgraded with water
efficient plumbing, this bill would be providing a tax
credit for conduct that is mandated by law. In addition,
because this bill applies to taxable years beginning on or
after January 1, 2014, this bill would be providing a
credit for behavior that had already taken place before
this bill's enactment. The Committee may wish to consider
the policy implications of providing such an incentive.
d) Double-dipping : This bill would allow a credit for
replacing plumbing with water efficient items. Such
repairs and upgrades would currently be deductible as a
business expense. Generally, a credit is allowed in lieu
of a deduction in order to eliminate multiple tax benefits
for the same item of expense.
e) Carry me over : This bill lacks standard "carryover"
language normally included with a tax credit. As a result,
any unused credit amount would be lost if the taxpayer were
unable to use the entire credit amount in the year claimed.
f) Absence of a sunset date : In its current form, this
bill's tax credits lack automatic sunset provisions. This
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Committee has a longstanding policy favoring the inclusion
of sunset dates to allow the Legislature periodically to
review the efficacy and cost of such programs. The author
may wish to consider the addition of appropriate sunset
provisions.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098