BILL ANALYSIS
REVISED
SENATE REVENUE & TAXATION COMMITTEE
Senator Jack Scott, Chair
SB 75XX - Ortiz
Amended: June 20, 2001
Tax Levy
Hearing: June 27, 2001 Fiscal: Yes
SUBJECT: Allows a deduction for interest paid on a loan
financed through a public or private utility
company to purchase energy efficient equipment
and products for California residences.
EXISTING LAW
Federal law provides two energy-related credits: (1) an
energy credit that is one portion of the investment credit;
and (2) a business credit for the production of electricity
from certain renewable resources.
Federal and state laws allow for the deduction of certain
expenses when calculating AGI, such as trade and business
expenses, losses from sale or exchange of property,
retirement savings, and alimony. These "above the line"
deductions can be taken regardless of whether these
deductions were itemized or the standard deduction was
claimed.
Federal and state laws also allow deduction of certain
expenses, such as medical expenses, charitable
contributions, and certain interest as itemized deductions.
Excluding home mortgage interest, these deductions may
only be claimed to the extent they exceed 2% of the
taxpayers AGI.
Federal and state laws allow 100% of the home mortgage
interest to be taken as an itemized deduction. Qualified
home mortgage interest is limited to interest paid or
accrued by the taxpayer by an acquisition loan or a home
equity loan.
THIS BILL
Allows an individual an above-the-line deduction
for interest paid or incurred on a public or private
utility company-financed loan that is used to purchase
and install energy efficient equipment or products,
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including zone heating products.
Defines the terms: energy efficient products or
equipment, public utility company, qualified
residence, and utility company financed indebtedness
pursuant to current law.
States legislative intent that the public utility
companies will have the responsibility to contact
their customers about this interest deduction program
and further inform their customers that energy
efficient products purchased through another type of
loan, such as a home equity loan is deductible.
Allows the interest deduction to begin January 1,
2001.
Takes effect immediately as a tax levy.
FISCAL EFFECT:
The Franchise Tax Board (FTB) estimates that this bill will
result in a $5 million revenue loss. This estimate is
based on the amount of interest expenses not otherwise
deducted as part of home equity financing and the marginal
tax rates of such taxpayers.
COMMENTS:
A. Purpose of the bill
The intent of this bill is to encourage energy conservation
by providing an incentive to taxpayers to make energy
efficient improvements.
B. Loans and Liens
An acquisition loan is the financing to acquire, construct,
or substantially improve the taxpayer's principal
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residence. A home equity loan is any financing, other than
the original acquisition loan that is not more than the
fair market value of the residence less the original
acquisition loan. The amount that can be treated as home
equity indebtedness cannot exceed $100,000. When interest
on a loan is deductible, the lender provides the homeowner
with a 1098 form that allows him or her to deduct the
interest. A taxpayer may have two principal residences for
tax purposes with up to $100,000 home equity indebtedness
and up to $1 million acquisition indebtedness. In the
cases of rental property, that interest may be deducted as
a business expense.
The qualified residence must secure both the acquisition
loan and/or the home equity loan. However, a debt will not
be considered to be secured by a qualified residence if it
is secured solely by a security interest, such as a fixture
filing (under the Uniform Commercial Code), a mechanic's
lien or a judgment lien, that attaches to the property
without the consent of the debtor. In other words, the
taxpayer agrees to the lien that accompanies the
aforementioned loans; he or she does not have to agree to
other types of liens.
C. SMUD utility loans
Currently, in accordance with the Municipal Utility
District (MUD) Act, the Sacramento Municipal Utility
District (SMUD) is the only significant utility district in
the State that has been identified as lending money to its
customers to encourage and enable customers to acquire and
install energy efficient products or equipment. The MUD
Act allows public utilities to make loans for energy
efficient purposes.
To the extent that interest on the utility company financed
indebtedness is considered qualified residence interest, it
is currently deductible as an itemized deduction.
However, SMUD representatives do not believe the interest
on these loans is deductible as the debt is secured by a
fixture filing, not a lien on the home as discussed above.
A fixture filing, according to the Uniform Commercial Code,
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secures a specific fixture in the home such as an air
conditioner. The fixture, due to its nature, such as
windows, a heater or an air conditioner, becomes part of
that real property. Although fixture filings are
considered a passive document; for example, SMUD cannot
foreclose on the home with this document, property cannot
be further encumbered until the fixture filing is taken
care of.
SMUD loans are offered in the following manner: At a point
of sale, a SMUD approved contractor will sell an energy
efficient product to a consumer. The contractors have the
ability to offer SMUD's financing. If the consumer agrees
to this financing, the contractor gives the information to
SMUD who reviews the consumer as for regular loan criteria,
credit and income. That consumer is then billed by SMUD.
D. 1098 Forms
In it's current form, this bill includes intent language
that public and private utilities must notify customers of
the deductibility option. It does not, however, require
that the utility issue a 1098 or similar form for tax
purposes.
E. IRS Question.
If this bill does become law, it will clarify the
deductibility question as it relates to state law; it will
not, however, answer the question as it relates to federal
law. According to SMUD, an IRS opinion may be necessary
for the federal deductibility of interest on these loans.
F. Public and Private Utilities
It is important to note that this bill does not define a
"private utility" and that the MUD act only allows public
utilities to offer loans for energy efficient products that
are not for profit. This bill should clarify the
definition of a "private utility."
For example, according to the MUD act, the SMUD loans are
not funded from bond revenue (as would be prohibited by the
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MUD act). These loans are funded out of the general fund
revenue. The interest earned on the loans is only used to
pay for the cost of the loan, administrative costs, and
anticipated losses.
SMUD has $70 million in total outstanding loans in 19,000
accounts.
G. Conservation Legislation
SB 5X (Sher, Chapter 7, Statutes of 2001, First
Extraordinary Session) appropriates $708.9 million to
various state agencies in order to reduce peak electricity
demand, to expand low-income energy assistance programs,
aid agricultural customers and encourage energy efficiency.
The bill also implements some new energy efficiency
programs and supplements existing energy efficiency
programs.
AB 29X (Kehoe, Chapter 8, Statutes of 2001, First
Extraordinary Session) appropriates $408 million for a
variety of new programs relating to energy conservation,
efficiency, and distributed generation.
H. Retroactive Incentive
The bill would allow the interest to be deducted for
qualified conservation equipment starting with the 2001
taxable year. The bill should probably be amended to apply
to interest incurred on or after the effective date of the
bill, since any expenses incurred before that date
presumably did not need this additional incentive.
I. Sunset
Often a sunset is recommended for this type of program.
Although FTB uses the best estimates possible, it is
possible that this program will cost more money than
initial estimates indicate.
Support and Opposition
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Support:SMUD
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Consultant: Gayle Miller
06/25/:1 13:57