BILL ANALYSIS                                                                                                                                                                                                    



                                                                     AB 697


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          Date of Hearing:  May 4, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 697  
          (Chu) - As Amended March 26, 2015


          


          Majority Vote.  Tax levy.  Fiscal committee.


          SUBJECT:  Personal income tax:  credits:  senior citizen renters


          SUMMARY:  Allows an income tax credit to low-income seniors in  
          an amount equal to the increase in rent of a qualified  
          residence, as specified.  Specifically, this bill:  


          1)Allows an income tax credit under the Personal Income Tax  
            (PIT) Law to a qualified taxpayer in an amount equal to the  
            increase in rent of a qualified residence paid or incurred by  
            the qualified taxpayer for the taxable year as compared to the  
            previous taxable year. 









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          2)Defines a "qualified taxpayer" as a person that meets all of  
            the following requirements:


             a)   He or she is 62 years of age or older;


             b)   He or she rents a qualified residence as his/her primary  
               residence, is named on the lease of that residence and has  
               rented that residence for a period of 12 months or more;  
               and,


             c)   His or her combined annual household income is $50,000  
               or less, more than one-third of which is spent on rent.


          3)Defines a "qualifying residence" as a property that is located  
            in the County of Alameda, the City and County of San  
            Francisco, the County of Ventura, and the County of Santa  
            Clara.


          4)Applies to taxable years beginning on or after January 1,  
            2016, and before January 1, 2019. 


          5)Allows any unused credit to carry over eight years until  
            exhausted. 


          6)Disallows the credit if a renter's credit has been claimed by  
            a taxpayer pursuant to Revenue and Taxation Code (R&TC)  
            Section 17053.5.


          7)Contains legislative findings and declarations relating to the  
            fact that a growing numbers of homeless senior citizens are  








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            being priced out of their homes. 


          8)Takes effect immediately as a tax levy. 


          EXISTING LAW:  


          1)Allows a nonrefundable income tax credit for qualified renters  
            in the following amounts:


             a)   $60 for single or married filing separately with an  
               adjusted gross income (AGI) of $37,768 or less; and,


             b)   $120 for married filing jointly, head of household, or  
               qualified widow or widower with an AGI of $73,536 or less.   
               (R&TC Section 17053.5.) 


          2)Defines a "qualified renter" as an individual who satisfies  
            both of the following requirements:


             a)   Is a California resident for all or part of the tax  
               year; and,


             b)   Rented and occupied California premises constituting his  
               or her principal place of residence for at least 50% of the  
               taxable year.


          3)Excludes from the definition of a "qualified renter" certain  
            individuals who otherwise would qualify.  For example, an  
            individual who, for more than 50% of the taxable year, rented  
            and occupied premises which were exempt from property taxes  








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            would not qualify as a qualified renter. Similarly, a person  
            who has been granted the homeowner's property tax exemption  
            during the taxable would not be eligible to claim the existing  
            renter's credit. 


          4)Requires the Legislature to provide increases in benefits to  
            qualified renters that are comparable to the average increase  
            in benefits provided to homeowners under the homeowner's  
            property tax exemption. (California Constitution, Article  
            XIII, Section 3(k)).  


          5)Requires any new tax credit legislation introduced on or after  
            January 1, 2015, to include specific goals, purposes,  
            objectives, and performance measures. (R&TC Section 41).  


          FISCAL EFFECT:  The FTB staff estimates that this bill will  
          result in an annual General Fund revenue loss of $26 million in  
          fiscal year (FY) 2015-16, $56 million in FY 2016-17, and $70  
          million in FY 2017-18. 


          COMMENTS:  


           1)Author's Statement  .  The author has provided the following  
            statement in support of this bill:



          "AB 697 is a pilot program that will provide necessary data on  
            how our State can lessen the effects of the rising costs of  
            housing.  California continues to be at the top of list of the  
            least affordable states to reside in.  This demonstration  
            project will allow stakeholders to ascertain if a tax credit  
            is an effective means to assist low-income senior citizens in  
            reducing some of the financial burden that occurs with a rent  








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            increase."
           2)Arguments in Support  . The proponents of this bill support this  
            bill's approach to help elderly low-income tenants.  They  
            argue that a tax credit is needed to "put money back into the  
            pockets of those who need it."


           3)Arguments in Opposition  . The opponents argue that this bill  
            "violates principles of good tax policy" and the "Equal  
            Protection Clause of the United States Constitution, which  
            requires each state to provide equal protection under the law  
            to all people within its jurisdiction."  The opponents do not  
            believe that a tax credit may be provided to taxpayers of "one  
            county and not to similarly situated taxpayers in other  
            counties simply on the basis of their location."  The  
            opponents state that they will remove their opposition "if the  
            bill is amended to provide the same rent moratorium and tax  
            credit to taxpayers who meet the criteria specified in the  
            bill in every county."


           4)The Purpose of This Bill  .  According to the author's office,  
            the rising cost of housing continues to be a problem for many  
            individuals, especially low-income senior citizens.  Thus,  
            this bill is intended to create a pilot program to determine  
            if a tax credit is an effective means to assist low-income  
            senior citizens who often have difficulty paying for expenses  
            such as healthcare costs, food and transportation.  Only four  
            counties would participate in the pilot program:  the County  
            of Alameda, the City and County of San Francisco, the County  
            of Ventura, and the County of Santa Clara. 


           5)Tax Expenditures  .  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  








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            determinable cost associated with each (in the form of  
            foregone revenues). 



            As noted by the FTB staff, tax expenditures are often adopted  
            because the Legislature hopes that the incentives will alter  
            the behavior of taxpayers.  "However, it is very difficult to  
            know if a tax expenditure has been calibrated properly for  
            achieving its desired goal.  For example, if a tax credit  
            intended to encourage additional investments of a specific  
            type is set too high, the credit may have the effect of  
            diverting investment from other projects that would be more  
            beneficial to the economy.  Another possibility is that a tax  
            expenditure may be adopted on equity grounds to offset some  
            cost peculiar to a particular group of taxpayers, but it may  
            also induce behavioral changes.  For example, the Renter's  
            Credit was designed to offset the perceived inequities in tax  
            treatment between renters and homeowners.  However, the  
            Renter's Credit actually offers renters an incentive to  
            continue renting their home rather than buying it.  As a  
            result, this credit undermines the mortgage interest deduction  
            and other tax expenditures that were designed specifically to  
            encourage home ownership."  (California Income Tax  
            Expenditures, FTB 2010 Report, pp. 21-22.)

           6)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.  While this affords  
            taxpayers greater financial predictability, 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, effectively  








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            resulting in a "one-way ratchet" whereby tax expenditures can  
            be conferred by majority vote, but cannot be rescinded,  
            irrespective of their cost or efficacy, without a  
            supermajority vote.
           
          7)Existing Renter's Credit  .  Existing law provides an income tax  
            credit to low-income taxpayers who rent their primary  
            residence.  Since 1999, the credit has been nonrefundable.   
            There is no comparable federal credit.  The amount of the  
            credit is $60 for single, married filing separately, and head  
            of household filers with incomes not exceeding the California  
            AGI limitation, currently $37,768.  The credit amount is $120  
            for married filing jointly and qualified widowers provided  
            that their AGI does not exceed $75,536.  The renter's credit  
            was originally enacted in 1972 as part of a comprehensive  
            property tax reform program.  The credit was intended to  
            equalize property taxes between renters and homeowners by  
            providing a benefit directly to the renter.  The Committee may  
            wish to consider amending the existing renter's credit program  
            instead of creating a new tax credit.  For example, the  
            Committee may wish to increase the amount of the renter's  
            credit for qualified seniors who rent in designated counties. 



           8)Alternative Approach  .   While this bill's tax credit is  
            designed to help the most vulnerable segment of California  
            residents, it is not clear whether that the proposed incentive  
            would achieve this goal.  Seniors 65 years of age or older,  
            with AGI of $18,238 or less, are not required to pay  
            California income tax and are unable to utilize any tax  
            credit.  Consequently, the proposed nonrefundable credit would  
            not benefit seniors who have little or no state income tax  
            liability.  However, almost any tax expenditure program could  
            simply be replaced with a direct expenditure program.  Thus,  
            the Committee may wish to consider whether the state could  
            subsidize rent paid by qualified seniors by making direct  
            payments to them, equivalent to the tax savings that would  
            have been available under the credit, instead of the tax  








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            credit.

           9)Rent Control in California  .  Fifteen cities in California have  
            rent control ordinances (Berkeley, Beverly Hills, Campbell,  
            East Palo Alto, Fremont, Hayward, Los Angeles, Los Gatos,  
            Oakland, Palm Springs, San Francisco, San Jose, Santa Monica,  
            Thousand Oaks, and West Hollywood).  These ordinances are most  
            common in cities with large populations and low vacancy rates,  
            where tenants may have difficulty finding affordable housing.   
            Local rent control ordinances specify how much a landlord can  
            increase the rent of an existing tenant.  Generally, under  
            local rent control ordinances, a landlord can increase a  
            tenant's rent once every 12 months by the allowable annual  
            rent increase without filing a petition with the local rent  
            board.  

            Historically, the state has invested in the construction,  
            preservation, and rehabilitation of affordable housing for low  
            and moderate-income households.  The funding sources to  
            support construction of affordable housing have drastically  
            diminished over the last five years.  With the elimination of  
            redevelopment agencies and the exhaustion of state housing  
            bonds, California has reduced its funding for the development  
            and preservation of affordable homes by 79% - from  
            approximately $1.7 billion per year to nearly nothing.  While  
            the goal of this bill is admirable, it will likely do nothing  
            to increase the supply of affordable housing for seniors.   
            Furthermore, it is unclear whether the credit may achieve its  
            objective if conditions in the rental market are favorable to  
            landlords.  Under these market conditions, landlords may be  
            able to increase rents by an amount equal to the Renter's  
            Credit, leaving no benefit to the renters.  The Committee may  
            wish to consider whether a better investment of the General  
            Fund monies required to fund this bill's tax credit would be  
            to provide funding for the construction of new affordable  
            units.  

           10)Deductibility of State Income Tax  .  State income taxes are  
            deductible for federal income tax purposes.  Thus, for those  








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            who itemize deductions, up to 40% of the state income tax  
            would effectively be borne by the Federal Government in the  
            form of reduced federal income tax payments.  Thus, a tax  
            credit or deduction on the state level generally translates  
            into an increased amount of federal income taxes paid by  
            Californians.  By decreasing the state income tax obligation  
            of seniors, this bill would effectively subsidize the federal  
            coffers.
           
          11)R&TC Section 41  :  On September 29, 2014, Governor Brown  
            signed SB 1335 (Leno), Chapter 845, Statutes of 2014, which  
            added R&TC Section 41.  SB 1335 recognized that the  
            Legislature should apply the same level of review used for  
            government spending programs to tax preference programs,  
            including tax credits.  Thus, Section 41 requires any bill  
            that is introduced on or after January 1, 2015 and allows a  
            new PIT credit to contain specific goals, purposes, and  
            objectives that the tax credit will achieve.  In addition,  
            Section 41 requires detailed performance indicators for the  
            Legislature to use when measuring whether the tax credit meets  
            the goals, purposes, and objectives so-identified.  
             


            In its current form, this bill does not specify the goals,  
            purposes, objectives or performance measures of the proposed  
            credit program and, thus, is not in compliance with the  
            requirements of R&TC Section 41.  The Committee may wish to  
            consider asking the author to comply with Section 41  
            requirements. 





           12)Equal Protection Clause  .  The opponents question the  
            constitutionality of this bill under the Equal Protection  
            Clause of the XIV Amendment of the United States Constitution,  
            which prohibits any state from denying to "any person within  








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            its jurisdiction the equal protection of the laws."  The Equal  
            Protection clause reaches well beyond racial classifications,  
            targeting a broad range of discriminatory legislation and has  
            played a significant role in challenges to state and local  
            taxes.   

          The tax laws are full of distinctions and classifications.  For  
            example, state legislatures have created several income tax  
            brackets based on the taxpayer's income, enacted lower tax  
            rates of tax for capital gains in comparison to ordinary  
            income, and provided an exclusion from sales tax for purchases  
            of intangible property, among others.  The Equal Protection  
            Clause does not necessarily prohibit state legislatures from  
            drawing distinctions among classes of individuals or property.  
             However, it requires that the distinctions rationally further  
            a legitimate state interest unless a classification scheme  
            implicates the exercise of a fundamental right or categorizes  
            persons on the basis of an inherently suspect characteristic.   
            Practically speaking, a state tax statute would be upheld if a  
            plausible policy reason exists for the classification, the  
            classification is used to further the statutory goal and it is  
            not so tenuous as to be arbitrary or irrational.  In this  
            case, this bill would create a tax credit program available to  
            seniors with a specified AGI who live in certain designated  
            counties.   The proposed tax credit pilot program is intended  
            to help low-income senior renters remain in their homes and  
            designates counties based on the average fair market rent.   
            Clearly, the state government has a legitimate interest in  
            protecting the most vulnerable segment of its population and  
            the distinction drawn between the low-income seniors living in  
            the most expensive counties in California and those living  
            elsewhere in the state cannot be said to be arbitrary or  
            irrational.  
           13)FTB's Implementation Concerns  .  In its current form, this  
            bill's tax provisions lack sufficient detail to enable the FTB  
            to administer the credit.  For example, the credit is based on  
            the "increase in rent".  This bill may be interpreted to allow  
            several people residing in the same household to claim the  
            full amount of the credit for the same "rent increase."  








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            Furthermore, it is not readily apparent what "combined annual  
            household income" means.  Is it the amount of AGI or taxable  
            income?  What type of "property" is eligible for the credit?   
            A mobile home, vacant land, or property that has been granted  
            a homeowners' exemption?  FTB staff has identified these and  
            other technical considerations that would need to be addressed  
            before this tax credit program could be effectively  
            implemented.  


           14)Related Legislation  .


             a)   AB 1229 (Campos) would create a credit equal to the  
               amount of foregone rent pursuant to the Senior Citizen Rent  
               Increase Exemption program.  AB 1229 is pending hearing by  
               this Committee.


             b)   AB 476 (Chang) would increase the homeowners' exemption  
               from $7,000 to $25,000 of the full value of a dwelling and  
               increase the renter's credit for qualified renters, as  
               provided.  AB 476 is pending hearing by this Committee. 


          REGISTERED SUPPORT / OPPOSITION:




          Support


          Apartment Association of Orange County


          Apartment Association, California Southern Cities










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          East Bay Rental Housing Association


          Nor Cal Rental Property Association


          North Valley Property Owners Association




          Opposition


          California Taxpayers Association (oppose unless amended)




          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098