AB 476
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Date of Hearing: May 18, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 476 (Chang) – As Amended March 25, 2015
SUSPENSE
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Taxation: homeowners’ exemption and renters’ credit
SUMMARY: Increases the homeowners' property tax exemption and the renters' credit amounts.
Specifically, this bill:
1) Increases the homeowners' property tax exemption from $7,000 to $25,000, beginning with
the lien date for 2016-17 fiscal year (FY).
2) Requires a county assessor, for the 2017-18 FY and each fiscal year thereafter, to adjust the
amount of the homeowners' exemption by the percentage change in the Housing Price Index
for California for the first three quarters of the prior calendar year, as specified.
3) Increases the nonrefundable renter's tax credit for taxable years beginning on and after
January 1, 2016, according to filing status of the individual as follows:
a) From $60 to $214 for individual taxpayers filing single, or married filing separate, with
an adjusted gross income of $39,182 or less.
b) From $120 to $428 for married couples filing joint returns, heads of household, and
surviving spouses with an adjusted gross income of $78,363 or less.
4) Requires the Franchise Tax Board (FTB) to adjust annually the amount of the renter's credit
for inflation, beginning with the 2017 taxable year, based upon the California Consumer
Price Index.
5) Makes technical, non-substantive changes to the renters' credit provisions.
6) Takes effect immediately as a tax levy.
EXISTING LAW:
1) Provides that all property is taxable, unless otherwise provided by the California Constitution
or federal laws [Section 1(a), Article XIII, California Constitution].
2) Limits ad valorem taxes on real property to 1% of the full cash value of that property and
limits future annual increases in assessed values to the rate of inflation, not to exceed 2%, as
long as the property remains under the same ownership (Proposition 13).
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3) Exempts from property taxation the first $7,000 of assessed valued of an owner-occupied
principal place of residence (usually referred to as the "homeowners' exemption") [Section
3(k), Article XIII, California Constitution].
4) California Constitution, Article XIII, Section 25, requires the state to reimburse each local
government for the revenue loss from the homeowners' exemption. The Constitution
establishes the minimum amount of the homeowners' exemption, but permits statutory
increases under certain conditions.
5) Authorizes the Legislature to increase the amount of the homeowners' exemption if both of
the following requirements are satisfied:
a) Local governments are reimbursed for the revenue loss, and,
b) Benefits to renters, currently provided via the renters' income tax credit, are increased by
a comparable amount. [Section 3(k), Article XIII, California Constitution.]
6) Allows a nonrefundable credit for qualified renters in the following amounts:
a) $60 for single and married filing separate with an adjusted gross income (AGI) of
$37,768 or less; and,
b) $120 for married or registered domestic partners filing jointly, heads of household, or
surviving spouses with an AGI of $75,536 or less.
7) Requires the FTB to adjust annually for inflation the amount of the AGI used for purposes of
calculating the renters' credit. (R&TC Section 17053.5).
8) Allows an individual, under the California Personal Income Tax (PIT) Law, to deduct real
property taxes if that taxpayer reports itemized deductions in a taxable year. The PIT Law
allows a renters' credit to qualified taxpayers.
9) Requires the Legislature to provide increases in benefits to qualified renters that are
comparable to the average increase in benefits allowed to homeowners under the
homeowners' property tax exemption.
FISCAL EFFECT: The State Board of Equalization (BOE) staff estimates that this bill would
result in an annual General Fund (GF) revenue loss of $1.07 billion (from the increase in the
state reimbursement for the homeowners' exemption). In addition, the FTB staff estimates that
this bill would result in an annual GF revenue loss of $340 million in FY 2016-17, and $220
million in FY 2017-18.
COMMENTS:
1) Author's Statement. The author has provided the following statement in support of this bill:
"The current homeowners' exemption in California is $7,000. This is taken off the value of a
homeowner's primary residence, amounting to $70 annually off of your property tax bill, or
one percent. As of 1972, when the homeowner's exemption was last changed, the median
California home price was approximately $21,000. Today, it is nearly $425,000 and
climbing. Clearly this benefit to taxpayers has not kept up with the price of homes.
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"Since 1985, there have been at least 30 bills introduced into the state Legislature attempting
to increase the exemption amount, either for all homeowners or for certain groups (such as
seniors or first-time home buyers) or to index it to inflation. All have failed.
"Beginning with the 2015-16 fiscal year, the exemption would increase from $7,000 to
$25,000. This would increase the annual exemption every homeowner would receive from
$70 (1% of exemption) to $250. Some would argue that this increase is not necessary
because Proposition 13 already saves homeowners thousands of dollars every year.
However, property taxes remain high because of local bond debt and special taxes –
especially special parcel taxes –which do not count against Proposition 13's one percent cap.
"According to the non-partisan Tax Foundation, California ranks 19th out of 50 states in per
capita property tax collections. We would argue there is much more government can do to
bring increased property taxes under control. This is especially true considering California
ranks at or near the top of a number of major tax categories including income, sales, and gas
taxes. With California experiencing a revenue surplus in the billions of dollars, and the
highest General Fund budget since before the recession, the time seems right for broad based
tax relief. With homeowners constituting a majority of California's population, an increase in
the exemption represents sound public policy.
"The proposed bill would also annually index the homeowner's exemption to the House Price
Index for California as determined by the federal Housing Finance Agency to ensure that
current and future homeowners can also benefit from the full value of the homeowners'
exemption."
2) Arguments in Support. The proponents argue that the time "is right for tax relief…that
supports the greatest number of taxpayers" and that, "while Proposition 13 continues to
provide necessary property tax relief for all homeowners, more is needed." They assert that
inflation, "as well as bonds and voter-approved parcel taxes, have added additional burdens
to homeowners' tax bills." Thus, the proponents believe that, given "California's
homeownership base and increased General Fund revenues, increasing the homeowners'
exemption represents appropriate public policy."
3) One of the Lowest Property Tax Burden for Owner-Occupied Housing in the Nation.
Proposition 13, passed by the voters in 1978, was designed to provide real property tax relief
by imposing a set of interlocking limitations upon the assessment and taxing powers of state
and local governments. Proposition 13 generally limits the maximum amount of any ad
valorem tax on real property to no more than 1% of the property's full cash value, as adjusted
for the lesser of inflation or 2% per year1. Proposition 13 also requires cities, counties, and
special districts to obtain approval of two-thirds of their qualified electors in order to impose
an undefined class of "special taxes."2 Consequently, California homeowners bear a low
property tax burden in comparison to homeowners in other states: California ranks 34th for
property taxes paid as a percentage of owner-occupied housing value. The effective
property tax rate on owner-occupied housing (which is calculated as total real property taxes
paid divided by total home value) amounts to 0.81% in California. In contrast, that rate is
1
2
California Constitution, Section 1 of Article XIII A.
California Constitution, Section 4 of Article XIII A.
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2.38% in New Jersey, 1.64% in New York, and 1.90% in Texas. Hawaii has the lowest rate
of 0.28%.
4) Homeowners' Property Tax Exemption. In addition to Proposition 13, the California
Constitution provides for a property tax homeowners' exemption, which amounts to annual
tax relief for homeowners of almost $75. The exemption, which reduces the taxable value of
a home, may be claimed only by a taxpayer who owns and occupies a home as his/her
principal residence. According to the BOE staff, in fiscal year 2013-14, the homeowners'
exemption was claimed by 5.2 million property owners.
The amount of the exemption was set at $7,000 in 1974, prior to the passage of
Proposition13, and has remained unchanged since then. Clearly, the amount of tax relief due
to the homeowners' exemption was more valuable in 1974. However, it may be argued that
the need for the homeowners' exemption was made obsolete by the passage of Proposition 13
because protections against rising property taxes are now built into the tax system.
5) The Value of the Homeowners' Exemption: Who Benefits the Most? Since the homeowners'
exemption is set at a fixed amount, the real benefit of this exemption varies depending on the
assessed value of the house. For example, under this bill, a taxpayer who owns a house with
the assessed value of $100,000 would see an 18% reduction in his/her property tax bill. In
contrast, the same exemption would result in a 4.5% reduction in the property tax burden
imposed on a taxpayer whose house is identical, yet assessed at $400,000. In light of the
acquisition value system created by Proposition 13, the increase of the exemption amount
from $7,000 to $25,000 would disproportionately benefit taxpayers who have owned their
houses for a longer period of time, i.e. those with the lower assessed value. The Committee
may wish to consider whether the state should provide yet another General Fund subsidy that
would mostly benefit those taxpayers, regardless of their income.
6) One of the Most Subsidized Assets. In addition to protections guaranteed by Proposition 13,
owner-occupied housing is also heavily subsidized by the federal and state governments.
Existing federal and state income tax laws allow deductions from income for mortgage
interest on the first and second homes and exclude from income up to $500,000/ $250,000 of
gain on the sale of a principal residence. Tax preferences that encourage homeownership
also include deductibility from income of property taxes for state and federal tax purposes.
Homeownership is also encouraged by the non-taxability of the housing services that are
received by the owner, as well as by the exclusion from income of the cancellation of
indebtedness income made temporarily available as part of the recent economic stimulus
packages. Furthermore, both state and federal laws provide a special tax treatment of assets
inherited after the owner dies. Thus, if the heir sells the asset, the capital gain is calculated
based on the asset's "stepped-up" value when the owner died, not its value when the owner
bought that asset. Although this preferential tax treatment is not limited to owner-occupied
housing, the "step-up basis" treatment of capital gains significantly affects housing
transactions.3 Originally, this preferential tax treatment was justified as a way to avoid
double taxation of capital gains on inherited property, but California removed its taxes on
3
Housing-Related Tax Expenditure Programs, a Presentation to the Assembly Revenue and Taxation Committee,
prepared by the Legislative Analyst's Office, March 18, 2013, page 9.
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inherited property in 1982. Finally, the applicability of the federal estate tax has also been
recently limited.4
Homeownership is clearly a public goal because similar income tax benefits are not afforded
to any other asset class. According to the CRS report,5 some analysts argue that this
preferential tax treatment of housing encourages households to over-invest in housing and
invest less in business ventures that might contribute more to the nation's productivity and
output. The Committee may wish to consider whether an increase in the amount of the
homeowner's tax exemption is warranted in light of the myriad of other types of tax relief,
both state and federal, afforded to home ownership.
7) Indexing. This bill requires the county assessor to index the amount of the homeowners'
exemption every year by the percentage change in the House Price Index, as specified. The
proposed adjustment would provide on-going property tax reductions, even if values of
houses in California soar, while an adjustment to the assessed value of a house would remain
subject to the 2% constitutional inflation cap. The Committee may wish to consider whether
indexing the homeowners' exemption amount without a corresponding annual adjustment to
the assessed value is justified, given the existence of Proposition 13 limitations on the
assessment of real property in the state.
8) Renters' Credit. The Personal Income Tax (PIT) law allows an eligible individual who rents
his/her principal residence to reduce his/her state income tax with a tax credit. The renters'
credit was suspended for the 1993 through 1997 taxable years, but was reinstated beginning
with the 1998 taxable year. The credit eligibility is based on the taxpayer's AGI and his/her
filing status. AGI amounts are indexed annually for inflation. For the 2015 tax year, a credit
of $120 is allowed for married taxpayers filing joint returns; heads of household and
surviving spouses with an AGI of $75,536 or less; and $60 for other individuals (single or
married/RDP filing separately) with an AGI of $37,768 or less.6 The renters' credit is
nonrefundable.
9) The Constitutional Requirement. The $7,000 homeowners' exemption amount prescribed by
the California Constitution is the minimum exemption amount, which means that it may be
increased by the Legislature. However, the California Constitution requires the Legislature
to provide an equivalent increase in the amount of the renters' credit whenever the
homeowners' exemption amount is increased. Furthermore, the state is required by the
Constitution to reimburse local governments for the property tax revenue loss due to the
homeowners' exemption. In fact, this exemption is the only property tax exemption for
which the state fully reimburses local governments.
4
Ibid.
Congressional Research Services, The Mortgage Interest and Property Tax Deductions: Analysis and Options,
Mark P. Keightley, p.17.
6
The California Constitution requires the State Legislature to provide a comparable increase in benefits to qualified
renters wherever it proposes to increase the homeowner's exemption, as provided by Article XIII, Section 3(k) of the
California Constitution. The current exemption amount is the first $7,000 of the full value of a dwelling occupied as
the owner's principal residence on the January 1 lien date from property taxation. The Legislature may increase the
size of the homeowners' exemption; but if it does so, it must also: (a) increase the rate of state taxes in an amount
sufficient to pay for the increased cost of state subventions to local governments, and (b) provide a comparable
increase in benefits to qualified renters.
5
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REGISTERED SUPPORT / OPPOSITION:
Support
B. Dutton, Assessor-Recorder-County Clerk, San Bernardino County
California Apartment Association
California Association of Realtors
Contra Costa Taxpayers Association
D. Harkey, State Board of Equalization, Member
Fullerton Taxpayers Association
G. Runner, State Board of Equalization, Member
Habitat for Humanity California
Howard Jarvis Association
Humboldt County Taxpayers League
Kern County Taxpayers Association
KernTax Fact Through Research
Long Beach Taxpayers Association
Napa County Taxpayers Association
National Tax-Limitation Committee
Orange County Taxpayers Association
Placer County Taxpayers Association
San Diego Tax Fighters
Opposition
California Tax Reform Association
Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098