Existing property tax law provides, pursuant to the authority of a specified provision of the California Constitution, for a homeowners exemption in the amount of $7,000 of the full value of a dwelling, as defined, and authorizes the Legislature to increase this exemption.

This bill, beginning with the lien date for the 201617 fiscal year, would increase the homeowners exemption from $7,000 to $25,000 of the full value of a dwelling. This bill would also require, for the 201718 fiscal year and for each fiscal year thereafter, the county assessor to adjust the amount of the homeowners exemption by the percentage change in the House Price Index for California for the first 3 quarters of the prior calendar year, as specified.

The California Constitution requires the Legislature, whenever it increases the homeowners property tax exemption, to provide a comparable increase in benefits to qualified renters. The Personal Income Tax Law authorizes various credits against the taxes imposed by that law, including a credit for qualified renters in the amount of $120 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income is $50,000 or less, and in the amount of $60 for other individuals if adjusted gross income is $25,000 or less. Existing law requires the Franchise Tax Board to annually adjust for inflation these adjusted gross income amounts.

This bill would, for taxable years beginning on and after January 1, 2016, increase this credit for a qualified renter to $428 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income is $50,000 or less, as adjusted for inflation, and to an amount equal to $214 for other individuals if adjusted gross income is $25,000 or less, as adjusted for inflation. The bill would also require, for taxable years beginning on or after January 1, 2017, the Franchise Tax Board to annually adjust for inflation, based upon the California Consumer Price Index, the amount of these credits. The bill would also make technical, nonsubstantive changes to the renters credit.

This bill would take effect immediately as a tax levy.

Existing property tax law provides, pursuant to the authority of a specified provision of the California Constitution, for a homeowners exemption in the amount of $7,000 of the full value of a dwelling, as defined, and authorizes the Legislature to increase this exemption.

This bill, beginning with the lien date for the 201617 fiscal year, would increase the homeowners exemption from $7,000 to $25,000 of the full value of a dwelling. This bill would also require, for the 201718 fiscal year and for each fiscal year thereafter, the county assessor to adjust the amount of the homeowners exemption by the percentage change in the House Price Index for California for the first 3 quarters of the prior calendar year, as specified.

The California Constitution requires the Legislature, whenever it increases the homeowners property tax exemption, to provide a comparable increase in benefits to qualified renters. The Personal Income Tax Law authorizes various credits against the taxes imposed by that law, including a credit for qualified renters in the amount of $120 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income is $50,000 or less, and in the amount of $60 for other individuals if adjusted gross income is $25,000 or less. Existing law requires the Franchise Tax Board to annually adjust for inflation these adjusted gross income amounts.

This bill would, for taxable years beginning on and after January 1, 2016, increase this credit for a qualified renter to $428 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income is $50,000 or less, as adjusted for inflation, and to an amount equal to $214 for other individuals if adjusted gross income is $25,000 or less, as adjusted for inflation. The bill would also require, for taxable years beginning on or after January 1, 2017, the Franchise Tax Board to annually adjust for inflation, based upon the California Consumer Price Index, the amount of these credits. The bill would also make technical, nonsubstantive changes to the renters credit.

Section 2229 of the Revenue and Taxation Code requires the Legislature to reimburse local agencies annually for certain property tax revenues lost as a result of any exemption or classification of property for purposes of ad valorem property taxation.

This bill would take effect immediately as a tax levy.

Existing property tax law provides, pursuant to the authority of a specified provision of the California Constitution, for a homeowners exemption in the amount of $7,000 of the full value of a dwelling, as defined, and authorizes the Legislature to increase this exemption.

This bill, beginning with the lien date for the 201617 fiscal year, would increase the homeowners exemption from $7,000 to $25,000 of the full value of a dwelling. This bill would also require, for the 201718 fiscal year and for each fiscal year thereafter, the county assessor to adjust the amount of the homeowners exemption by the percentage change in the House Price Index for California for the first 3 quarters of the prior calendar year, as specified.

The California Constitution requires the Legislature, whenever it increases the homeowners property tax exemption, to provide a comparable increase in benefits to qualified renters. The Personal Income Tax Law authorizes various credits against the taxes imposed by that law, including a credit for qualified renters in the amount of $120 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income is $50,000 or less, and in the amount of $60 for other individuals if adjusted gross income is $25,000 or less. Existing law requires the Franchise Tax Board to annually adjust for inflation these adjusted gross income amounts.

This bill would, for taxable years beginning on and after January 1, 2016, increase this credit for a qualified renter to $428 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income is $50,000 or less, as adjusted for inflation, and to an amount equal to $214 for other individuals if adjusted gross income is $25,000 or less, as adjusted for inflation. The bill would also require, for taxable years beginning on or after January 1, 2017, the Franchise Tax Board to annually adjust for inflation, based upon the California Consumer Price Index, the amount of these credits. The bill would also make technical, nonsubstantive changes to the renters credit.

Section 2229 of the Revenue and Taxation Code requires the Legislature to reimburse local agencies annually for certain property tax revenues lost as a result of any exemption or classification of property for purposes of ad valorem property taxation.

This bill would take effect immediately as a tax levy.

Date of Hearing: May 18, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 476 (

Author:Chang) – As Amended Ver: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:
   
   

   1. From $60 to $214 for individual taxpayers filing single, or married filing separate, with an adjusted gross income of $39,182 or less.
      
      

   2. 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).

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:

   1. Local governments are reimbursed for the revenue loss, and,

   2. 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:

   1. $60 for single and married filing separate with an adjusted gross income (AGI) of $37,768 or less; and,

   2. $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.
   
   "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 19^th 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 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 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.

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

Date of Hearing: May 11, 2015

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Philip Ting, Chair

ABPCA Bill Id:AB 476

Author:(Chang) – As Amended Ver:March 25, 2015

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:
   
   

   1. From $60 to $214 for individual taxpayers filing single, or married filing separate, with an adjusted gross income of $39,182 or less.
      
      

   2. 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).

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:

   1. Local governments are reimbursed for the revenue loss, and,

   2. 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:

   1. $60 for single and married filing separate with an adjusted gross income (AGI) of $37,768 or less; and,

   2. $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.
   
   "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 19^th 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 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 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.

REGISTERED SUPPORT / OPPOSITION:

Support

B. Dutton, Assessor-Recorder-County Clerk, San Bernardino County

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

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

None on file

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