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 spouses filing joint returns, heads of household, and surviving spouses if adjusted gross income is $50,000, as adjusted, or less, and in the amount of $60 for other individuals if adjusted gross income is $25,000, as adjusted, or less. Existing law requires the Franchise Tax Board to annually adjust for inflation these adjusted gross income amounts. For 2016, the adjusted gross income limit is $76,518 and $38,259, respectively.

This bill would, for each taxable years year beginning on and after January 1, 2017, and before January 1, 2022, contingent upon a specified appropriation, increase this credit for a qualified renter to $240 for married couples spouses filing joint returns, heads of household, and surviving spouses if adjusted gross income is $100,000 or less, and to an amount equal to $120 for other individuals if adjusted gross income is $50,000 or less. The bill would require the Franchise Tax Board to annually adjust the increased adjusted gross income amount for inflation, beginning January 1, 2018. inflation.

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, as adjusted, or less, and in the amount of $60 for other individuals if adjusted gross income is $25,000, as adjusted, or less. Existing law requires the Franchise Tax Board to annually adjust for inflation these adjusted gross income amounts. For 2016, the adjusted gross income limit is $76,518 and $38,259, respectively.

This bill would, for taxable years beginning on and after January 1, 2017, increase this credit for a qualified renter to $240 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income is $100,000 or less, and to an amount equal to $120 for other individuals if adjusted gross income is $50,000 or less. The bill would require the Franchise Tax Board to annually adjust the adjusted gross income amount for inflation, beginning January 1, 2018.

This bill would take effect immediately as a tax levy.

Date of Hearing: May 10, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 181

Author:(Lackey) – As Amended Ver:April 24, 2017

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill increases the Renter’s Credit under the Personal Income Tax (PIT) Law from $120 to $240 for couples filing joint returns, heads of household, and surviving spouses, and from $60 to $120 for other individuals. These increases will be operative for taxable years beginning on or after January 1, 2017, and before January 1, 2022. This Renter’s Credit expansion is contingent upon an appropriation to the Franchise Tax Board (FTB) to administer the provisions of this bill.

FISCAL EFFECT:

1. Additional General Fund (GF) cost pressures in the range of $210 to $230 million each year beginning in 2017-18. These cost pressures reflect the potential GF revenue loss if the proposed deduction becomes operative once FTB receives an appropriation to administer it.
2. Minor GF cost pressures for FTB’s administration of the proposed deduction. These costs only materialize if FTB receives a budget appropriation to administer the provisions of this bill, as required.

COMMENTS:

1. Purpose. AB 181 aims to make the California Renter’s Credit more reflective of the current housing market. The Renter’s Credit has not been increased in over 25 years, and renters are under increasing financial pressure as housing costs rise.
2. Background. The Renter’s Credit provides a credit to low-income taxpayers who rent their primary residence in order to counteract the inequity between renters and homeowners. The credit was originally enacted in 1972 as part of a comprehensive property tax reform program. That program allowed for an increase in the Homeowner's Property Tax Exemption Credit that reduces the property tax on owner-occupied property. In contrast, rental property is not eligible for the homeowner's exemption. The Renter’s Credit was increased significantly in 1979 shortly after the approval of Proposition 13 because it was thought that homeowners were receiving a benefit from Proposition 13, while renters were not.

Today, the amount of the credit is $60 for single, married filing separately, and head of household filers with income not exceeding the California AGI limitation. The credit amount is $120 for married filing jointly and a qualified widower.

1. Fiscal implications of tax expenditures. Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. These features of tax law are 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). One ongoing concern about tax expenditures is the lack of control over revenue losses, since the number of taxpayers taking advantage of any given tax expenditure can vary each year. This bill expands an existing tax expenditure, the Renter’s Credit, to help renters cope with the high costs of housing.

A recent policy committee amendment that makes this new proposed credit expansion operative on years when the FTB receives an appropriation to administer it is a step in the right direction for controlling its year-to-year costs, but significant cost pressures remain. As amended, this bill creates the expectation that this expanded credit will be available and puts in place the conditions for it to be made available. Moreover, the nature of PIT tax expenditures means that once the expanded credit is made operative by funding the administrative costs, the revenue loss associated with it can no longer be managed or capped for that year.

1. Recent legislation. AB 2694 (Lackey), of the 2015-16 Legislative Session, would have also expanded the Renter’s Credit. AB 2694 was held on this committee’s Suspense File.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: April 17, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 181 (

Author:Lackey) – As Introduced Ver:January 18, 2017

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Taxation: renters’ credit

SUMMARY: Doubles the renters' credit amount under the Personal Income Tax (PIT) Law for qualified renters, and increases the income eligibility limits for the credit. Specifically, this bill:

1. Increases, for taxable years beginning on or after January 1, 2017, an existing tax credit under the PIT Law that may be claimed by qualified renters as follows:
   1. Increases the credit from $120 to $240 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income (AGI) is $100,000 or less; or,
   2. Increases the credit from $60 to $120 for other individuals if AGI is $50,000 or less.
2. Requires the Franchise Tax Board (FTB) to annually adjust the specified AGI amounts for inflation for each taxable year beginning on or after January 1, 2018.
3. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various tax credits under the PIT Law, generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
2. Allows a tax credit for qualified renters as follows:
   1. $120 for married couples filing joint returns, heads of household, and surviving spouses if AGI is $50,000 or less; or,
   2. $60 for other individuals if AGI is $25,000 or less.
3. Requires the FTB to adjust annually the specified AGI amounts for inflation. For tax year 2016, the AGI limits are $78,125 and $39,062, respectively.
4. Defines a "qualified renter" as an individual who satisfies both of the following:
   1. Was a resident of California; and,
   2. Rented and occupied premises in California which constituted his or her principal place of residence during at least half of the taxable year.
5. Specifies that a qualified renter does not include an individual whose principal place of residence is with another person who claims him or her as a dependent for income tax purposes, and other exclusions, as specified.
6. Requires any person claiming the credit to do so under penalty of perjury.

FISCAL EFFECT: The FTB estimates General Fund revenue losses of $210 million in fiscal year (FY) 2017-18, $220 million in FY 2018-19, and $230 million in FY 2019-20.

COMMENTS:

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

Research by the Center on Budget and Policy Priorities shows that low-income renters are far more likely to pay a higher share of their income for housing than higher-income households. While many tax benefits exist for homeowners – who tend to generally be more affluent – renters lack similar benefits that reduce their housing cost burden.

California housing costs have increased dramatically over the past few years which have placed a disproportionately high burden on working and middle-class families. The statewide median rent now exceeds $2,100 for a 2-bedroom, according to a February 2016 report by Apartment List with cities like Los Angeles and San Jose rising to over $2600 per month.

Short supplies of subsidized and affordable housing means that there is little relief for families struggling to cope with rising rental prices. The high price of housing is a key contributor to the state's troubling poverty rate, which the PPIC estimates includes 21% of all Californians when factoring in housing and other cost of living expenses. Not only does housing affordability affect low-income households, but in many urban areas middle-class families are struggling as well.

California's rental tax credit has not been increased for over 25 years. Doubling the amount this tax incentive offers to renters will make it more reflective of the current housing market, and is a near-term solution that the Legislature can provide to working and middle-class families while other potential strategies for expanding affordable housing will take many years to implement. With many working multiple-jobs or devoting a disproportionately high amount of their wages to afford rent, it's clear that some financial relief is desperately needed now.

1. Committee Staff Comments:
   1. Arguments in Support: Proponents of this bill state that "granting a modest increase to California's rental tax credit is a near-term solution that the Legislature can provide to families struggling with high housing costs while other potential strategies will take many years to implement."
   2. What is a "Tax Expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States 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 of them (in the form of forgone revenues). This bill would increase an existing tax expenditure program by doubling the amount of the renters' credit and increasing AGI eligibility limitations for the credit.
   3. Tax Expenditure vs. 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. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining 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 bill does not include a sunset date. The Committee may wish to consider including a sunset date on the increased renters' credit, especially since market forces may eventually cause rent prices to level out and eliminate the need for amplified relief.

• 1. Affordable Housing Crisis: There is no doubt that California is in the midst of a serious housing shortage impacting both homeowners and renters alike. A 2016 report from the Legislative Analyst's Office, Perspectives on Helping Low-Income Californians Afford Housing, concludes that facilitating more private housing development, especially in the state's coastal urban communities, is the key remedy to help make housing more affordable for low-income Californians. Existing affordable housing programs assist only a small proportion of low-income Californians, with the majority receiving little or no assistance – expanding such programs to help these households would be prohibitively expensive and potentially have a greater impact if the programs were tailored to support Californians with specialized housing needs.

The author's office contends that absent broader changes to the state's housing policies, targeted tax incentives as provided in this bill can help provide relief for households spending a disproportionate share of their income on housing. While increasing the amount and scope of the renters' credit would provide considerable relief to some low-income individuals, the increase would also put money in the pockets of individuals who may not notice it. For example, an increased credit may have greater economic impact for a family with numerous dependents than a young professional receiving financial support from his or her family. Additionally, a greater proportion of renters in regions of California with lower median incomes and costs of living would become eligible for the credit compared to renters in regions with higher median incomes and costs of living where the housing shortage is most pronounced. As a result, it is difficult to estimate the impact of relief that will be afforded to low-income taxpayers under this expanded tax expenditure program.

Some economists have argued that tax subsidies for homeownership, such as the mortgage interest deduction, are factored into the price of housing and, thus, essentially inflate the prices of homes. This preferential tax treatment may encourage households to over-invest in housing and invest less in business investments that might contribute more to the nation's productivity and output. Would the expanded tax credit have a similar impact on the rental market? Would the tax credit provide taxpayers with meaningful relief or simply increase rents higher? The Committee may wish to consider narrowing the scope of the increased credit to direct it towards individuals with the most need, or as an alternative, funding a grant program that targets vulnerable renters or supports other anti-poverty efforts.

• 1. Related Legislation: AB 1100 (Chen) would increase the renters' credit to $428 for married couples filing joint returns, heads of household, and surviving spouses and $214 for other individuals, and would provide an increase in the homeowners' property tax exemption. AB 1100 is pending hearing by this Committee.
  2. Prior Legislation:

1. AB 2694 (Lackey), of the 2015-16 Legislative Session, would have increased the renters' credit to $140 for married couples filing joint returns, heads of household, and surviving spouses and $70 for other individuals. AB 2694 was held on the Assembly Committee on Appropriations' Suspense File.
2. SB 1103 (Cannella), of the 2015-16 Legislative Session, would have increased the renters' credit to $200 for married couples filing joint returns, heads of household, and surviving spouses and $100 for other individuals. SB 1103 was held on the Senate Committee on Appropriations' Suspense File.
3. AB 476 (Chang), of the 2015-16 Legislative Session, would have increased the renters' credit to $428 for married couples filing joint returns, heads of household, and surviving spouses and $214 for other individuals, and would have provided an increase in the homeowners' property tax exemption. AB 476 was held on this Committee's Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

California Apartment Association

California Rural Legal Assistance Foundation

City of East Palo Alto

LeadingAge California

League of California Cities

San Diego County Apartment Association

Western Center on Law & Poverty

Opposition

None on file

Analysis Prepared by: Irene Ho / REV. & TAX. / (916) 319-2098

Date of Hearing: March 27, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 181 (

Author:Lackey) – As Introduced Ver:January 18, 2017

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Taxation: renters’ credit

SUMMARY: Doubles the renters' credit amount under the Personal Income Tax (PIT) Law for qualified renters, and increases the income eligibility limits for the credit. Specifically, this bill:

1. Increases, for taxable years beginning on or after January 1, 2017, an existing tax credit under the PIT Law that may be claimed by qualified renters as follows:
   1. Increases the credit from $120 to $240 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income (AGI) is $100,000 or less; or,
   2. Increases the credit from $60 to $120 for other individuals if AGI is $50,000 or less.
2. Requires the Franchise Tax Board (FTB) to annually adjust the specified AGI amounts for inflation for each taxable year beginning on or after January 1, 2018.
3. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various tax credits under the PIT Law, generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
2. Allows a tax credit for qualified renters as follows:
   1. $120 for married couples filing joint returns, heads of household, and surviving spouses if AGI is $50,000 or less; or,
   2. $60 for other individuals if AGI is $25,000 or less.
3. Requires the FTB to adjust annually the specified AGI amounts for inflation. For tax year 2016, the AGI limits are $78,125 and $39,062, respectively.
4. Defines a "qualified renter" as an individual who satisfies both of the following:
   1. Was a resident of California; and,
   2. Rented and occupied premises in California which constituted his or her principal place of residence during at least half of the taxable year.
5. Specifies that a qualified renter does not include an individual whose principal place of residence is with another person who claims him or her as a dependent for income tax purposes, and other exclusions, as specified.
6. Requires any person claiming the credit to do so under penalty of perjury.

FISCAL EFFECT: The FTB estimates General Fund revenue losses of $210 million in fiscal year (FY) 2017-18, $220 million in FY 2018-19, and $230 million in FY 2019-20.

COMMENTS:

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

Research by the Center on Budget and Policy Priorities shows that low-income renters are far more likely to pay a higher share of their income for housing than higher-income households. While many tax benefits exist for homeowners – who tend to generally be more affluent – renters lack similar benefits that reduce their housing cost burden.

California housing costs have increased dramatically over the past few years which have placed a disproportionately high burden on working and middle-class families. The statewide median rent now exceeds $2,100 for a 2-bedroom, according to a February 2016 report by Apartment List with cities like Los Angeles and San Jose rising to over $2600 per month.

Short supplies of subsidized and affordable housing means that there is little relief for families struggling to cope with rising rental prices. The high price of housing is a key contributor to the state's troubling poverty rate, which the PPIC estimates includes 21% of all Californians when factoring in housing and other cost of living expenses. Not only does housing affordability affect low-income households, but in many urban areas middle-class families are struggling as well.

California's rental tax credit has not been increased for over 25 years. Doubling the amount this tax incentive offers to renters will make it more reflective of the current housing market, and is a near-term solution that the Legislature can provide to working and middle-class families while other potential strategies for expanding affordable housing will take many years to implement. With many working multiple-jobs or devoting a disproportionately high amount of their wages to afford rent, it's clear that some financial relief is desperately needed now.

1. Committee Staff Comments:
   1. Arguments in Support: Proponents of this bill state that "granting a modest increase to California's rental tax credit is a near-term solution that the Legislature can provide to families struggling with high housing costs while other potential strategies will take many years to implement."
   2. What is a "Tax Expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States 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 of them (in the form of forgone revenues). This bill would increase an existing tax expenditure program by doubling the amount of the renters' credit and increasing AGI eligibility limitations for the credit.
   3. Tax Expenditure vs. 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. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining 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 bill does not include a sunset date. The Committee may wish to consider including a sunset date on the increased renters' credit, especially since market forces may eventually cause rent prices to level out and eliminate the need for amplified relief.

• 1. Affordable Housing Crisis: There is no doubt that California is in the midst of a serious housing shortage impacting both homeowners and renters alike. A 2016 report from the Legislative Analyst's Office, Perspectives on Helping Low-Income Californians Afford Housing, concludes that facilitating more private housing development, especially in the state's coastal urban communities, is the key remedy to help make housing more affordable for low-income Californians. Existing affordable housing programs assist only a small proportion of low-income Californians, with the majority receiving little or no assistance – expanding such programs to help these households would be prohibitively expensive and potentially have a greater impact if the programs were tailored to support Californians with specialized housing needs.

The author's office contends that absent broader changes to the state's housing policies, targeted tax incentives as provided in this bill can help provide relief for households spending a disproportionate share of their income on housing. While increasing the amount and scope of the renters' credit would provide considerable relief to some low-income individuals, the increase would also put money in the pockets of individuals who may not notice it. For example, an increased credit may have greater economic impact for a family with numerous dependents than a young professional receiving financial support from his or her family. Additionally, a greater proportion of renters in regions of California with lower median incomes and costs of living would become eligible for the credit compared to renters in regions with higher median incomes and costs of living where the housing shortage is most pronounced. As a result, it is difficult to estimate the impact of relief that will be afforded to low-income taxpayers under this expanded tax expenditure program.

Some economists have argued that tax subsidies for homeownership, such as the mortgage interest deduction, are factored into the price of housing and, thus, essentially inflate the prices of homes. This preferential tax treatment may encourage households to over-invest in housing and invest less in business investments that might contribute more to the nation's productivity and output. Would the expanded tax credit have a similar impact on the rental market? Would the tax credit provide taxpayers with meaningful relief or simply increase rents higher? The Committee may wish to consider narrowing the scope of the increased credit to direct it towards individuals with the most need, or as an alternative, funding a grant program that targets vulnerable renters or supports other anti-poverty efforts.

• 1. Related Legislation: AB 1100 (Chen) would increase the renters' credit to $428 for married couples filing joint returns, heads of household, and surviving spouses and $214 for other individuals, and would provide an increase in the homeowners' property tax exemption. AB 1100 is scheduled to be heard by this Committee on Marcy 27, 2017.
  2. Prior Legislation:

1. AB 2694 (Lackey), of the 2015-16 Legislative Session, would have increased the renters' credit to $140 for married couples filing joint returns, heads of household, and surviving spouses and $70 for other individuals. AB 2694 was held on the Assembly Committee on Appropriations' Suspense File.
2. SB 1103 (Cannella), of the 2015-16 Legislative Session, would have increased the renters' credit to $200 for married couples filing joint returns, heads of household, and surviving spouses and $100 for other individuals. SB 1103 was held on the Senate Committee on Appropriations' Suspense File.
3. AB 476 (Chang), of the 2015-16 Legislative Session, would have increased the renters' credit to $428 for married couples filing joint returns, heads of household, and surviving spouses and $214 for other individuals, and would have provided an increase in the homeowners' property tax exemption. AB 476 was held on this Committee's Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

California Apartment Association

California Rural Legal Assistance Foundation

City of East Palo Alto

League of California Cities

San Diego County Apartment Association

Western Center on Law & Poverty

Opposition

None on file

Analysis Prepared by: Irene Ho / REV. & TAX. / (916) 319-2098

Date of Hearing: March 13, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 181 (

Author:Lackey) – As Introduced Ver:January 18, 2017

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Taxation: renters’ credit

SUMMARY: Doubles the renters' credit amount under the Personal Income Tax (PIT) Law for qualified renters, and increases the income eligibility limits for the credit. Specifically, this bill:

1. Increases, for taxable years beginning on or after January 1, 2017, an existing tax credit under the PIT Law that may be claimed by qualified renters as follows:
   1. Increases the credit from $120 to $240 for married couples filing joint returns, heads of household, and surviving spouses if adjusted gross income (AGI) is $100,000 or less; or,
   2. Increases the credit from $60 to $120 for other individuals if AGI is $50,000 or less.
2. Requires the Franchise Tax Board (FTB) to annually adjust the specified AGI amounts for inflation for each taxable year beginning on or after January 1, 2018.
3. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various tax credits under the PIT Law, generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
2. Allows a tax credit for qualified renters as follows:
   1. $120 for married couples filing joint returns, heads of household, and surviving spouses if AGI is $50,000 or less; or,
   2. $60 for other individuals if AGI is $25,000 or less.
3. Requires the FTB to adjust annually the specified AGI amounts for inflation. For tax year 2016, the AGI limits are $78,125 and $39,062, respectively.
4. Defines a "qualified renter" as an individual who satisfies both of the following:
   1. Was a resident of California; and,
   2. Rented and occupied premises in California which constituted his or her principal place of residence during at least half of the taxable year.
5. Specifies that a qualified renter does not include an individual whose principal place of residence is with another person who claims him or her as a dependent for income tax purposes, and other exclusions, as specified.
6. Requires any person claiming the credit to do so under penalty of perjury.

FISCAL EFFECT: The FTB estimates General Fund revenue losses of $210 million in fiscal year (FY) 2017-18, $220 million in FY 2018-19, and $230 million in FY 2019-20.

COMMENTS:

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

Research by the Center on Budget and Policy Priorities shows that low-income renters are far more likely to pay a higher share of their income for housing than higher-income households. While many tax benefits exist for homeowners – who tend to generally be more affluent – renters lack similar benefits that reduce their housing cost burden.

California housing costs have increased dramatically over the past few years which have placed a disproportionately high burden on working and middle-class families. The statewide median rent now exceeds $2,100 for a 2-bedroom, according to a February 2016 report by Apartment List with cities like Los Angeles and San Jose rising to over $2600 per month.

Short supplies of subsidized and affordable housing means that there is little relief for families struggling to cope with rising rental prices. The high price of housing is a key contributor to the state's troubling poverty rate, which the PPIC estimates includes 21% of all Californians when factoring in housing and other cost of living expenses. Not only does housing affordability affect low-income households, but in many urban areas middle-class families are struggling as well.

California's rental tax credit has not been increased for over 25 years. Doubling the amount this tax incentive offers to renters will make it more reflective of the current housing market, and is a near-term solution that the Legislature can provide to working and middle-class families while other potential strategies for expanding affordable housing will take many years to implement. With many working multiple-jobs or devoting a disproportionately high amount of their wages to afford rent, it's clear that some financial relief is desperately needed now.

1. Committee Staff Comments:
   1. Arguments in Support: Proponents of this bill state that "granting a modest increase to California's rental tax credit is a near-term solution that the Legislature can provide to families struggling with high housing costs while other potential strategies will take many years to implement."
   2. What is a "Tax Expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States 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 of them (in the form of forgone revenues). This bill would increase an existing tax expenditure program by doubling the amount of the renters' credit and increasing AGI eligibility limitations for the credit.
   3. Tax Expenditure vs. 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. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining 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 bill does not include a sunset date. The Committee may wish to consider including a sunset date on the increased renters' credit, especially since market forces may eventually cause rent prices to level out and eliminate the need for amplified relief.

• 1. Affordable Housing Crisis: There is no doubt that California is in the midst of a serious housing shortage impacting both homeowners and renters alike. A 2016 report from the Legislative Analyst's Office, Perspectives on Helping Low-Income Californians Afford Housing, concludes that facilitating more private housing development, especially in the state's coastal urban communities, is the key remedy to help make housing more affordable for low-income Californians. Existing affordable housing programs assist only a small proportion of low-income Californians, with the majority receiving little or no assistance – expanding such programs to help these households would be prohibitively expensive and potentially have a greater impact if the programs were tailored to support Californians with specialized housing needs.

The author's office contends that absent broader changes to the state's housing policies, targeted tax incentives as provided in this bill can help provide relief for households spending a disproportionate share of their income on housing. While increasing the amount and scope of the renters' credit would provide considerable relief to some low-income individuals, the increase would also put money in the pockets of individuals who may not notice it. For example, an increased credit may have greater economic impact for a family with numerous dependents than a young professional receiving financial support from his or her family. Additionally, a greater proportion of renters in regions of California with lower median incomes and costs of living would become eligible for the credit compared to renters in regions with higher median incomes and costs of living where the housing shortage is most pronounced. As a result, it is difficult to estimate the impact of relief that will be afforded to low-income taxpayers under this expanded tax expenditure program.

Some economists have argued that tax subsidies for homeownership, such as the mortgage interest deduction, are factored into the price of housing and, thus, essentially inflate the prices of homes. This preferential tax treatment may encourage households to over-invest in housing and invest less in business investments that might contribute more to the nation's productivity and output. Would the expanded tax credit have a similar impact on the rental market? Would the tax credit provide taxpayers with meaningful relief or simply increase rents higher? The Committee may wish to consider narrowing the scope of the increased credit to direct it towards individuals with the most need, or as an alternative, funding a grant program that targets vulnerable renters or supports other anti-poverty efforts.

• 1. Related Legislation: AB 1100 (Chen) would increase the renters' credit to $428 for married couples filing joint returns, heads of household, and surviving spouses and $214 for other individuals, and would provide an increase in the homeowners' property tax exemption. AB 1100 is scheduled to be heard by this Committee on Marcy 27, 2017.
  2. Prior Legislation:

1. AB 2694 (Lackey), of the 2015-16 Legislative Session, would have increased the renters' credit to $140 for married couples filing joint returns, heads of household, and surviving spouses and $70 for other individuals. AB 2694 was held on the Assembly Committee on Appropriations' Suspense File.
2. SB 1103 (Cannella), of the 2015-16 Legislative Session, would have increased the renters' credit to $200 for married couples filing joint returns, heads of household, and surviving spouses and $100 for other individuals. SB 1103 was held on the Senate Committee on Appropriations' Suspense File.
3. AB 476 (Chang), of the 2015-16 Legislative Session, would have increased the renters' credit to $428 for married couples filing joint returns, heads of household, and surviving spouses and $214 for other individuals, and would have provided an increase in the homeowners' property tax exemption. AB 476 was held on this Committee's Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

California Apartment Association

California Rural Legal Assistance Foundation

League of California Cities

San Diego County Apartment Association

Western Center on Law & Poverty

Opposition

None on file

Analysis Prepared by: Irene Ho / REV. & TAX. / (916) 319-2098