The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws. Existing law requires any bill authorizing a new tax credit to contain, among other things, specific goals, purposes, and objectives that the tax credit will achieve, detailed performance indicators, and data collection requirements.

This bill would allow a credit against those taxes for each taxable year beginning on or after January 1, 2018, 2019, and before January 1, 2023, 2024, to a qualified taxpayer that installs an attic vent closure in a residential property, as defined, in an amount equal to 40% of the qualified costs paid or incurred by the qualified taxpayer for that installation. The bill also would include additional information required for any bill authorizing a new income tax credit.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws. Existing law requires any bill authorizing a new tax credit to contain, among other things, specific goals, purposes, and objectives that the tax credit will achieve, detailed performance indicators, and data collection requirements.

This bill would allow a credit against those taxes for each taxable year beginning on or after January 1, 2018, and before January 1, 2023, to a qualified taxpayer that installs an attic vent closure in a residential property property, as defined, in an amount equal to the qualified costs paid or incurred by the qualified taxpayer for that installation. The bill also would include additional information required for any bill authorizing a new income tax credit.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws. Existing law requires any bill authorizing a new tax credit to contain, among other things, specific goals, purposes, and objectives that the tax credit will achieve, detailed performance indicators, and data collection requirements.

This bill would allow a credit against those taxes for each taxable year beginning on or after January 1, 2018, to a qualified taxpayer that installs an attic vent closure in a residential property in an amount equal to the costs paid or incurred by the qualified taxpayer for that installation. The bill also would include additional information required for any bill authorizing a new income tax credit.

This bill would take effect immediately as a tax levy.

Date of Hearing: April 25, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2414

Author:(Choi) – As Amended Ver:April 17, 2018

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

SUMMARY:

This bill creates a Personal Income Tax (PIT) and Corporation Tax (CT) credit worth 40% of the costs paid or incurred for installing an attic vent closure, as defined. The credit cannot be more than $500 and is available for taxable years starting in 2019 through 2023.

FISCAL EFFECT:

Annual General Fund (GF) revenue loss of $29 million in 2018-19, $75 million in 2019-20, and $110 million in 2020-21.

COMMENTS:

1. Background and purpose. Homeowners can prevent an “ember attack,” a naturally occurring event during a wildfire when embers land on a combustible surface or drift into an attic, by replacing existing attic vents with a specialized vent closure. According to the author, AB 2414 will provide a tax incentive to encourage the purchase and installation of such vent closures, which can help protect the people and homes of California.
2. Fiscal implications of tax expenditures. Existing law allows for various tax expenditures such as credits, deductions, exclusions, and exemptions for particular taxpayer groups. These features of the tax code can result in significant state costs through foregone tax revenue, and, in many cases, policymakers have little control over the revenue loss that occurs in any given year. As a result, many tax expenditure bills now include provisions designed to give the Legislature more control over costs. Examples of such provisions include placing a sunset date or making a bill’s provisions contingent upon a separate budget appropriation. AB 2414 includes a sunset.

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

Date of Hearing: April 9, 2018

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 2414 (

Author:Choi) – As Amended Ver:March 22, 2018

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Income taxes: credits: attic vent closures

SUMMARY: Allows a tax credit to a "qualified taxpayer" that installs an attic vent closure in a "residential property", as specified. Specifically, this bill:

1. Allows a tax credit for taxable years beginning on or after January 1, 2018, and before January 1, 2023, to a "qualified taxpayer" that installs an attic vent closure in a "residential property" in an amount equal to the "qualified costs" paid or incurred by the "qualified taxpayer" during the taxable year for the installation.
2. Caps the credit at $500 per taxable year and provides that the credit shall only be allowed to a "qualified taxpayer" with regard to one "residential property" per taxable year.
3. Defines a "qualified taxpayer" as an owner of "residential property" located in this state. A taxpayer who owns a proportional share of a "residential property" located in this state may claim the credit based upon the taxpayer's share of the "qualified costs".
4. Defines "residential property" to mean any building containing not more than one unit that is intended for human habitation.
5. Defines "qualified costs" to include amounts paid or incurred for retrofitting, materials, and costs of labor either from an approved company or vendor listed on the California Department of Forestry and Fire Protection's (Cal Fire's) Web site or for the purchase and installation by the qualified taxpayer of one-eighth inch mesh to protect (sic) embers from entering through attic vents.
6. Deletes the credit's statutory provisions on December 1, 2023.
7. Allows the credit under both the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law.
8. Contains the following findings and declarations for purposes of complying with Revenue and Taxation Code (R&TC) Section 41:
   1. The goal of this bill is to prevent future fires generally and residential fires specifically; and,
   2. The effectiveness of the credit shall be measured by the number of taxpayers claiming the credit.
9. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various tax credits under both the PIT Law and the CT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
2. Requires any bill authorizing a new credit to contain all of the following:
   1. Specific goals, purposes, and objectives that the tax credit will achieve;
   2. Detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives stated in the bill; and,
   3. Data collection requirements to enable the Legislature to determine whether the tax credit is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.)

FISCAL EFFECT: The Franchise Tax Board (FTB) estimates that this bill would reduce General Fund revenues by $120 million in fiscal year (FY) 2018-19, $120 million in FY 2019-20, and $130 million in FY 2020-21.

COMMENTS:

1. The author has provided the following statement in support of this bill:

In 2017 the State of California faced one of the worst years in California wildfire history[.] Wildfires destroyed or damaged more than 10,000 structures in California in 2017. This destruction due to fires is more than what our state has faced in the last ten years combined. The Napa and Sonoma county fires alone in 2017 took 5,600 homes. It was the third-deadliest fire in California's history, killing 22 people.

In Orange County, albeit the destruction was much less than in Central and Northern California, 2017 saw the Canyon 2 Fire which destroyed 25 structures and damaged 55.

According to Cal Fire, 2017 was the most destructive and deadly year of fires for California. A total of 9,133 fires burned which included 1,381,405 acres.

In an attempt to reduce fires from spreading to residential homes during wildfires, I have authored AB 2414. This bill will provide a tax credit of up to $500 for the purchase and installation of attic vent closures. These attic vent closures can prevent fires from spreading into homes by blocking flying embers. Such a system is highly effective according to Orange County fire officials. Vendors who can install these attic vent closure systems have been approved and are listed on the Cal Fire web site.

This tax incentive is a smart investment in order to protect the people and homes of California.

1. The FTB has identified the following implementation concerns in its analysis of this bill:
   1. "The definition of 'qualified costs' uses the undefined term 'include, but not limited to.' The absence of a definition to clarify these terms could lead to disputes with taxpayers and would complicate the administration of this bill. For clarity and ease of administration, it is recommended that the bill be amended."
   2. "It is unclear if the definition provided for 'residential property' is limited to a detached single family dwelling. As a result, dwellings that have more than one family per building (for example, a duplex) would be considered a residential property. If this is contrary to the author's intent, the bill should be amended."
2. Committee Staff Comments:
   1. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, U.S. Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues).
   2. How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are typically reviewed less frequently than direct expenditures. 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 effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote.
   3. What would this bill do? This bill would establish a new tax expenditure program in the form of a credit available to qualified taxpayers that install an attic vent closure in a residential property. The credit amount would equal 100% of the "qualified costs" incurred for the installation, but the credit itself would be capped at $500 and would only be available for one residential property per taxable year.
   4. Picking a percentage: Even after taking into account this bill's $500 cap, allowing a credit equal to 100% of a taxpayer's qualifying expenses would appear to be unprecedented. Typically, state law specifies a credit percentage of 50% or less to ensure that the taxpayer is bearing at least one-half the cost of the underlying expenses.
   5. What costs are covered? Under this bill, qualified costs "include, but are not limited to" amounts paid or incurred for retrofitting, materials, and costs of labor either from an approved company or vendor listed on Cal Fire's Internet Web site or for the purchase and installation by the taxpayer of one-eighth inch mesh to prevent embers from entering through attic vents.

For purposes of its fiscal analysis, the FTB estimated the average cost of a vent closure replacement project to be $4,000. Committee staff is concerned, however, that using the phrase "include, but [. . .] not limited to" might lead to confusion regarding which expenses are included in the credit calculation. This, in turn, might cause disputes between taxpayers and the FTB. To ease administration, it might be preferable simply to specify those costs that are included.

• 1. What exactly are attic vent closures? While not referenced in this bill, the Cal Fire Web site includes a "Building Materials Listing" page that allows individuals to search for vendors by specific building component categories. The category to which this bill most likely refers is labeled "Vents for Wildland Urban Interface (W.U.I.)". This category, in turn, lists the following three vendors in California: Vulcan Technologies in San Rafael, Brandguard Vents in San Clemente, and Embers Out LLC in Yorba Linda.

As a representative example, the Web site for Embers Out LLC notes that, by replacing existing vents with their product, homeowners can prevent an "ember attack". The site describes an "ember attack" as a naturally occurring event during a wildfire where burning parts of brush and trees become airborne and can drift for miles. If these embers land on a combustible surface or drift into an attic they can potentially ignite. Embers Out LLC states that its vent's unique design prevents embers from entering an attic. These vents are also advertised as being useful in preventing the entry of wind-driven rain, insects, and dust.

• 1. An incentive or a reward? Typically, tax credits are provided as a matter of legislative grace to encourage taxpayers to behave in ways they might not absent a financial incentive. This bill, however, provides a tax credit for taxable years beginning on or after January 1, 2018. Thus, if this bill were enacted in late 2018, it would provide a financial reward to taxpayers for attic vent projects they had completed absent any awareness of this credit. As such, the Committee may wish to consider delaying the credit provisions by one year to apply to taxable years beginning on or after January 1, 2019.
  2. Carrying things forward: As currently written, this credit does not include standard "carry forward" provisions allowing a taxpayer to utilize any unused credit amounts in future years. Committee staff suggests including standard language allowing for a seven year window to carry forward unused credit amounts.
  3. Double dipping? As noted in the FTB analysis, conflicting tax policies result when a credit is allowed for an item that could be deductible (e.g., as a business expense). As a result, the Committee may wish to consider amending this bill to disallow multiple tax benefits for the same item of expense.
  4. Section 41: On September 29, 2014, Governor Brown signed SB 1335 (Leno), Chapter 845, Statutes of 2014, which added R&TC Section 41. SB 1335 recognized that the Legislature should apply the same level of review used for government spending programs to tax expenditure programs, including tax credits. Thus, R&TC Section 41 requires any bill introduced on or after January 1, 2015 that allows a new income tax credit to contain specific goals, purposes, and objectives that the tax credit will achieve. In addition, Section 41 requires detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives so-identified. In its current form, this bill states that the credit is designed to prevent future fires generally and residential fires specifically. In addition, this bill provides that the credit's effectiveness shall be measured by the number of taxpayers claiming the credit. The Committee may wish to consider whether credit utilization, in and of itself, is a sufficient rubric by which to measure this credit's effectiveness.
  5. Technical amendments: Committee staff suggests adoption of the following technical amendments:
     1. On page 2, in line 24, strike "protect" and insert "prevent"; and,
     2. On page 3, in line 20, strike "protect" and insert "prevent".

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098