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 spouses filing joint returns, heads of household, and surviving spouses if adjusted gross income is $50,000 or less, as currently adjusted to $80,156, and in the amount of $60 for other individuals if adjusted gross income is $25,000 or less, as currently adjusted to $40,078.

This bill would increase that credit from $120 to $500 and from $60 to $250 for taxable years beginning on or after January 1, 2019.

This bill would take effect immediately as a tax levy.

SENATE COMMITTEE ON

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1212 (Anderson) - Personal income taxes: renter’s credit

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 1212 would increase the Renter’s Credit from $60 to $250 for single filers, and from $120 to $500 for joint filers.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $290 million in 2019-20, and $300 million in 2020-21. FTB’s costs to implement the bill have yet to be determined.

Background:

: Tax expenditure programs (TEPs) are special tax provisions that reduce the amount of revenues the “basic” tax system would otherwise generate in order to provide (1) benefits to certain groups of taxpayers, and/or (2) incentives to encourage certain types of behavior and activities, such as charitable giving. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax. The Department of Finance is required to publish a list of TEPs (currently totaling several hundred), which currently $61 billion annually.

Under current law, eligible taxpayers who rent their principal residence can reduce their state income tax with a nonrefundable tax credit. The credit was originally enacted in 1972 to provide renters parity with homeowners who received an increase in their property tax exemption that year. To further maintain parity, the Legislature significantly increased the credit in 1979 shortly after the approval of Proposition 13, which placed a limit on property tax rates. The Legislature suspended the renter’s credit for taxable years 1993 through 1997, but reinstated it beginning with the 1998 taxable year.

Currently, the credit is equal to: (1) $60 for filers that are single or married filing separately with an adjusted gross income (AGI) of $40,078 or less, and (2) $120 for filers that are married filing jointly, head of household, or a qualified widow(er) with an AGI of $80,156 or less. Current law requires the credit’s AGI limitations be adjusted annually for inflation.

Proposed Law:

This bill would, beginning in taxable year 2019, increase the Renter’s Credit to the following amounts: (1) $250 for filers that are single or married filing separately with an AGI of $25,000 or less, and (2) $500 for filers that are married filing jointly, head of household, or a qualified widow(er) with an AGI of $50,000 or less. FTB would be required to adjust the credit’s AGI limitations annually for inflation.

Related Legislation:

• SB 1182 (Glazer) also would increase the Renter’s Credit while changing its fundamental structure. Instead of the credit’s current tiered system, which consists of single and joint filers below a specified AGI threshold, it would phase in a different tiered system: renters with dependents and renters without dependents. The bill is being heard today in this Committee.
• AB 2833 (Santiago) would increase the Renter’s Credit based on the median rent of the renter’s city. AB 2833 is currently pending in the Assembly Appropriations Committee.

Staff Comments:

FTB’s revenue estimate for the bill is based on (1) its current Renter’s Credit data, and (2) its Personal Income Tax micro-simulation model. Specifically, the amount of the Renter’s Credit for taxpayers currently claiming the credit was recalculated using the proposed credit amounts by filing status and number of dependents, and then reduced by the amount taxpayers may claim under current law. The amount of additional credit each taxpayer could use would be limited by their current tax liability. As a result, the revenue loss from the increase in the available Renter’s Credit is estimated to be $240 million in 2015. The estimate was then adjusted to reflect changes in the economy over time, resulting in an estimated revenue loss of $290 million in taxable year 2019, and $300 million in 2020.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Personal income taxes: Renter’s credit

Increases the Renter’s credit from $60 to $250 for single filers and from $120 to $500 for joint filers.

Background

Tax expenditures. California law allows various income tax credits and deductions, as well as sales and use tax exemptions. The Legislature enacts such tax incentives to either compensate taxpayers for incurring certain expenses, such as child adoption, or to influence certain behavior, such as charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something that but for the tax credit, they would otherwise not do. The Department of Finance is required to annually publish a list of tax expenditures, currently totaling around $61.3 billion per year.

Renter’s Credit. The state’s Personal Income Tax law allows eligible taxpayers who rent their principal residence to reduce their state income tax with a tax credit. The credit was originally enacted in 1972 as part of a comprehensive property tax reform program. The Legislature wanted to increase the Homeowner's Property Tax Exemption (HPTE) which reduces the property tax on owner-occupied property. However, renters do not directly benefit from property tax reductions so the Legislature enacted the Renter’s Credit to provide a direct benefit to renters. To further maintain parity, the Legislature significantly increased the credit in 1979 shortly after the approval of Proposition 13, which placed a limit on property tax rates. The Legislature suspended the credit for the 1993 through 1997 taxable years, but reinstated it beginning with the 1998 taxable year.

Currently, the credit — which is nonrefundable — is equal to:

• $60 for filers that are single or married filing separately with an adjusted gross income (AGI) of $40,078 or less; and
• $120 for filers that are married filing jointly, head of household, or a qualified widow(er) with an AGI of $80,156 or less.

State law requires the credit’s AGI limitations be adjusted annually for inflation.

The author would like to increase the credit to provide more of a benefit to California taxpayers who face increases in housing costs.

Proposed Law

Senate Bill 1212 increases the Renter’s Credit to the following amounts:

• $250 for filers that are single or married filing separately with an AGI of $25,000 or less, and
• $500 for filers that are married filing jointly, head of household, or a qualified widow(er) with an AGI of $50,000 or less.

SB 1212 requires the Franchise Tax Board (FTB) to adjust the credit’s AGI limitations annually for inflation, and makes the credit available for taxable years beginning on or after January 1^st, 2019. This bill also makes other technical and conforming changes.

State Revenue Impact

According to the FTB, SB 1212 results in revenue losses of $290 million 2019-20 and $300 million in 2020-21.

Comments

1. Purpose of the bill. According to the author, “California continues to be one of the most expensive states to live and that burden falls most heavily on the middle class and young people starting out. This bill aims to provide relief for California’s renter population from the pressure of extraordinarily high housing costs in our state. Nearly one in three renter households spend at least half of their income on rent, according to a Public Policy Institute of California study. While incomes have remained stagnant, rents in California continue to soar resulting in many lower- and middle-income workers cutting essential spending, which also hurts the overall economy. For younger Californians, studies have found that insufficient apartment and affordable housing construction, student loan debt, and changing housing preferences are also contributing factors to the State’s housing crisis and the increase in homelessness.”

2. Revenue loss. Existing tax law provides various credits, deductions, exclusions, and exemptions for certain taxpayers. Since these items are enacted to accomplish some governmental purpose and determined to have a cost — in the form of foregone revenues — state law refers to them as "tax expenditures." This bill would increase an existing tax expenditure resulting in $290 million in foregone General Fund revenue in the first year it’s enacted. As a result, the state will have to reduce spending or increase taxes to match the foregone revenue. The Committee may wish to consider weather SB 1212 is a cost-effective way to help California families manage the state’s high housing costs.

3. The Housing Crisis. California is in the midst of a housing crisis. Home prices in California are much higher than they are in other states. According to the Legislative Analysist’s Office’s (LAO) California’s High Housing Costs report, as of early 2015 the average home in California cost $437,000 which is more than double the average home price in the U.S ($179,000). With the high cost of homes, many Californians are forced to rent. However, the state’s housing shortage has pushed rents past the point of affordable. The LAO reports the state’s major metro areas added about 120,000 new housing units each year from 1980 to 2010. However, to have kept the state’s housing costs steady, California should have built 190,000 to 230,000 units per year. As a result, the state’s average monthly rent in 2013 was $1,240, nearly 50 percent more than the national average ($840 per month). In fact, in California’s most expensive cities — such as San Francisco — the average rent is more than double the state’s average rent. Amid high housing costs, taxpayers must make serious trade-offs such as longer commutes, postponing or foregoing homeownership, and in some severe cases, choosing between food or housing. While the state has recently enacted a slew of legislation that targets the housing crisis — such as SB 2 (Atkins, 2017), SB 3 (Beall, 2017), and SB 35 (2017, Weiner) — it will take a while for the effects to be felt by taxpayers in the form of lower housing costs. SB 1212 would provide immediate relief for low to moderate-income taxpayers.

4. Homeownership benefits. State and federal law provide many benefits to homeowners. For example, both federal and state tax laws allow a mortgage interest deduction, in which taxpayers can deduct interest on their home acquisition debt. Taxpayers can also exclude from income the sale of their principal residence — up to $250,000 for single filers and $500,000 for joint filers — for both federal and state tax purposes. Additionally, the California Constitution grants a $7,000 HPTE for owner-occupied housing. This exemption reduces a homeowner’s assessed value by $7,000, typically reducing the homeowner’s tax payment by about $80 annually.^[1] Furthermore, Proposition 13 — passed in 1978 — provided homeowners with substantial protections from higher property tax rates and annual reassessments. Renters, on the other hand, have the benefit of the credit which is subject to an AGI limit. Even if the credit was increased, is the state doing enough to help taxpayers who do not own a home?

5. Related legislation. Senate Bill 1182 (Glazer, 2018) also increases the Renter’s Credit while changing its fundamental structure. Instead of the credit’s current tiered system — which consists of single and joint filers below a specified AGI threshold — SB 1182 will phase in a different tiered system: renters with dependents and renters without dependents. The Committee will hear SB 1182 at its May 9^th, 2018 hearing. Assembly Bill 2833 (Santiago) also increases the credit based on the median rent of the renter’s city. AB 2833 is currently pending in the Assembly Revenue and Taxation Committee.

Support and Opposition

(5/2/18)

Support: Orange County Taxpayers Association; San Diego County Apartment Association; Board of Equalization Member Jerome Horton; and California Apartment Association.

Opposition: Unknown.

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1. “A.G. File No. 2015-028.” Legislative Analyst's Office, 22 June 2015, www.lao.ca.gov/BallotAnalysis/Initiative/2015-028 ↑