Date of Hearing: August 14, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 248

Author:(Glazer) – As Amended Ver:June 27, 2019

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

SUMMARY:

This bill, for tax years 2020 through 2024, increases the Renter’s Credit and makes it refundable. Specifically, this bill:

1. Increases the Renter’s Credit as follows:
   1. For spouses filing joint returns, heads of households, and surviving spouses with no dependents, the credit amount increases from $120 to $220.
   2. For single filers or spouse filing separate returns with no dependents, the credit amount increases from $60 to $220.
   3. For taxpayers in a) and b) who have dependents, the credit amount increases to $434.
2. Requires, starting in tax year 2021, the Franchise Tax Board (FTB) to adjust the Renter’s Credit by inflation, as specified.
3. Provides that unless otherwise specified in a budget-related bill, the amount of the proposed increase to the Renter’s Credit is $0, and authorizes the Governor to suspend a scheduled increase to the credit during an economic emergency.
4. Provides that, for credits allowable for taxable years beginning on or after January 1, 2019, the credit amount in excess of the qualified renter's liability shall be refunded upon legislative appropriation.

FISCAL EFFECT:

1. Annual General Fund revenue loss of $550 million in 2019-20, $500 million in 2020-21 and $500 million in 2021-22.
2. Administrative costs of approximately $5.9 million in 2019-20 and ongoing costs in excess of $3.6 million beginning in 2020-21.

COMMENTS:

1. Background. The Renter’s Credit provides a credit to a low-income taxpayer who rents their primary residence 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 The credit was originally enacted in 1972 as part of a comprehensive property tax reform program.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.

In 2018, the amount of the credit was $60 for taxpayers whose filing status is single or married and filing separately and whose AGI was $41,641 or less, and $120 for other taxpayers (such as married and filing jointly) whose AGI was $83,282 or less.

1. Purpose. According to the author, SB 248 will provide financial relief to 2.4 million low- and middle-income renters and provide greater benefit to those renters with dependents. The author argues this will complement California’s long-term goals to increase and expand access to housing through immediate financial assistance.
2. Refundability. This bill makes the Renter’s Credit fully refundable, thereby ensuring it reaches low-income households in most need the assistance. Currently, the Renter’s Credit is not refundable, which means a taxpayer only receives a credit if there is a tax liability to offset. Today, the only refundable credit is the California Earned Income Tax Credit (CalEITC).

This bill’s refundability differs from that of the CalEITC in one key way. While the CalEITC is available only to those taxpayers with at least one dollar of earned income, the Renter’s Credit under SB 248 would be available to those without any earned income. The idea behind CalEITC’s “first dollar” limitation is to promote and encourage work. Since SB 248 aims to help families pay rent and stay in their homes, regardless of whether or not they work or have earned income, this may be an appropriate design choice. However, this type of refundability significantly increases revenue losses and administrative costs.

1. Recent legislation. There were a number of bills in the 2017-18 Legislative Session that sought to increase the Renter’s Credit. SB 1182 (Glazer) would have increased the credit amount for a qualified renter based on income level and filing status. AB 1100 (Chen),\ would have increased the Renter’s Credit and the homeowners’ property tax exemption. AB 181 (Lackey) would have doubled the credit amount and increased the income eligibility thresholds. These three bills were all held on this committee’s Suspense File.

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

Date of Hearing: June 24, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

SBPCA Bill Id:SB 248

Author:(Glazer) – As Amended Ver:May 21, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SENATE VOTE: 37-0

SUBJECT: Taxation: renters' credit

SUMMARY: Increases the renters' credit amounts, for taxable years beginning on or after January 1, 2019, as provided. Specifically, this bill:

1. Increases the renters' credit for spouses filing joint returns, heads of household, and surviving spouses to:
   1. $220 if the qualified renter has no dependents, as defined; and,
   2. $434 if the qualified renter has one or more dependents, as defined.
2. Increases the renters' credit for other individuals to:
   1. $220 if the qualified renter has no dependents, as defined; and,
   2. $434 if the qualified renter has one or more dependents, as defined.
3. Requires the Franchise Tax Board (FTB) to re-compute annually for inflation the credit amounts for taxable years on or after January 1, 2020, unless otherwise provided.
4. Increases the renters' credit amounts only when specified in a bill relating to the Budget Act.
5. Provides that, in the event the increased credit amount is not specified in a budget-related bill, the existing credit amounts of $120 and $60, respectively, would be the credit amounts for that taxable year.
6. Provides that, for credits allowable for taxable years beginning on or after January 1, 2019, the credit amount in excess of the qualified renter's liability shall be refunded upon legislative appropriation.
7. Takes immediate effect as a tax levy.

EXISTING LAW:

1. Allows various credits under the Personal Income Tax (PIT) Law, including a credit for "qualified renters" in the amount of:
   1. $120 for spouses filing joint returns, heads of household, and surviving spouses if adjusted gross income (AGI) is $50,000, as adjusted, or less; and,
   2. $60 for other individuals if AGI is $25,000, as adjusted, or less.
2. Requires the Franchise Tax Board (FTB) to adjust these AGI amounts for inflation annually. For 2018, the AGI limits are $83,282 and $41,641, respectively.
3. Defines a "qualified renter" as an individual who satisfies both of the following:
   1. Was a resident of this state, as defined in Revenue and Taxation Code Section 17014; and,
   2. Rented and occupied premises in this state that constituted the individual's principal place of residence during at least 50% of the taxable year.
4. Establishes the continuously appropriated Tax Relief and Refund Account in the General Fund and provides that payments required to be made to taxpayers or other persons from the PIT Fund are to be paid from that account, including any amount allowable as an earned income tax credit in excess of any tax liabilities.

FISCAL EFFECT: The FTB estimates this bill would reduce General Fund revenues by $550 million in fiscal year (FY) 2019-20, and by $600 million in FYs 2020-21 and 2021-22.

COMMENTS:

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

Surging rental prices across the state have squeezed families' budgets as short supplies of subsidized and affordable housing has left little relief for families struggling with rising rental prices. The high price of housing is a key contributor to the state's troubling poverty rate, which the Public Policy Institute of California estimates includes 21% of all Californians when factoring in housing and cost of living expenses. The Renter's Tax Credit was [established] in 1972, but has only been raised once, in 1979, since. Meanwhile, rents have nearly tripled. The California Legislature continues to work on packages to increase housing supply, yet little has been done to provide direct help to renters. SB 248 would provide immediate financial relief to 2.4 million low- and middle-income renters by increasing and restructuring the credit. Under the new structure, the credit would no longer differentiate between single and joint filers, but instead would provide the greatest benefit to renters with dependents, making the credit more fair to single moms, dads, and families. Additionally, the credit would be made refundable to ensure those who are the most in need benefit – regardless of their tax obligation. SB 248 compliments California's long-term goals to increase and expand access to housing. While it will be years before all Californians have access to affordable homes, this bill would help millions of Californians now.

1. This bill is supported by the California Council for Affordable Housing, which notes the following:

Surging rental prices across our state have made California increasingly unaffordable. Half of California's renters pay more than 30% of their income on rent; almost 1 in 3 renters pay 50% or more of their income on rent each month.

SB 248 increases the renter's tax credit from a maximum credit of $120 to $434, specifically focused on filers with children, regardless of marital status. This bill would provide needed relief to renters throughout the state by not only increasing the credit, but making it refundable. Even those without an income could receive this credit, helping California families struggling the most.

1. The FTB has identified the following policy concerns:
   1. "The department is concerned that another refundable credit could increase the trend in refund fraud and identity theft. Historically, both the Internal Revenue Service and the FTB have experienced fraud and improper claims with refundable credits. These concerns are heightened because if a refund is determined to be fraudulent, the refund commonly cannot be recovered."
   2. "Generally credit amounts are less for single and married filing separate filers as compared with the amount allowed to married filing jointly, head of household, and qualified widow/widower filers. The increased credit amounts this bill would allow are the same for all filers regardless of the existence of a dependent."
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).
      

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 generally reviewed less frequently than direct expenditures. Second, there is often 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.

• 1. What does this bill do? This bill revises and expands California's renters' credit in a number of ways:
     1. First, this bill increases the renters' credit amounts substantially, but makes this increase contingent upon annual authorization in the budget. Specifically, the maximum credit amount would increase from $120 under current law to $434;
     2. Second, this bill provides equal credit amounts irrespective of filing status. While current law provides a more generous renters' credit to spouses filing joint returns, heads of household, and surviving spouses, this bill would provide equal credit amounts to these taxpayers and individual filers alike;
     3. Third, unlike current law, this bill would provide more generous credit amounts (e.g., $434 instead of $220) if the filer has one or more dependents;
     4. Fourth, unlike current law, the credit amounts would be adjusted for inflation for taxable years beginning on or after January 1, 2020, unless otherwise provided; and,
     5. Finally, this bill would make the credits refundable upon legislative appropriation. Put simply, this means that taxpayers would get the full benefit of the credit even if the credit amount eliminates their tax liability entirely.
  2. Affordable housing crisis: There is no doubt that California is in the midst of a serious housing shortage, impacting both homeowners and renters alike. Some economists have argued that tax subsidies for homeownership, such as the mortgage interest deduction, are factored into the price of housing and, therefore, essentially inflate the prices of homes. 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. It is not clear if increasing and expanding the renters' credit would make housing more affordable. Similar to preferential tax treatment for homeownership, expanding the tax credit might have the unintended consequence of increasing rental prices since every person within these income brackets would be able to pay slightly more for their place of abode. The Committee may wish to consider narrowing the scope of the 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.
  3. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added Revenue and Taxation Code (R&TC) Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015.  This Committee has recently adopted a new policy, requiring that all new or expanded tax expenditure proposals comply with the requirements of R&TC Section 41.  A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives.  A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements.  This bill, in its current form, does not comply with the Committee's R&TC Section 41 requirements.  
     
     In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote.  According to the new policy, an "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years.  This bill does not currently have a sunset provision. This bill does, however, make the augmented credit amounts contingent upon annual authorization in the budget. The Committee may wish to consider whether this annual authorization requirement serves the same purpose as a sunset date in providing effective legislative control over tax expenditures and their attendant costs and effectiveness.
  4. Prior legislation
     1. SB 1182 (Glazer), of the 2017-18 Legislative Session, would have increased the credit amount for a qualified renter, as specified, and would have required the FTB to annually adjust for inflation the credit amount for taxable years on and after January 1, 2023. SB 1182 was held on the Assembly Appropriations Committee's Suspense File.
     2. AB 1100 (Chen), of the 2017-18 Legislative Session, would have increased the homeowners' property tax exemption and the renters' credit. AB 1100 was held on the Assembly Appropriations Committee's Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

AIDS Healthcare Foundation

Apartment Association, California Southern Cities

Apartment Association of Orange County

California Apartment Association

California Council for Affordable Housing

California Rental Housing Association

City of Alameda

City of Santa Monica

City of West Hollywood

East Bay Rental Housing Association

National Association of Social Workers, California Chapter

Orange County Business Council

University of California Student Association

Opposition

None on file

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

 THIRD READING  

Bill No: SB 248

Author: Glazer (D), et al.

Amended: 5/21/19

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 5/1/19

AYES: McGuire, Beall, Hertzberg, Hurtado, Nielsen, Wiener

NO VOTE RECORDED: Moorlach

SENATE APPROPRIATIONS COMMITTEE: 6-0, 5/16/19

AYES: Portantino, Bates, Bradford, Hill, Jones, Wieckowski

SUBJECT: Taxation: renters’ credit

SOURCE: Author

DIGEST:

This bill restructures the Renter’s Tax Credit to differentiate between filers with and without dependents, increases the credit amounts, and makes the credit refundable.

ANALYSIS:

Existing law:

1. Allows various tax credits under existing Gross Premiums Tax, the Personal Income Tax (PIT) Law, and the Corporation Tax Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses.
2. Establishes the nonrefundable Renter’s Credit, which allows eligible taxpayers who rent their principal residence to reduce their state income tax liability.
3. Allows taxpayers — who are either single or married filing separately with an adjusted gross income (AGI) of $41,641 or less — to claim a $60 Renter’s Credit.
4. Allows taxpayers — who are married filing jointly, a head of household, or a surviving spouse with an AGI of $83,282 or less — to claim a $120 Renter’s Credit.

This bill:

1. Restructures the Renter’s Tax Credit (Credit) for taxpayers with no dependents and taxpayers with one or more dependents.
2. Sets the Credit for taxpayers with no dependents at $220 indexed to inflation.
3. Sets the Credit for taxpayers with one or more dependents at $434 indexed to inflation.
4. Provides the AGI limitation would be the same as under existing law.
5. Makes the Credit refundable upon appropriation by the Legislature.
6. Sets the total credit amount allowed at $0, unless otherwise specified in any bill providing for appropriations related to the Budget Act. In the event the increased credit amount is not specified in a bill relating to the Budget Act, the existing credit amounts of $60 and $120, and the existing credit structure would be the credit amount for that taxable year.

Background

The state’s PIT law allows eligible taxpayers, who rent their principle residence, to claim the Credit on their PIT Return. The Legislature enacted the Credit in 1972 as part of a comprehensive property tax reform program. The Legislature wanted to increase the Homeowner's Property Tax Exemption, which reduces the property tax on owner-occupied property. However, renters do not directly benefit from property tax reductions so the Legislature enacted the credit to provide a direct benefit to renters. To 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. State law requires the Credit’s AGI limitations be adjusted annually for inflation. The Credit is nonrefundable, which means that the Credit can reduce a taxpayer’s tax liability to zero, but it cannot result in a refund.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: No

According to the Senate Appropriations Committee, the Franchise Tax Board (FTB) estimates that this bill would result in General Fund revenue losses of $550 million in 2019-20, $600 million in 2020-21, and $600 million in 2021-22. The amendment changes the revenue loss to a cost pressure. FTB’s costs to implement this bill have yet to be determined.

SUPPORT: (Verified 5/15/19)

Aids Healthcare Foundation

Apartment Association California Southern Cities

Apartment Association of Orange County

California Apartment Association

California Council for Affordable Housing

California Rental Housing Association

California Strategic Advisors

California Yimby

City of Alameda

City of Santa Monica

Coalition of California Welfare Rights Organizations

Consumer Action

East Bay Rental Housing Association

Fieldstead and Company, Inc.

National Association of Social Workers, California Chapter

Orange County Business Council

Southwest California Legislative Council

University of California Student Association

OPPOSITION: (Verified 5/15/19)

None received

ARGUMENTS IN SUPPORT: According to the author, “Surging rental prices across the state have squeezed families’ budgets as short supplies of subsidized and affordable housing has left little relief for families struggling with rising rental prices. The high price of housing is a key contributor to the state’s troubling poverty rate, which the Public Policy Institute of California estimates includes 21% of all Californians when factoring in housing and cost of living expenses. The Renter’s Tax Credit was establish in 1972, but has only been raised once, in 1979, since. Meanwhile, rents have nearly tripled. The California Legislature continues to work on packages to increase housing supply, yet little has been done to provide direct help to renters. SB 248 would provide immediate financial relief to 2.4 million low- and middle-income renters by increasing and restructuring the credit. Under the new structure, the credit would no longer differentiate between single and joint filers, but instead would provide the greatest benefit to renters with dependents, making the credit more fair to single moms, dads, and families. Additionally, the credit would be made refundable to ensure those who are the most in need benefit – regardless of their tax obligation. SB 248 compliments California’s long-term goals to increase and expand access to housing. While it will be years before all Californians have access to affordable homes, this bill would help millions of Californians now.”

Prepared by: Marnie Brown / GOV. & F. / (916) 651-4119

5/21/19 17:40:48

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 248 (Glazer) - Taxation: renters’ credit

Bill Summary:

SB 248 would (1) restructure the Renter’s Tax Credit to differentiate between filers with and without dependents, (2) increase the credit amounts, and (3) make the credit refundable.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on May 16, 2019

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $550 million in 2019-20, $600 million in 2020-21, and $600 million in 2021-22. The amendment changes the revenue loss to a cost pressure. FTB’s costs to implement the bill have yet to be determined.

Committee Amendments:

Make the credit operative only in years specified in a trailer bill.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 248 (Glazer) - Taxation: renters’ credit

Bill Summary:

SB 248 would (1) restructure the Renter’s Tax Credit to differentiate between filers with and without dependents, (2) increase the credit amounts, and (3) make the credit refundable.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $550 million in 2019-20, $600 million in 2020-21, and $600 million in 2021-22. 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 total $65 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 $41,641 or less, and (2) $120 for filers that are married filing jointly, head of household, or a qualified widow(er) with an AGI of $83,232 or less. Current law requires the credit’s AGI limitations be adjusted annually for inflation.

Proposed Law:

This bill would increase the Renter’s Tax Credit, beginning with taxable year 2019, to (1) $220, indexed to inflation, for qualifying renters with no dependents, and (2) $434, indexed to inflation, for qualifying renters with one or more dependents. Additionally, the credit would be refundable, and the bill’s AGI limitation would be the same as under existing law.

Beginning with taxable year 2020, the Governor may suspend the credit if he or she declares an economic emergency exists in the state. If the suspension mechanism is used, the credit will go back to its original structure ($60 or $120, as specified).

Upon expiration of any suspension, the credit amounts will continue under the bill’s new specifications.

Related Legislation:

• SB 1182 (Glazer, 2018) was similar to this bill, and was held under submission on the Suspense File of the Assembly Appropriations Committee.
• SB 1212 (Anderson, 2018) would have increase the Renter’s Credit from $60 to $250, for single filers, and from $120 to $500, for joint filers. The bill is being heard today in this 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 to account for the credit being refundable. Credits were then reduced by the amount taxpayers currently claimed. FTB estimates the resulting revenue loss to be $500 in 2016. The estimate was then adjusted to reflect changes in the economy over time, resulting in an estimated revenue loss of $550 million in taxable year 2019.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Taxation: renters’ credit

Restructures the Renter’s Tax Credit to differentiate between filers with dependents and filers with no dependents, increases the credit amounts, and makes the credit refundable.

Background

Tax expenditures. California law allows various income tax credits, deductions, exemptions, and exclusions. The Legislature enacts such tax incentives either to 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 annually to publish a list of tax expenditures, currently totaling around $65.2 billion per year.

Unlike deductions, which reduce the amount of earnings subject to tax, credits are applied after taxable income is calculated. Tax credits reduce—dollar for dollar—the amount of taxes owed.

Renter’s credit. The state’s Personal Income Tax law allows eligible taxpayers, who rent their principle residence, to claim the Renter’s Tax Credit (credit) on their Personal Income Tax Return. The Legislature enacted the credit 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 credit to provide a direct benefit to renters. To 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 is equal to:

• $60 for filers that are single or married filing separately with an adjusted gross income (AGI) of $41,641 or less; and
• $120 for filers that are married filing jointly, head of household, or a qualified widow(er) with an AGI of $83,282 or less.

State law requires the credit’s AGI limitations be adjusted annually for inflation. The credit is nonrefundable, which means that the credit can reduce a taxpayer’s tax liability to zero, but it cannot result in a refund.

The author wants to restructure the credit to provide more of a benefit to California taxpayers who face increasing housing costs.

Proposed Law

Senate Bill 248 restructures the Renter’s Tax Credit, for taxable years beginning on or after January 1, 2019, to the following amounts:

• $220—indexed to inflation—for qualifying renters with no dependents.
• $434—indexed to inflation—for qualifying renters with one or more dependents.

Generally, dependents are children and certain qualifying relatives. Qualifying renters are individuals who are residents of the state, and who rented a residence within the state for at least 50 percent of the year. Additionally, the credit is refundable, which allows taxpayers to receive cash from the government, if the credit awarded to the taxpayer exceeds his or her tax liability.

SB 248’s adjusted gross income limitation is the same as under existing law, specifically:

• $41,641 or less taxpayers filing individually.
• $83,282 or less for taxpayers who are filing jointly, head of household, or surviving spouse.

For taxable years beginning on or after January 1, 2020, the Governor may suspend the credit if he or she declares an economic emergency exists in the state. If the suspension mechanism is used, the credit will go back to its original structure as follows:

• $60 for filers that are single or married filing separately with an adjusted gross income (AGI) of $41,641 or less; and
• $120 for filers that are married filing jointly, head of household, or a qualified widow(er) with an AGI of $83,282 or less.

Upon expiration of any suspension, the credit amounts will continue under SB 248’s new format.

State Revenue Impact

According to the FTB, SB 248 results in revenue losses of $550 million in fiscal year 2019-20, $600 million in 2020-21, and $600 million in 2021-22.

Comments

1. Purpose of the bill. According to the author, “Surging rental prices across the state have squeezed families’ budgets as short supplies of subsidized and affordable housing has left little relief for families struggling with rising rental prices. The high price of housing is a key contributor to the state’s troubling poverty rate, which the Public Policy Institute of California estimates includes 21% of all Californians when factoring in housing and cost of living expenses. The Renter’s Tax Credit was establish in 1972, but has only been raised once, in 1979, since. Meanwhile, rents have nearly tripled. The California Legislature continues to work on packages to increase housing supply, yet little has been done to provide direct help to renters. SB 248 would provide immediate financial relief to 2.4 million low- and middle-income renters by increasing and restructuring the credit. Under the new structure, the credit would no longer differentiate between single and joint filers, but instead would provide the greatest benefit to renters with dependents, making the credit more fair to single moms, dads, and families. Additionally, the credit would be made refundable to ensure those who are the most in need benefit – regardless of their tax obligation. SB 248 compliments California’s long-term goals to increase and expand access to housing. While it will be years before all Californians have access to affordable homes, this bill would help millions of Californians now.”

2. Refundable credits. Both FTB and the Legislative Analyst’s Office, agree that refundable credits can increase refund fraud and identity theft. Historically, both the Internal Revenue Service and FTB have experienced identity fraud and improper claims with refundable credits. More importantly, if a refund is determined to be fraudulent, FTB cannot likely recover the refund because an unknown person filed the tax return using a stolen or fraudulent identify. SB 248 makes the Renter’s Tax Credit refundable which may lead to more fraudulent tax claims. The Committee may wish to consider the effects of refundable credits and the risk the state may assume in the future.

3. Tradeoffs. Existing tax law provides various credits, deductions, exclusions, and exemptions for taxpayers. This bill would increase an existing tax expenditure, resulting in losses of General Fund revenue. Without General Fund moneys, the government has less funding to pay for important public services such as education and public safety. As a result, the state will have to reduce spending or increase taxes to match the foregone revenue. The Committee may wish to consider whether SB 248 is worth the spending cuts and/or tax increases.

4. 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 of $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 248 would provide immediate relief for low- to moderate-income taxpayers.

5. Homeownership benefits. State and federal laws 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, only have the benefit of the credit, which is subject to an AGI limit. Even if the credit was increased as proposed in SB 248, is the state doing enough to help taxpayers who do not own a home?

6. Low-income families. The current Renter’s Tax Credit has little benefit for the state’s poorest families. Since California has a progressive income tax and a significant dependent exemption credit, many low-income families have little to no income tax liability. However, if the tax credit was refundable it could provide benefit to low- and middle-income taxpayers. SB 248 makes the Renter’s Tax Credit refundable, providing financial assistance to low-income and some middle-income families who may not receive any benefit from the current credit due to low tax liabilities.

7. Where is the sunset? Tax expenditure programs do not always produce desired outcomes. Sunset provisions enable the Legislature to review the efficacy of tax expenditure programs in the future. The standard sunset provision is five years. SB 248 contains no sunset date, meaning that the Legislature may be unable to evaluate the effectiveness of the program going forward. Committee staff recommends amending SB 248 to include a sunset provision of January 1, 2024, at which time the Renter’s Tax Credit would revert to its original structure as of January 1, 2018.

8. Related legislation. Assembly Bill 399 (Brough) also increases the Renter’s Credit—contingent upon appropriation—from $60 to $120, for single filers, and from $120 to $240, for joint filers, head of households, or surviving spouses. AB 399 is currently pending in the Assembly Revenue and Taxation Committee.

9. Past legislation. The Senate Committee on Governance and Finance saw a substantially similar bill last year. SB 1182 (Glazer, 2018) would also have restructured the Renter’s Tax Credit in a similar manner. However, SB 1182 did not make the credit refundable. SB 1182 passed out of Committee by a vote of 5-0, but was held in the Assembly Appropriations Committee.

Support and Opposition

(4/26/19)

Support: Aids Healthcare Foundation; City of Alameda; Apartment Association of Orange County; Apartment Association California Southern Cities; California Apartment Association; California Council For Affordable Housing; California Rental Housing Association; California Strategic Advisors; California Yimby; Coalition of California Welfare Rights Organizations; Consumer Action; East Bay Rental Housing Association; Fieldstead and Company, Inc.; National Association of Social Workers, California Chapter; Orange County Business Council; City of Santa Monica; Southwest California Legislative Council; and University of California Student 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 ↑