The Personal Income Tax Law, in modified conformity with federal income tax laws, generally allows various deductions in computing the income that is subject to the tax imposed by that law.

This bill, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, would allow a deduction in computing income for the amount paid or incurred by a taxpayer during the taxable year as premiums on a homeowners insurance policy on the taxpayers primary residence, as defined.

Existing law requires a bill authorizing a new tax expenditure to contain, among other things, specific goals, purposes, and objectives the tax expenditure will achieve, detailed performance indicators, and data collection requirements.

This bill would include additional information required for any bill authorizing a new tax expenditure.

This bill would take effect immediately as a tax levy.

Date of Hearing: April 29, 2024

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 1867 (

Author:Sanchez) – As Introduced Ver:January 18, 2024

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal Income Tax Law: deductions: homeowners' insurance premiums

SUMMARY: Allows, under the Personal Income Tax (PIT) Law, a deduction equal to the costs paid or incurred by a taxpayer for a homeowners' insurance policy, as specified. Specifically, this bill:

1. Allows, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, under the PIT Law, a deduction equal to the amount paid or incurred by a taxpayer during the taxable year as premiums on a homeowners' insurance policy on the taxpayer's "primary residence".
2. Defines "primary residence" as a residence that is eligible for either of the following:
   1. The homeowner's exemption, as described in Revenue and Taxation Code (R&TC) Section 218; or,
   2. The veteran's exemption, as described in R&TC Section 205 and subdivisions (o), (p), (q), and (r) of Section 3 of Article XIII of the California Constitution.
3. Finds and declares the following for the purposes of satisfying the requirements of Revenue and Taxation Code (R&TC) Section 41:
   1. The specific goals, purposes, and objectives of the deduction are to assist homeowners in affording the cost of homeowners' insurance; and,
   2. To measure whether this bill achieves its intended purpose, the performance indicator is the number of taxpayers claiming the deduction.
4. Requires the Franchise Tax Board (FTB), by December 1, 2025 and annually thereafter, to prepare a report on the number of taxpayers claiming the deduction.
5. Takes immediate effect as a tax levy.
6. Sunsets these provisions on December 1, 2029.

EXISTING LAW:

1. Allows for deductions for trade or business expenses, including a deduction for insurance premiums against fire, storm, theft, accident, or other similar losses in case of a business, and rental for the use of business property. (Internal Revenue Code (IRC) Section 162 and R&TC Section 17201.)
2. Allows a deduction equal to the amount of interest a taxpayer pays on a mortgage secured by their principal or secondary residence, subject to certain limitations. (IRC Section 163(h) and R&TC Section 17201.)

FISCAL EFFECT: The FTB estimates General Fund revenue losses of $110 million in fiscal year (FY) 2024-25, $75 million in FY 2025-26, and $80 million in FY 2026-27.

COMMENTS:

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

California is in the midst of a homeowners' insurance affordability and availability crisis. Catastrophic wildfires, rising building and reconstruction costs, and the rising costs of reinsurance has led many insurers to leave the state or have limited issuance of new policies. This has translated into higher insurance premiums for California homeowners. That is why I introduced AB 1867 to make homeowners' insurance premiums tax deductible and help many Californians achieve or maintain the dream of homeownership by offsetting the rising costs of insurance.

1. The Howard Jarvis Taxpayers Association, writing in support of AB 1867, notes, in part:

Homeowners' insurance premiums have been steadily increasing over the past few years, and currently show no signs of stopping. Additionally, the exodus of insurers from the market and restrictions on new policies have left many homeowners with no choice but to resort to costly and limited coverage options. For many, especially those in high wildfire risk areas, the exorbitant cost of home insurance has prompted them to sell their homes and leave California all together.

1. The American Federation of State, County and Municipal Employees, AFL-CIO California (AFSCME CA), writing in opposition to AB 1867, notes, in part:

Tax cuts such as this proposal weaken state revenues by large and growing amounts over time, limiting California's ability to maintain support for schools and other vital public services or make new investments that can strengthen the economy and promote opportunity, just as the state faces a $73 billion deficit. Although California is indeed facing challenges in home insurance access and affordability, AB 1867 would contribute to California's already unstable revenue stream. The Legislature and the Governor face the difficult task of balancing the budget in the next few months. Many core services could face steep cuts - core services that many Californians rely on to be able to take care of themselves and their families. A proposal such as AB 1867 is likely to lead to the instability of the state's General Fund.

1. Committee Staff Comments:
   1. What would this bill do? This bill would create a miscellaneous deduction for the full costs paid or incurred by a taxpayer as premiums for a homeowners' insurance policy on their primary residence. The bill defines a "primary residence" by cross-referencing two existing property tax exemptions.
   2. Who is likely to benefit? As a miscellaneous deduction, the deduction for amounts paid or incurred by a taxpayer for a homeowners' insurance policy would only be available to taxpayers who itemize deductions when filing their taxes. Filers claiming the standard deduction would not be able to claim the deduction created by this bill. In California, just over 15% of filers itemized deductions in 2020.^[1] The U.S. Treasury Office of Tax Analysis, in a working paper analyzing the distribution of eight major tax expenditures across different income levels and racial and ethnic groups, found that itemized deductions disproportionately benefit White families: 84% of the benefits of the deductibility of mortgage interest were received by White families, which make up only 67% of the population studied. The average dollar benefit per family for the mortgage interest deduction was estimated to be $213 for White families, $77 for Hispanic families, and $63 for Black families.^[2] Additionally, across all racial and ethnic categories, families in the upper middle-income ranges benefitted from the home mortgage deduction at higher rates than families in lower income deciles.
   3. Deductions tend to benefit higher income households: A deduction is generally more valuable to high-income taxpayers because the "value" of a deduction varies with the marginal tax rate (or tax bracket) of the taxpayer. For example, an individual taxpayer in a 10% tax bracket would receive a tax benefit of $10 on a $100 deduction. In contrast, a taxpayer in a 25% tax bracket would save $25 in taxes for every $100 deducted from income. Thus, assuming the same level of deductions, high-income taxpayers, presumably with a greater ability to pay taxes, would receive a greater tax benefit from the proposed deduction than lower income taxpayers.
   4. Homeowners insurance in California: Proposition 103, passed by California voters in November 1988, was intended to protect consumers from arbitrary insurance rates and practices, to encourage a competitive marketplace, and to ensure that insurance is fair, available and affordable for all Californians. Proposition 103 instituted a regulatory system where the Insurance Commissioner must approve a rate applied for by an insurer before its use, known as the "prior approval" system, before an insurer can implement property and casualty insurance rates.^[3] In 2017 and 2018, California experienced two of the most destructive wildfire seasons in state history, which resulted in California insurers paying a record of $15.4 billion in losses in 2017 and $13.6 billion in 2018. After two straight years of insurers paying out $1.85 in losses for every $1 of premium earned, the California Department of Insurance approved 71 rate increase requests from 50 different companies in 2019.^[4] Damage resulting from winter storms in subsequent years has continued to strain the property insurance market, with several major insurers stopping issuance of new policies or exiting the state altogether.
   5. An incentive or a reward? Typically, tax expenditures are provided prospectively as a matter of legislative grace to encourage taxpayers to behave in ways they might not absent a financial incentive. This expenditure, in turn, is intended to assist taxpayers that are struggling to pay home insurance costs and begins providing this deduction for taxable years beginning on January 1, 2024. Tax expenditures with retroactive application, however, cannot incentivize past behavior that has already occurred. If this is contrary to the author's intent, the bill should be amended to remove the retroactive application and provide the deduction prospectively.
   6. 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 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.

• 1. Committee's tax expenditure policy: Both R&TC Section 41 and Committee policy require any tax expenditure bill to 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. 

In its current form, this bill states that the deduction is intended to assist homeowners in affording the cost of homeowners' insurance. In addition, this bill provides that the expenditure's effectiveness shall be measured by the number of taxpayers claiming the deduction pursuant to this bill. This bill requires the FTB to submit a report to the Legislature by December 1, 2025, and annually thereafter, estimating the number of taxpayers claiming the deduction.

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 this policy, an "appropriate sunset provision" means five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" means ten years.  This bill contains a five-year sunset provision and therefore complies with the Committee's policy on sunset dates.

• 1. Implementation Considerations:
     1. Appropriately targeted? As described above, deductions disproportionately benefit higher income taxpayers. Given the high cost of homeownership in California, homeowners typically have access to more financial resources than renters. As currently drafted, this bill does not limit the deduction based on a taxpayer's income, meaning even very high-income filers that can afford their insurance costs could claim the deduction. The Committee may wish to consider whether a deduction is appropriately targeted to achieve the stated goal of relieving financial burdens for those who are struggling to pay for homeowners' insurance costs.
     2. Conformity issues: This bill proposes a deduction that has no counterpart in the Federal tax code. In general, state conformity with federal law promotes greater simplicity and eases administration of complex tax laws. This bill would bring California further out of conformity with federal law as the deduction created by this bill could not be claimed on a Federal return. In the absence of similar federal treatment, taxpayers may need to keep separate accounting for state and federal tax purposes.
  2. Primary residency: In order to facilitate verification of the primary residence using existing property tax exemptions, the author may wish to amend the bill to allow data sharing between the FTB and the state Board of Equalization.
  3. Current legislation: AB 582 (Connolly) allowed a credit for seniors residing in high or very high-risk fire zones who incur costs relating to fire-resistant home improvements, as specified. AB 582 was held on the Assembly Appropriations' Suspense File.
  4. Prior legislation:
     1. AB 324 (Choi), of the 2021-22 Legislative Session, allowed a tax credit for qualified taxpayers that install an attic vent closure in a residential property, as specified. AB 324 was held on the Assembly Appropriations' Suspense File.
     2. AB 266 (Choi), of the 2019-20 Legislative Session, was substantially similar to AB 324 and was held on the Assembly Appropriations' Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

Howard Jarvis Taxpayers Association

Southwest California Legislative Council

Opposition

AFSCME CA

California Federation of Teachers AFL-CIO

California Teachers Association

Analysis Prepared by: Wesley Whitaker / REV. & TAX. / (916) 319-2098

1. Villanova, Where Americans Write Off the Most in Taxes – 2023 Study, SmartAsset (April 6, 2023). https://smartasset.com/data-studies/where-americans-write-off-the-most-in-taxes-2023. ↑

2. Cronin, Tax Expenditures by Race and Hispanic Ethnicity: An Application of the U.S. Treasury Department's Race and Hispanic Ethnicity Imputation, U.S. Treasury Office of Tax Analysis (January 2023). https://home.treasury.gov/system/files/131/WP-122.pdf. ↑

3. Prop. 103 Consumer Intervenor Process, California Department of Insurance. https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/. ↑

4. 2021 CA Property & Casualty Market Share. California Department of Insurance. https://www.insurance.ca.gov/01-consumers/120-company/04-mrktshare/2021/index.cfm. ↑

Date of Hearing: March 4, 2024

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

ABPCA Bill Id:AB 1867 (

Author:Sanchez) – As Introduced Ver:January 18, 2024


Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal Income Tax Law: deductions: homeowners' insurance premiums

SUMMARY: Allows, under the Personal Income Tax (PIT) Law, a deduction equal to the costs paid or incurred by a taxpayer for a homeowners' insurance policy, as specified. Specifically, this bill:

1. Allows, for taxable years beginning on or after January 1, 2024, and before January 1, 2029, under the PIT Law, a deduction equal to the amount paid or incurred by a taxpayer during the taxable year as premiums on a homeowners' insurance policy on the taxpayer's "primary residence".
2. Defines "primary residence" as a residence that is eligible for either of the following:
   1. The homeowner's exemption, as described in Revenue and Taxation Code (R&TC) Section 218; or,
   2. The veteran's exemption, as described in R&TC Section 205 and subdivisions (o), (p), (q), and (r) of Section 3 of Article XIII of the California Constitution.
3. Finds and declares the following for the purposes of satisfying the requirements of Revenue and Taxation Code (R&TC) Section 41:
   1. The specific goals, purposes, and objectives of the deduction are to assist homeowners in affording the cost of homeowners' insurance; and,
   2. To measure whether this bill achieves its intended purpose, the performance indicator is the number of taxpayers claiming the deduction.
4. Requires the Franchise Tax Board (FTB), by December 1, 2025 and annually thereafter, to prepare a report on the number of taxpayers claiming the deduction.
5. Takes immediate effect as a tax levy.
6. Sunsets these provisions on December 1, 2029.

EXISTING LAW:

1. Allows for deductions for trade or business expenses, including a deduction for insurance premiums against fire, storm, theft, accident, or other similar losses in case of a business, and rental for the use of business property. (Internal Revenue Code (IRC) Section 162 and R&TC Section 17201.)
2. Allows a deduction equal to the amount of interest a taxpayer pays on a mortgage secured by their principal or secondary residence, subject to certain limitations. (IRC Section 163(h) and R&TC Section 17201.)

FISCAL EFFECT: The FTB estimates General Fund revenue losses of $110 million in fiscal year (FY) 2024-25, $75 million in FY 2025-26, and $80 million in FY 2026-27.

COMMENTS:

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

California is in the midst of a homeowners' insurance affordability and availability crisis. Catastrophic wildfires, rising building and reconstruction costs, and the rising costs of reinsurance has led many insurers to leave the state or have limited issuance of new policies. This has translated into higher insurance premiums for California homeowners. That is why I introduced AB 1867 to make homeowners' insurance premiums tax deductible and help many Californians achieve or maintain the dream of homeownership by offsetting the rising costs of insurance.

1. The Howard Jarvis Taxpayers Association, writing in support of AB 1867, notes, in part:

Homeowners' insurance premiums have been steadily increasing over the past few years, and currently show no signs of stopping. Additionally, the exodus of insurers from the market and restrictions on new policies have left many homeowners with no choice but to resort to costly and limited coverage options. For many, especially those in high wildfire risk areas, the exorbitant cost of home insurance has prompted them to sell their homes and leave California all together.

1. The American Federation of State, County and Municipal Employees, AFL-CIO California (AFSCME CA), writing in opposition to AB 1867, notes, in part:

Tax cuts such as this proposal weaken state revenues by large and growing amounts over time, limiting California's ability to maintain support for schools and other vital public services or make new investments that can strengthen the economy and promote opportunity, just as the state faces a $73 billion deficit. Although California is indeed facing challenges in home insurance access and affordability, AB 1867 would contribute to California's already unstable revenue stream. The Legislature and the Governor face the difficult task of balancing the budget in the next few months. Many core services could face steep cuts - core services that many Californians rely on to be able to take care of themselves and their families. A proposal such as AB 1867 is likely to lead to the instability of the state's General Fund.

1. Committee Staff Comments:
   1. What would this bill do? This bill would create a miscellaneous deduction for the full costs paid or incurred by a taxpayer as premiums for a homeowners' insurance policy on their primary residence. The bill defines a "primary residence" by cross-referencing two existing property tax exemptions.
   2. Who is likely to benefit? As a miscellaneous deduction, the deduction for amounts paid or incurred by a taxpayer for a homeowners' insurance policy would only be available to taxpayers who itemize deductions when filing their taxes. Filers claiming the standard deduction would not be able to claim the deduction created by this bill. In California, just over 15% of filers itemized deductions in 2020.^[1] The U.S. Treasury Office of Tax Analysis, in a working paper analyzing the distribution of eight major tax expenditures across different income levels and racial and ethnic groups, found that itemized deductions disproportionately benefit White families: 84% of the benefits of the deductibility of mortgage interest were received by White families, which make up only 67% of the population studied. The average dollar benefit per family for the mortgage interest deduction was estimated to be $213 for White families, $77 for Hispanic families, and $63 for Black families.^[2] Additionally, across all racial and ethnic categories, families in the upper middle-income ranges benefitted from the home mortgage deduction at higher rates than families in lower income deciles.
   3. Deductions tend to benefit higher income households: A deduction is generally more valuable to high-income taxpayers because the "value" of a deduction varies with the marginal tax rate (or tax bracket) of the taxpayer. For example, an individual taxpayer in a 10% tax bracket would receive a tax benefit of $10 on a $100 deduction. In contrast, a taxpayer in a 25% tax bracket would save $25 in taxes for every $100 deducted from income. Thus, assuming the same level of deductions, high-income taxpayers, presumably with a greater ability to pay taxes, would receive a greater tax benefit from the proposed deduction than lower income taxpayers.
   4. Homeowners insurance in California: Proposition 103, passed by California voters in November 1988, was intended to protect consumers from arbitrary insurance rates and practices, to encourage a competitive marketplace, and to ensure that insurance is fair, available and affordable for all Californians. Proposition 103 instituted a regulatory system where the Insurance Commissioner must approve a rate applied for by an insurer before its use, known as the "prior approval" system, before an insurer can implement property and casualty insurance rates.^[3] In 2017 and 2018, California experienced two of the most destructive wildfire seasons in state history, which resulted in California insurers paying a record of $15.4 billion in losses in 2017 and $13.6 billion in 2018. After two straight years of insurers paying out $1.85 in losses for every $1 of premium earned, the California Department of Insurance approved 71 rate increase requests from 50 different companies in 2019.^[4] Damage resulting from winter storms in subsequent years has continued to strain the property insurance market, with several major insurers stopping issuance of new policies or exiting the state altogether.
   5. An incentive or a reward? Typically, tax expenditures are provided prospectively as a matter of legislative grace to encourage taxpayers to behave in ways they might not absent a financial incentive. This expenditure, in turn, is intended to assist taxpayers that are struggling to pay home insurance costs and begins providing this deduction for taxable years beginning on January 1, 2024. Tax expenditures with retroactive application, however, cannot incentivize past behavior that has already occurred. If this is contrary to the author's intent, the bill should be amended to remove the retroactive application and provide the deduction prospectively.
   6. 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 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.

• 1. Committee's tax expenditure policy: Both R&TC Section 41 and Committee policy require any tax expenditure bill to 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. 

In its current form, this bill states that the deduction is intended to assist homeowners in affording the cost of homeowners' insurance. In addition, this bill provides that the expenditure's effectiveness shall be measured by the number of taxpayers claiming the deduction pursuant to this bill. This bill requires the FTB to submit a report to the Legislature by December 1, 2025, and annually thereafter, estimating the number of taxpayers claiming the deduction.

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 this policy, an "appropriate sunset provision" means five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" means ten years.  This bill contains a five-year sunset provision and therefore complies with the Committee's policy on sunset dates.

• 1. Implementation Considerations:
     1. Appropriately targeted? As described above, deductions disproportionately benefit higher income taxpayers. Given the high cost of homeownership in California, homeowners typically have access to more financial resources than renters. As currently drafted, this bill does not limit the deduction based on a taxpayer's income, meaning even very high-income filers that can afford their insurance costs could claim the deduction. The Committee may wish to consider whether a deduction is appropriately targeted to achieve the stated goal of relieving financial burdens for those who are struggling to pay for homeowners' insurance costs.
     2. Conformity issues: This bill proposes a deduction that has no counterpart in the Federal tax code. In general, state conformity with federal law promotes greater simplicity and eases administration of complex tax laws. This bill would bring California further out of conformity with federal law as the deduction created by this bill could not be claimed on a Federal return. In the absence of similar federal treatment, taxpayers may need to keep separate accounting for state and federal tax purposes.
  2. Primary residency: In order to facilitate verification of the primary residence using existing property tax exemptions, the author may wish to amend the bill to allow data sharing between the FTB and the state Board of Equalization.
  3. Current legislation: AB 582 (Connolly) allowed a credit for seniors residing in high or very high-risk fire zones who incur costs relating to fire-resistant home improvements, as specified. AB 582 was held on the Assembly Appropriations' Suspense File.
  4. Prior legislation:
     1. AB 324 (Choi), of the 2021-22 Legislative Session, allowed a tax credit for qualified taxpayers that install an attic vent closure in a residential property, as specified. AB 324 was held on the Assembly Appropriations' Suspense File.
     2. AB 266 (Choi), of the 2019-20 Legislative Session, was substantially similar to AB 324 and was also held on the Assembly Appropriations' Suspense File.

REGISTERED SUPPORT / OPPOSITION:

Support

Howard Jarvis Taxpayers Association

Opposition

AFSCME CA

California Teachers Association

Analysis Prepared by: Wesley Whitaker / REV. & TAX. / (916) 319-2098

1. Villanova, Where Americans Write Off the Most in Taxes – 2023 Study, SmartAsset (April 6, 2023). https://smartasset.com/data-studies/where-americans-write-off-the-most-in-taxes-2023. ↑

2. Cronin, Tax Expenditures by Race and Hispanic Ethnicity: An Application of the U.S. Treasury Department's Race and Hispanic Ethnicity Imputation, U.S. Treasury Office of Tax Analysis (January 2023). https://home.treasury.gov/system/files/131/WP-122.pdf. ↑

3. Prop. 103 Consumer Intervenor Process, California Department of Insurance. https://www.insurance.ca.gov/01-consumers/150-other-prog/01-intervenor/. ↑

4. 2021 CA Property & Casualty Market Share. California Department of Insurance. https://www.insurance.ca.gov/01-consumers/120-company/04-mrktshare/2021/index.cfm. ↑