Thursday, October 7, 2010
2:00 p.m. - 3:30 p.m.
Anaheim, California
Mission Statement:This Committee is a Policy committee. Its mission is to develop C.A.R.'s government finance and taxation policy. It has original jurisdiction to evaluate legislation and regulation in the following issue areas as they relate to real estate:
Commercial Investment
Government Finance
Property Tax
Transaction Tax
Presiding:
Dennis Badagliacco, Chair
Patricia Bouie-Hinds, Vice-Chair
Issue Chairs:
Virginia Butler, Property Tax
Skip Zeleny, Government Finance
David Zigal, Commercial Investment
Phil Schafer, Transaction Tax
Liaisons:
Kevin Brown, Executive Committee Liaison
Becky Blair, NAR Commercial Alliance Committee Representative
Leslie Munger, NAR Federal Taxation Committee Representative
CAR Staff:
Christopher Carlisle, Legislative Advocate
Matt Roberts, Federal Government Affairs Manager
I. Welcome and Opening Comments - Dennis Badagliacco, Chair
II. State Taxation Issues
A. Action Items:
1. Fannie and Freddie Cannot Finance Mortgages with Contractual Assessments Having Lien Priority - Under the Property Assessed Clean Energy (PACE) program, local governments make loans to homeowners to cover the upfront costs of installing energy improvements. Homeowners repay the loan through a contractual assessment collected at the same time they pay their property taxes; the assessments have tax or "first priority" lien status. The Federal Housing Finance Agency (FHFA) has announced that Fannie Mae and Freddie Mac are prohibited from financing mortgages which have PACE liens senior to a Fannie Mae or Freddie Mac lien. As a result, all local governments - with the exception of Sonoma County - have suspended their PACE programs pending a resolution of this dispute. Since it is unknown whether Congress or the courts may act, should the following state legislative alternatives be considered: (1) statutorily subordinating PACE or PACE-like liens to any home mortgage and (2) appropriately informing potential participants in a PACE or PACE-like program of the FHFA announcement and how buyers may not be able to get Fannie Mae or Freddie Mac financing. (See Issue Briefing Paper.)
2. Senior Citizen Property Tax Postponement Program May Be Resurrected Without Funding - C.A.R. adopted an "oppose" position on the June 1976 proposition authorizing the Senior Citizens and Disabled Citizens Property Tax Postponement Program. The C.A.R. analysis of the ballot propositions on the June 1976 ballot noted that the "Senior Citizens Property Tax Assistance Program already provides assistance to low income senior citizens." However, as part of the effort to close last year's budget gap, funding for the program was eliminated. In May, Assembly Member Bob Blumenfield authored legislation resurrecting the Senior Citizens and Disabled Citizens Property Tax Postponement Program. However, in August, the measure was completely recast replacing the previous state funded property tax postponement program with a program that relies upon counties voluntarily electing to participate in, and fund, the program. Given the budget difficulties local governments are experiencing, it is unlikely that any county will elect to participate in the program. As such, it is probable that attempts will be made to fund the program in the next few years. Or, if the Governor vetoes the measure, it is likely that legislation will be introduced to resurrect the former property tax postponement program for seniors. (See Issue Briefing Paper.)
3. Ballot Propositions
a. Proposition 21: State Parks and Wildlife Conservation Trust Fund Act, Initiative Constitutional Amendment - Proposition 21 creates the State Parks and Wildlife Conservation Trust Fund. Funding for the State Parks and Wildlife Conservation Trust Fund would come from an additional annual surcharge of $18 which will be added to every vehicle licensing fee charged on or after January 1, 2011. Those vehicles that are subject to the surcharge will have paid for the "State Park Access Pass" and will receive free admission to, and parking at, all parks in the State parks system. These funds will be used solely for the operation and benefit of current State park facilities, the creation of new parks and the protection of California's forests, waterways and wildlife areas. (See Issue Briefing Paper.)
b. Proposition 22: Local Taxpayer, Public Safety, and Transportation Protection Act of 2010, Initiative Constitutional Amendment - Under Proposition 22, the state would not be able to re-allocate property taxes revenues that go to local redevelopment agencies for any other purpose, nor would it be able to shift property taxes that go to cities, counties or special districts to schools without an order from the Governor due to "severe fiscal hardship" or a two-thirds vote of both houses of the Legislature. If these funds were to be re-allocated the revenues must be repaid within three fiscal years. (See Issue Briefing Paper.)
c. Proposition 24: Repeal Corporate Tax Loopholes Act, Initiative Constitutional Amendment - In 2008 and 2009 legislation that affected how corporations were taxed was instituted by the Legislature and the Governor. The first allows a corporation to use their company’s net operating loss (when a business has less income then deductions) to reduce a previous year’s state taxes or to reduce future taxes for up to 20 years starting on January 1, 2011. The second allows a corporation that has received tax credits to apply any unused credits to another affiliated corporation. Also, multi-state businesses would have the ability to choose between two formulas to determine their level of income for the California portion of their business. This proposition would repeal each of those measures. (See Issue Briefing Paper.)
d. Proposition 25: Passing the Budget on Time Act of 2010, Initiative Constitutional Amendment - Currently two-thirds of each house of the Legislature must approve a budget bill in order for it to be enacted. Proposition 25 would change this requirement and instead allow a budget to be passed by a majority vote in both houses. If the Legislature failed to enact a budget by the budget deadline, the legislators would receive no pay, reimbursement or per diem until the budget is passed with no retroactive payments. (See Issue Briefing Paper.)
e. Proposition 26: Increase the Vote Requirement for State Levies and Charges to Two-Thirds. Initiative Constitutional Amendment - Current law requires that any increase in taxes must be passed by a two-thirds vote in both houses of the Legislature in order to be imposed. This measure expands the definition of a "tax" to include any charge or levy that does not provide a direct benefit or privilege to the payer, a government service or product, pay for the regulatory costs of the state, allow for the use of state property, or is a fine or penalty imposed for a violation of the law. Any other charges or levies would be considered taxes. (See Issue Briefing Paper.)
f. Proposition Number Pending (February 2012 Ballot): HOPE 2010: California Cancer Research Act, Initiative Constitutional Amendment - This measure would impose a distribution tax of fifty cents for every cigarette distributed on every cigarette distributor, and a floor stock tax on every dealer and wholesaler of fifty cents for every cigarette in their possession. Revenues will be used to provide grants and loans for cancer research and facilities, tobacco and cigarette education and prevention programs, and law enforcement programs to regulate the movement of tobacco products. (See Issue Briefing Paper.)
B. Discussion/Reporting Items:
1. Government Finance - Skip Zeleny, Issue Chair
a. SB 1123 (Negrete McLeod) Expansion of DRE "Poison Pill" to Special Funds - During the 1990's the Governor and Legislature raided DRE reserve funds to help balance the budget’s general fund during budget crises. In response, C.A.R. sponsored legislation created a two part "poison pill" that would roll back licensee fees to 1982 levels if DRE funds were again raided and/or borrowed by the general fund or if DRE reserves are allowed to grow to exceed 18 months. As a part of the 2009 Budget Bill, the Legislature loaned $500,000 from the DRE operating reserve to the Department of Justice to start up a new foreclosure consultant registration program. This loan did not trigger the so-called "poison pill" statute and roll back license fees because the recipient was a special fund agency and not the state's General Fund. C.A.R. sponsored SB 1123 to prevent DRE reserve fund transfers ("loans") to other special fund agencies. According to the finance analysis, the bill had a $2 million price tag dooming its chances for passage this session.
Position: Sponsored Bill
Status: Died in the Senate Appropriations Committee
b. Capital Gains
1. SB 1416 (Walters) Senior Capital Gains Exemption - Current law reduces capital gains tax by permitting single individuals to exclude up to $250,000, and married couples to exclude up to $500,000, of the net gain from the sale of their home. Beginning January 1, 2010, SB 1416 would, for California state income tax purposes, have exempted individuals 65 years of age or older from paying capital gains tax on the sale or exchange of their principal residence. C.A.R. would have supported SB 1416 if it was amended to protect all homeowners, and not just seniors, from paying additional income tax on the money they received from the sale of their home.
Position: Support if Amended
Status: Died in the Senate Revenue and Taxation Committee
2. SB 10 of the Sixth Extraordinary Session (Dutton) Capital Gains - Current law reduces capital gains tax by permitting individuals to exclude up to $250,000, and married couples to exclude up to $500,000, of the net gain from the sale of their home. Beginning January 1, 2013 and ending January 1, 2016, SB 10 of the Sixth Extraordinary Session would have, for California state income tax and corporate tax purposes, exempted 50% of any net capital gain from the sale or exchange of a capital asset that was held for more than three years. C.A.R. supported this bill because it would have given property owners another option to limit their income tax liability that can result from the sale of residential and commercial property.
Position: Support
Status: Died in the Senate Revenue and Taxation Committee
c. Contractual Assessments
1. AB 1755 (Swanson) Seismic Safety Finance Act - Current law provides that local cities may enter into a voluntary agreement with a willing property owner to use an assessment against the property to finance energy efficiency and water system improvements to the property. AB 1755 expands the existing law to include property improvements for seismic strength and safety. The contractual assessment used to fund these improvements would be collected with the property owners’ taxes. AB 1755 was recently amended to limit the total amount of debt that may be imposed by these types of assessment to 5% of the value of the property. C.A.R. supports this legislation because it allows property owners to install seismic retrofits other than at point of sale and without immediately burdening the owner with the up-front installation costs.
Position: Support
Status: Enrolled to the Governor
2. AB 2182 (Huffman) Sewer and Septic Improvement Contractual Assessments - Existing law authorizes a public agency official and the willing owner of real property to enter into a voluntary agreement for a contractual assessment to finance the installation of property improvements. AB 2182 would expand existing law to include sewer and septic improvements in the eligible property improvements. The assessment used to fund these improvements would be collected with the homeowners’ property taxes. AB 2182 was recently amended to limit the total amount of debt that maybe imposed by these types of assessment to 5% of the value of the property. C.A.R. supports this legislation because it allows property owners to install these improvements other than at point of sale and without immediately burdening the owner with the up-front installation costs.
Position: Support
Status: Enrolled to the Governor
2. Commercial Investment - David Zigal, Issue Chair
a. AB 1103 (Saldana) Commercial Building Energy Star Benchmarking Program - Since the passage of AB 1103 (2007), C.A.R. has been participating as a stakeholder in developing the Commercial Building Energy Star Benchmarking program which will require building owners to benchmark the energy usage of all nonresidential buildings and disclose this information to a prospective buyer, lessee or lender when an entire building is sold, leased financed or refinanced. Currently, the draft language for the proposed regulations is being finalized and was supposed to be released to the public for comment in June. The program regulations will go into effect on the following schedule: January 1, 2011: buildings solely occupied by the owner or which are more than 50,000 square feet, January 1, 2012: buildings of 10,000 to 50,000 square feet, July 1, 2012: buildings of less than 10,000 square feet.
b. 1031 Property Exchanges
1. AB 2640 (Arambula) 1031 Property Exchanges - As introduced, AB 2640 would have eliminated state conformity with federal tax law relating to "1031" exchanges. In other words, if this bill had passed, tax deferred exchanges while still possible for federal tax purposes would not have enjoyed tax deferred treatment for state tax purposes. In early April, C.A.R. obtained amendments that removed this provision from the bill. As amended, C.A.R. removed its opposition.
Position: Watch as Amended
Status: Died in the Assembly Appropriations Committee
2. SB 1316 (Romero) 1031 Property Exchange Limitation - SB 1316 was "gutted" and amended to create a state tax credit for investments in low income communities that would have been funded with revenues obtained from a capital gains tax increase on 1031 exchanges that would exchange a California property for a property out-of-state. C.A.R. opposed SB 1316 because it limited the state's conformity with federal tax law relating to 1031 exchanges. If this bill had passed, tax deferred exchanges - while still allowable under federal law - would not have enjoyed the same tax deferred treatment for state tax purposes if the in-state property had been exchanged for a property outside the borders of California.
Position: Oppose
Status: Died on the Senate Floor
c. AB 2492 (Ammiano) Split Roll - Existing law requires the reassessment of real property upon the sale of that property. As introduced, AB 2492 proposed to create a rebuttable presumption that commercial property has undergone a change in ownership every three years. As amended, the bill would have instead triggered reassessment of a commercial property upon the sale or transfer of 100% of the corporation owning the property in any single transaction. C.A.R. opposed AB 2492 because it would have created a burdensome reassessment rule on non-residential property and lead to a split tax roll that will exacerbate the already unfortunate trend toward the "fiscalization" of land use decisions.
Position: Oppose
Status: Died on the Assembly Floor
3. Property Tax - Virginia Butler, Issue Chair
a. SB 1415 (Walters) Property Tax Portability - Currently, Proposition 60 allows a homeowner 55 years of age or older to transfer, on a one-time basis, their property tax base year value to another home of equal or lesser value within the same county, or to a home located in a county that has adopted an ordinance permitting homeowners to transfer their property tax base year value to that county. Beginning January 1, 2011, this measure would have allowed senior homeowners who are 65 years of age or older to transfer their property tax base year value to a dwelling located in a different county without the adoption of an ordinance. C.A.R. supported SB 1430 because it would have protected seniors who are often on a fixed and/or limited income from property tax increases that can occur when purchasing a new home.
Position: Support
Status: Died in the Senate Revenue and Taxation Committee
b. SB 1430 (Walters) Senior Citizen Property Tax Exemption - Existing property tax law provides for a homeowners' exemption in the amount of $7,000 of the full value of a "dwelling". SB 1430 would have increased this exemption to $27,000 for individuals 62 years of age and older and requires county assessors to annually adjust this tax credit by the percentage change in California's Housing Price Index. Additionally, the existing Personal Income Tax Law authorizes a $120 credit for married couples or heads of households renting a unit whose adjusted gross income is $50,000 or less, and a $60 credit for those renters whose adjusted gross income is $25,000 or less. SB 1430 would have increased this credit for senior citizen renters that are 62 years of age or older to $151 for senior citizen couples and $75 for single senior citizen renters. C.A.R. supported SB 1430 because senior citizens are generally on limited fixed incomes and the current $7,000 exemption does little to alleviate the property tax burden that comes with homes that generally in California have assessed values in the hundreds of thousands of dollars.
Position: Support
Status: Died in the Senate Revenue and Taxation Committee
4. Transaction Tax - Phil Schafer, Issue Chair
a. AB 1919 (Davis) Survey Monument Preservation Fund - Originally, AB 1919 proposed to impose a $10 transfer fee on every real estate transaction to pay for the preservation of survey monuments (e.g., generally, small brass markers). Existing law allows a county board of supervisors to create a survey monument preservation fund which can be financed by the imposition of a fee of up to $10 on the recording of a grant deed. Currently, this fee cannot be charged on parcels created by a tract map. AB 1919 proposed to delete that exemption. C.A.R. opposed AB 1919 because it imposes a transfer tax disguised as a "fee" on ALL grant deed recordings and not just those where survey monument preservation is ongoing and necessary. The author agreed not to move AB 1919 forward if an agreement on amendments that would remove C.A.R.'s opposition was not reached. AB 1919 was recently "gutted" and amended to instead, pertain to an unrelated issue, as a result C.A.R. has removed its opposition to the bill.
Position: Oppose
Status: Died on the Senate Floor
III. Federal Taxation Issues
A. GSE’s Proposed Guidelines on Private Transfer Fee
The Federal Housing Finance Agency (FHFA) has issued a proposed guideline stating “the Enterprises (Fannie Mae and Freddie Mac) should not purchase or invest in mortgages encumbered by private transfer fee covenants or securities backed by private transfer fee revenue, as such investments would be unsafe and unsound practices and contrary to the public missions of the Enterprises and the Banks.” Both C.A.R. and NAR have asked for this prohibition on private transfer fees (PTF) and are supportive of the proposed guideline’s intent.
An area of question is the guideline’s failure to grandfather in existing PTFs. This may make properties with existing PTFs unmarketable to anyone who would otherwise utilize conventional financing. In the example of where a homebuilder placed a PTF on a property sold years ago there is little to no leverage to force the homebuilder to remove the PTF since they no longer own the property.
The deadline for submitting comments to the FHFA is October 15, 2010. NAR has sent a Call-For-Action to State and Local Associations asking them to sign onto a form letter supporting the proposed guideline.
B. 1099 Reporting
The health care legislation enacted earlier this year included a controversial and burdensome new requirement, effective in 2012, that would require all businesses to provide IRS 1099 information returns to any vendor (and to the IRS) when the business makes payments of more than $600 to the vendor in any calendar year. This 1099 reporting provision came out of nowhere in the final days of the health care debate.
While there is bi-partisan support for the elimination of this provision as it is currently written, the Senate was unable to come to an agreement on what should be done. Two amendments to the small business bill failed to gain the 60 votes necessary to be included in the final bill.
The IRS, who will be in charge of implementing and enforcing the new law has stated their concern for the avalanche of paperwork the law will create. They have stated they do not intend to require purchases made with credit and debit cards to be subject to the new law. They are also listening to the business community to see how else they may be able to ease the burden on small businesses.
C. Bush Tax Cuts & Estate Tax
Congress is facing a slew of expiring tax breaks in 2010. These tax breaks include: the expiring Bush income tax cuts, the capital gains rate returning to 20%, and the 1-year elimination of the estate tax - with 2011 returning to a $1,000,000 exemption with a 55% tax rate.
Congress is going to be hard pressed to deal with all of these looming tax issues, especially with so many other issues still on their table and 2010 also being an election year. There is a chance that many of these tax breaks for household earning less that $200,000 for individuals or $250,000 for married couples will get temporary or permanent extensions.
Effective in 2010, the estate tax was repealed, but only for 2010. However, in 2011, the estate tax laws will revert to the laws that were in effect on June 6, 2001.When repeal came into effect, the estate is not taxed, but the basis of assets that heirs receive are "carried over" so that the basis in the hands of the heir is the same as the basis of the previous owner. Any estate tax fix is expected to be retroactive to cover all of 2010.
D. Fiscal Commission
In February of this year, President Obama issued an Executive Order creating the National Commission of Fiscal Responsibility and Reform (Commission). The purpose of the Commission is to come up with recommendations to balance the budget, excluding interest payment on the debt, by 2015. While the Commission is merely an advisory body to the President, when they issue their final report later this year, their report will likely spark discussion and debate on how the country can cut costs and raise revenue. Because real estate has so many tax incentives for both individual households and businesses the final report issued by the Commission is likely to include a number of recommended changes that will directly impact the industry and should therefore be closely watched.
IV. Other Business
V. Adjournment
