Thursday, October 4, 2012 2:00 p.m. - 3:30 p.m. Anaheim
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: Ted Loring, Chair Hal Alpert, Vice-Chair
Issue Chairs: Scott Swendiman, Commercial Investment J. Michael Roberts, Government Finance Heide Wolf-Reid, Property Tax Judy Ellis, Transaction Tax
C.A.R. Staff: Christopher Carlisle, Legislative Advocate Matt Roberts, Federal Government Affairs Manager
I. Welcome and Opening Comments - Ted Loring, Chair
II. State Taxation Issues
A. Action Items:
1. Government Finance - J. Michael Roberts, Issue Chair
a. FHFA Significantly Restricts Use of Private Transfer Fees: Is it Time for a Complete Ban? In recent years, some developers have required the payment of a PTF as a condition of purchasing a residential property. The governing covenant requires payment of such a fee - which is usually a percentage of the purchase price - each time the property is resold. The fees are generally paid to an environmental organization for open space preservation or environmental mitigation; however, the fee can simply be paid to a private party for whatever purpose they see fit. At the fall, 2008, business meetings, the Board of Directors adopted the final report of a PTF task force which recommended that C.A.R., "Take a 'wait and see' attitude with regard to sponsoring legislation to prevent or regulate the imposition of [PTFs]. Specifically, the sponsorship of any such legislation should occur if the makeup of the legislature changes significantly enough that it is politically feasible that legislation will win approval." In March of this year, the FHFA promulgated a rule - for Fannie and Freddie backed mortgages - requiring that there be a "direct benefit" to the real property encumbered by the PTF covenant. Even though the type of projects that can be funded by FHFA PTFs has been significantly limited, environmentalists and builders are still likely to oppose a ban on PTFs. The limited PTFs may still help builders curry some favor with the local government with regard to proposed developments. That said, is this the time to attempt a complete ban on PTFs? (See Issue Briefing Paper.)
b. Ballot Propositions
1. Proposition 30: Temporary Taxes to Fund Education. Guaranteed Local Public Safety Funding. Initiative Constitutional Amendment. According to the Official Title and Summary prepared by the Attorney General, Proposition 30:
- Increases personal income tax on annual earnings over $250,000 for seven years. - Increases sales and use tax by ¼ cent for four years. - Allocates temporary tax revenues 89% to K-12 schools and 11% to community colleges. - Bars use of funds for administrative costs, but provides local school governing boards discretion to decide, in open meetings and subject to annual audit, how funds are to be spent. - Guarantees funding for public safety services realigned from state to local governments.
With regard to the last point, the state would be required to continue providing the tax revenues redirected in 2011 (or equivalent funds) to local governments to pay for the public safety programs transferred in the 2011 realignment. (See Proposition 30 Issue Briefing Paper.)
2. Proposition 31: State Budget. State and Local Government. Initiative Constitutional Amendment and Statute.
Summary: This measure will change California's budget from an annual budget to a biennial budget beginning in 2015. The biennial budget passed will contain, in addition to information on available revenues, anticipated expenditures, etc., a statement of how the budget will achieve the following goals: increase employment, improve education, decrease poverty, decrease crime, and improve heath. Local governments will also be required to address these goals in their local budgets. In this new two-year budget process, the legislature will be required to reserve part of the second session, beginning in July, for oversight and review of state-funded programs to assess their effectiveness and determine if changes or reductions are needed. In addition to a biannual budgetary cycle, the measure would create restrictions on the legislature's ability to increase state costs or decrease state revenues. Measures that increase state spending by more than $25 million would have to demonstrate how the cost will be paid for with spending reductions, revenue increases or both. Measures that decrease state revenues by more than $25 million a year would require spending reductions, revenue increases or both to fill that gap. This measure would allow the governor, in cases of a fiscal emergency, to reduce General Fund spending that is not required by the constitution by enough to balance the budget if the legislature fails to do so within 45 days of the fiscal emergency being declared. (See Issue Briefing Paper on Propositions.)
3. Proposition 38: Tax to Fund Education and Early Childhood Programs. Initiative Statute.
Summary: This measure would increase the state income tax on all individuals except those in the lowest tax bracket over a 12 year period beginning in 2013. These increases range from 0.4% to 2.2% with those in the highest tax bracket's rate increasing the most. It is estimated to increase the state's revenues by about $10 billion just for the 2013-2014 fiscal year. The revenues from this increase will be transferred into the newly created California Education Trust Fund, which will be used to supplement funding for school programs, teacher training, early care and education programs and debt-service relief. The measure allocates the funds based on specified annual formulas contained within the measure. The measure prohibits: 1) the legislature from making any modifications to this measure without voter approval; and 2) these additional funds being used to replace existing state, local and federal funds designated for education. (See Issue Briefing Paper on Propositions.)
4. Proposition 39: Tax Treatment for Multistate Businesses. Clean Energy and Energy Efficiency Funding. Initiative Statute.
Summary: Under the current corporate tax law, multistate businesses can choose one of two methods to determine their taxable state income. These methods are: the three factor method based on a combination of the company's sales, property and employees located within the state; and the single sales factor method which is based solely on company's sales within the state. This initiative would, starting in 2013, require all multistate companies doing business in California to determine their taxes based on the single sales factor. This measure also establishes the Clean Energy Job Creation Fund (Fund), which will be funded by $550 million from increased corporate revenues, to improve energy efficiency in schools and public facilities through cost effective energy efficient retrofits, public/private partnerships to establish and implement Property Assessed Clean Energy programs and other methods of financial assistance for retrofits. The Fund will also create jobs and expand clean energy generation through the funding of workforce development in energy efficiency areas, and public-private partnerships to maximize job creation. This measure specifies that all projects will be selected and overseen by existing state and local government agencies as well as a newly created Citizens Oversight Board. Projects will be chosen based on their in-state job creation and energy benefits. (See Issue Briefing Paper on Propositions.)
B. Report Items
1. Commercial Investment - Scott Swendiman, Issue Chair
a. AB 1978 (Galgiani) Collection Box Requirements for Salvageable Personal Property - Under existing law organizations placing collection boxes on private property are required to include their contact information on the outside of the box but do not have to obtain advanced approval from the property owner. This has resulted in a surge of collection boxes being placed on rental housing and retail properties without the property owners' consent. AB 1978 proposes to require the express written consent of a property owner before a collection box could be placed on his or her property. C.A.R. supports this measure as it addresses the public's desire to donate goods for charitable purposes and at the same time protect the rights of property owners that permit collection boxes on their properties.
Status: To Governor Position: Support
b. SB 1130 (de Leon) Nonresidential Building Energy Retrofit Financing Act - This measure would have established the Nonresidential Building Energy Retrofit Financing Act of 2012 and required the California Energy Commission to establish the Nonresidential Building Energy Retrofit Financing Program by July 1, 2013, to provide financial assistance through revenue bonds for owners of eligible buildings to implement energy efficiency improvements and renewable energy generation.
Status: Held in the Assembly Appropriations Committee Position: Watch
c. SB 1186 (Steinberg & Dutton) Disability Access Liability - This measure would reduce statutory damages and provide litigation protections for defendants who timely correct construction-related accessibility violations of the Unruh Civil Rights Act. The bill would limit statutory damages to $1,000 instead of $4,000 for any defendant who corrected all violations in the claim within 60-days of being served with the compliant and was either (1) a defendant who had hired a certified access specialist and met all applicable compliance standards, or (2) a defendant who had new construction or an improvement approved by the local building department on or after January, 2008.
Status: To the Governor Position: Watch
2. Government Finance – J. Michael Roberts, Issue Chair
a. Fire Prevention Fee
1. AB 1506 (Jeffries) - The passage of AB 29 (Blumenfield) of the First Extraordinary Session in 2011, requires the State Board of Forestry and Fire Prevention, before September 1, 2011, to establish regulations instituting a fire prevention fee not to exceed $150 on structures located in State Responsibility Areas to supplement the State Responsibility Area Fire Prevention Fund. The State Board of Forestry and Fire Prevention’s initially enacted regulations imposing a base yearly fee of $70 with an additional $20 for structures in a high or very high Fire Hazard Severity Zone, and $25 for each additional dwelling. The average resident would have paid about $25 with some paying as low as $5. This fee schedule was revisited a few months later by the Board and the base fee was raised to $150 with exemptions bringing the average resident's payment to $115. AB 1506 would repeal the fire prevention fee. C.A.R. is supporting this measure because homeowners who already pay a fire prevention fees should not be forced to pay twice for fire prevention. .
Status: Held in the Assembly Appropriations Committee Position: Support
2. AB 2474 (Chesbro) - This measure would specify that an individual who resides in a State Responsibility Area and who pays $150 or more to a local agency that provides fire protection services in the State Responsibility Area is not required to pay the fire prevention fee. Individuals paying less than $150 would receive a credit toward payment of the fire prevention fee equal to the amount paid to the local agency. The measure would also require that the fee be adjusted to "take into account fire history and severity … to ensure that the fee accurately reflects the fire prevention benefits provided."
Status: Held in Assembly Appropriations Committee Position: Watch
b. Recording Fees
1. SB 1220 (DeSaulnier & Steinberg) Document Recording Fee to Fund HOMeS - Due to the depletion of current housing bond funds, and recognition of their undependability and expense, the affordable housing community has been working on establishing a permanent funding source for affordable housing. Numerous options have been researched over the years and recent work by HCD has narrowed the field to a surcharge on real estate document recording fees. As introduced, SB 1220 proposed to provide such funding by enacting the Housing Opportunity And Market Stabilization (HOMeS) Act of 2012, which would require a flat $75 per document recording fee on every real estate related document required or permitted to be recorded. Typically, it is necessary to record at least three documents in a real estate sales transaction, so SB 1220 would have increased the cost of every real estate transfer by $225. CAR was opposed to this measure as it added an additional financial burden to all home sales transactions, placing most if not all of the responsibility for funding California's affordable housing and shelters needs on those who sell, purchase or transfer real property rather than on society as a whole. C.A.R. obtained amendments to make it clear that SB 1220 does not apply to transfers/sales of real property and will not impose a transfer tax in the form of a point of sale document recording fees. With these amendments C.A.R. removed its opposition and moved to a support position.
Status: Failed to pass off the Senate Floor Position: Support
2. SB 1342 (Emmerson) County Recording Fees - Currently, a county board of supervisors can adopt a recording fee on a real estate document of up to $3 to fund the Real Estate Fraud Prosecution Trust Fund. These funds are utilized to enhance the capacity of local policy and prosecutors to deter, investigate and prosecute real estate fraud crimes. SB 1342 increases the recording fee cap to $10 and expands the definition of what constitutes a "real estate instrument" to include any real estate related document not already subject to a transfer tax. C.A.R. sought and received amendments clarifying that the fee cannot be applied to documents recorded in connection with a sale or transfer of property. With these amendments, C.A.R. moved to a support position.
Status: Signed into law by the Governor on July 13, 2012 (Chapter 104, Statutes 2012) Position: Support
c. SB 1168 (Calderon) Homebuyer Tax Credit - SB 1168 creates a homebuyer tax credit for qualified taxpayers who purchase a home between January 1, 2012 and December 31, 2012. The credit will be equal to 5% of the sale price of a home, not to exceed $10,000 and payable in equal amounts over 3 successive tax years (maximum of $3,333 per year) beginning with the tax year in which the home is purchased. This measure will allocate $100 million for qualified first time homebuyers of new or existing homes and $100 million for purchasers of new or previously unoccupied homes. Should the purchaser fail to live in the home for two years, the remainder of the credit payments will be canceled and the purchaser will be required to repay the credit already received. C.A.R. supports this measure which would provide an incentive for first time home buyers to purchase a home as well as encourage purchases of new homes.
Status: Died in the Senate Governance and Finance Committee Position: Support
d. Infrastructure Financing Districts
1. AB 2144 (J. Perez) Infrastructure and Revitalization Financing Districts - Existing law authorizes the creation of an infrastructure financing district and the issuance of bonds upon the approval of 2/3 of the voters. AB 2144 would, among other things, authorize the creation of such a district and the bonds to finance it with only 55% voter approval. C.A.R. is opposed to this measure because C.A.R. believes that the creation of such districts should require a two-thirds vote.
Status: Sent to the Governor Position: Oppose
2. AB 2551 (Hueso) Renewable Energy Zones - Under current law cities and counties are authorized to form infrastructure financing districts if the district is approved by two-thirds of the registered voters in the proposed district. As introduced, AB 2551 would authorize the legislative body of a city or county to create an infrastructure financing district in a renewable energy zone area to promote renewable energy projects without voter approval. C.A.R. is opposed to AB 2551 because it removes the requirement for voter approval of the creation of such a district, leaving the taxpayers who would fund the district with no say in whether the district should be created.
Status: Sent to the Governor Position: Oppose
3. SB 214 (Wolk) Infrastructure Financing Districts - Under existing law the legislative body of a city or county is authorized to create and infrastructure financing district and to issue bonds to finance improvements within the district if two-thirds of the voters approve the plan. SB 214 would eliminate the current voter approval needed to establish an infrastructure financing district and issue bonds. C.A.R. is opposed to this measure as it would result in the property owners who would fund the infrastructure financing district through property taxes losing their ability to vote on the establishment of such a district and the issuance of bonds.
Status: Sent to the Governor Position: Oppose
e. Vote Threshold Reductions
1. ACA 21 (Feuer) Property Tax Vote Threshold Reduction - Current law requires a two-thirds vote to approve special taxes. ACA 21 proposed to reduce the vote requirement for the imposition of property taxes by a school district, community college district or county office of education to 55%. C.A.R. opposes ACA 21 because property taxes should only be approved by a two-thirds vote, with limited case-by-case exceptions.
Status: Died on the Assembly Floor Position: Oppose
2. ACA 23 (Perea) Local Transportation Project Special Tax Vote Threshold Reduction - This bill proposes to reduce the vote required to approve special taxes for local transportation projects, from a two-thirds vote to 55 percent. C.A.R. opposes ACA 23 because special taxes should only be approved by a two-thirds vote, with limited case-by-case exceptions
Status: Died on the Assembly Floor Position: Oppose
3. Property Tax - Heide Wolf-Reid, Issue Chair
a. AB 1590 (Campos) Assessment Appeals Boards - The Brown Act requires that local government meetings be properly noticed and prohibits those which have not been so noticed. A 1996 attorney general’s opinion found that local assessment appeals boards are not required to comply with the Brown Act. C.A.R. sponsored AB 1590 to clarify that property tax assessment appeals boards are subject to the Brown Act. This legislation also includes provisions specifying that deliberations may be held in closed session. AB 1590 passed out of the Assembly Revenue and Taxation Committee with the author's commitment to amend to bill to codify alternate, existing appeals board practices. With these amendments C.A.R. no longer sponsored the measure.
b. AB 1700 (Butler) Change in Ownership of a Co-Tenancy Interest - Under existing law, when real property changes ownership, it prompts a reassessment of the property taxes. AB 1700 would provide that a "change in ownership" reassessment is not triggered when one co-owner of a principal residence dies and his or her interest in the property is transferred to the other owner. C.A.R. is supporting this measure because it protects the surviving co-owner from reassessment when a co-owner dies.
Status: Sent to the Governor Position: Support
4. Transaction Tax - Judy Ellis, Issue Chair
a. AB 2225 (Perea) Debt Forgiveness Income Tax - The federal government enacted the Mortgage Debt Relief Act of 2007 that permitted 3 years of mortgage debt relief by not requiring borrowers to pay income tax on debt forgiven in a "short" sale. In late 2008, the federal government extended this relief through December 31, 2012. In 2008, California enacted and C.A.R. supported SB 1055 (Machado) which provided conformity with the federal statute for the 2007 and 2008 tax years and, in 2010, C.A.R. supported and California enacted SB 401 (Wolk) which extended the income tax debt forgiveness until December 31, 2012, conforming to the federal law. C.A.R. sponsored AB 2225, as a potential vehicle with which to conform state tax law to federal law, if the federal government extended the mortgage debt forgiveness sunset date. However, the U.S. Congress failed to deal with this issue prior to the state legislature adjourning for the year. Should the U.S. Congress take up the sunset date extension when they return from summer recess in September, C.A.R. will introduce a new conforming measure next year.
Status: Senate Rules Committee Position: Sponsor
III. Federal Taxation Issues
A. Report Items
1. Commercial Investment - Scott Swendiman, Issue Chair
a. Congress Submits Letter on Lease Accounting Proposal - On May 17, 2012, Reps. Sherman (D-CA) and Campbell (R-CA) sent a bipartisan letter signed by 58 other lawmakers to the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), urging the accounting standard setters to conduct a comprehensive economic analysis of its recent lease accounting proposal before making a final rule.
Under the proposal, U.S. companies that lease commercial space would be required to capitalize the costs of that lease - similar to as if they purchased the property - instead of recognizing the true costs of the lease transaction.
b. FASB and IASB Lease Accounting Standards - The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) met in July to take into consideration the most recent recommendations to their proposed lease accounting standards. FASB and IASB will be reconsidering new comments and may come out with another recommendation prior to the end of the year or sometime in 2013.
c. EPA Pushes Back Deadline for lead paint Proposed Rulemaking - Under a settlement agreement between the EPA and various public interest groups, the EPA is required to develop regulations that establish lead safe work practices for renovation, repair and painting (RRP) activities for commercial and public buildings. Under the original agreement, a proposed (RRP) rule for the exterior of commercial and public buildings was due on December 15, 2011. This date has been pushed back twice so far, most recently to September 15, 2012. A final rule is due on July 15, 2013, although the delays in issuing the proposed rule will no doubt delay promulgation of the final rule.
2. Government Finance - J. Michael Roberts, Issue Chair
a. Fiscal Cliff (Please see IBP) - Prior to the end of the year, Congress is facing the expiration of approximately 60 tax provisions, an automatic budget cut and the nation’s debt running up against the current debt ceiling. This has become known as the "fiscal cliff" as inaction by Congress will force the nation into a recession in the short term, but may prove to be beneficial in the long term.
b. Mortgage Debt Forgiveness - Congress would appear unable to pass any tax extenders package prior to the end of their session. This will push any effort to extend the mortgage debt forgiveness relief, along with the approximately 60 other tax provisions expiring at the end of the year, to the lame duck session. It is simply unknown if Congress will be able to act this issue prior to the end of the year.
c. 3.8% Medicare Tax - Beginning in 2013, the much publicized and often misunderstood 3.8 percent Medicare tax on unearned-taxable income will go into effect. While the application of this tax will utilize a complex formula, what is important to remember is it is applicable to:
- Households in the top two tax brackets (individuals with an adjusted gross income above $200,000 or $250,000 for married couples), - Applicable only on taxable unearned income, such as capital gains, interest, dividends and rents, - Capital gains exemption for principal residences ($250,000 for individuals and $500,000 for married couples) is not effected, and - Agents should have their clients contact their tax professional if they believe the new tax will impact them.
NAR has prepared a new guide, Top 10 Things You Should Know about the 3.8% Tax (http://www.ksefocus.com/billdatabase/clientfiles/172/4/1609.pdf)