Agenda Summary – Taxation CommitteeSeaview Room A Hyatt Regency Hotel Long Beach, California Wednesday, October 18, 2006 2:00 p.m. – 4:00 p.m.Presiding: Raymond E. Karpe, Chair Robert Kevane, Vice Chair Pat A. Zicarelli, Vice Chair Jeannette Way, Executive Committee Liaison Leslie Munger, NAR Committee RepresentativeCAR Staff: Christopher Carlisle, Legislative Advocate Jeff Keller, Public Policy AnalystI. Opening CommentsII. State Taxation IssuesA. Action Items:1. Business License Taxes – Cities have become increasingly aggressive and creative in applying BLTs to real estate license activities, and every indication is that the pressure on municipal revenues will only increase. The law is clear that municipalities can tax business activities within their jurisdiction, but the taxation power is limited to a tax apportioned to the amount of activity actually performed within their jurisdiction. As a result, brokers and agents are often taxed by each of the cities in which some part of the real estate transaction that they perform is located. Consequently, Realtors® may end up paying BLTs in several cities. C.A.R. has twiceappointed special task forces to study the situation (the first in 1998 and most recently in 2004) and twice the task forces have concluded that the best strategy with which to address the situation would be strong advocacy efforts by Realtors® at the local level. In particular, the task forces have rejected state legislation strategies that include any concession that real estate salespersons are anything other than independent contractors for any purpose, including for payment of BLTs. This position was reiterated by the members of the Taxation Committee who attended the June business meetings. Several legislative options were discussed at that time but, ultimately, the committee members directed staff to prepare a paper which focuses solely on the legislative option that does not implicate the employee/independent contractor issue. (Please see IBP.)2. “Private” Transfer Taxes – “Private” transfer “taxes” (PTTs) are increasingly being usedto settle disputes between environmentalists and builders or, in the alternative, by builders to proactively avoid a lawsuit by environmentalists or to smooth development negotiations with local government. Typically, in return for an agreement bythe environmental group to not pursue a lawsuit based on one of the state’s environmental protection acts, the builder agrees to the imposition of one or more PTTs. These PTTs can total as much as 1.75 percent of the purchase price of a home and is paid by every buyer of a home in the development for 20 to 25 years or even in perpetuity. The monies generated by imposition of a PTT can be used for everything from environmental mitigation to the development of affordable housing. Some believe that such PTTs usurp functions that properly belong to local government and, as a result, that the imposition of PTTs should be prohibited, limited or, at a minimum, that the existence of a PTT should be explicitly disclosed to potential home buyers. (Please see task force final report which will be distributed at October meetings.)3. Proposition 86 – Tax on Cigarettes. Initiative Constitutional Amendment and Statute. Proposition 86 would impose an additional 13 cent taxon each cigarette distributed ($2.60 per pack), and would also indirectly increase tax on other tobacco products. The projected increase in new state tobacco tax revenue is about $2.1 billion annually by 2007-08, declining slightly annually thereafter. The revenue generated by this tax would provide funding to qualified hospitals for emergency services, nursing education, health insurance to eligible children, tobacco use prevention programs, enforcement of tobacco-related laws, and research prevention and treatment of various cancers (breast, cervical, prostate and colorectal), heart disease, stroke, asthma and obesity. With the imposition of this tax there is an unknown but potentially significant savings in state and local government public health carecosts over time due to the expected reduction in consumption of tobacco products. (Please see Propositions IBP.)4. Proposition 87 – Alternative Energy. Research, Production, Incentives. Tax on California Oil. Initiative Constitutional Amendment and Statute. Proposition 87 would establish a $4 billion program to reduce oil and gasoline usage by 25% over the next 10 years to be administered by the California Energy Alternatives Program Authority, which would be comprised of 9members. This program would be funded by a 1.5% to 6% tax on producers of oil extracted in California, depending on the price per barrel, to pay for research and production incentives for alternative energy vehicles and clean-burning fuels. Under Proposition 87 producers would be prohibited from passing the oil extraction tax on to consumers. The authority may incur indebtedness and issue and renew negotiable bonds, notes, or other securities of any kind to carry out its corporate purpose, but would be prohibited from changing the oil extraction tax while indebtedness remains. The authority may be terminate at anytime by the Legislature after January 1, 2027, or after the authority has expended all of its assets, which ever is later. The Legislative Analyst and Director of Finance estimate that new state revenues annually could range from about $200 million to $380 million. Further, this measure would create reductions of unknown amounts in local revenues from property taxes paid on oil reserves that may,potentially, be offset by state payments to schools to make up their revenue loss. (Please see Propositions IBP.)5. Proposition 89 – Political Campaigns. Public Financing. Corporate Tax Increases. Contribution and Expenditure Limits. Initiative Statute. Proposition 89 would create the Clean Money Fund to finance candidates for state office by increasing the income tax rate on corporations and financial institutions by 0.2 percent per year. Further, Proposition 89would ban candidates during the primary and general election campaign period who voluntarily agree to participate in, and become eligible for, Clean Money benefits from accepting private contributions from any source other then the candidates political party, which is limited based upon the office that the candidate seeks. Candidates who obtain Clean Money campaign funding must complete an exploratory period (beginning 18 months prior to the primary election) and qualifying period (ending 90 days prior to the election). During this period candidates must collect a specified number of qualified contributions, based upon the elected office they seek, from voters within the candidate’s district. Each contribution must equal $5.Candidates qualified forthe Clean Money benefit would be eligible for the following funds during a primary election: $250,000 for an Assembly bid; $500,000 for a Senate bid; $250,000 for the State Board of Equalization (BOE) bid; $2,000,000 for a statewide office other the Governor; and $10,000,000 for a Gubernatorial bid. For those candidates running in the general election they would receive: $400,000 for an Assembly race; $800,000 for a Senate race; $400,000 for the BOE race; $2,000,000 for a statewide office other the Governor; and $15,000,000 for a Gubernatorial race. Proposition 89 would limit small contributor committees from contributing more the $2,500 to any candidate per election, and $7,500 per calendar year to any political party.This measure further limits individual, corporate, and any group of persons acting in concert, from contributing more then $10,000 to any committee that is “for” or “against” a state or local ballot measure if that committee is controlled by a candidate for electivestate office or an elected state officer. Finally, Proposition 89 restricts contributions that are made by individuals, corporations, and any group of persons acting in concert from exceeding $1,000 for the purpose of funding an independent expenditure campaign to support or defeat a candidate for state office. The Legislative Analyst and Director of Finance estimate that the increased taxes on corporations and financial institutions will generate $200 million annually. (Please see Propositions IBP.)B. Discussion/Reporting Items:1. AB 2962 (Benoit) Real Estate Withholding Requirements - Existing law requires that the Franchise Tax Board hold 3 and 1/3% of the total sales price in all real property transactions to cover the tax on the gain to the seller of the property. This bill would instead require that the amount withheld be equal to the actual gain to the seller multiplied by the maximum applicable tax rate. C.A.R. supports AB 2962 because the current system often promotes over-withholding since the amount withheld does not reflect the actual taxes due on the sale of the property; and this measure would correct this defect.Status: Signed into law. Position: Support
2. SB 1374 (Cedillo) Taxpayer Information – Existinglaw authorizes the Franchise Tax Board, until December 31, 2008, to provide confidential taxpayer information to city officials including a taxpayer's name, address, social security or taxpayer identification number, and business activity code but limitsthe use of that information to employees of the taxing authority of a city. Additionally, existing law requires the California Research Bureau to complete a report on the impact and effect of the taxpayer disclosure program by December 2005. SB 1374 would extend the sunset date to December 31, 2010, thereby allowing city tax officials to obtain their taxpayer information from the Franchise Tax Board for an additional two years. C.A.R. opposes this measure because it is premature to change the sunset dateon a program prior to the public release of the report intended to evaluate important aspects of the program, and because it is almost three years before the scheduled sunset of the program.Status: Signed into law. Position: Oppose.
3. SCA 8 (Simitian) Vote Threshold Reduction for Parcel Taxes – In January of 2005, C.A.R.’s Board of Directors adopted the report of C.A.R. Vote Threshold Reduction Task Force. The Task Force recommended that vote threshold reduction proposals be considered on a case by case basis. SCA 8 proposes to allow the same 55% vote for approval of school parcel taxes as is currently in place for school bonds. After consideration, C.A.R. opposes SCA 8 because the parcel tax funds allowed by themeasure are much broader in application than the earlier bonds which are limited to capital costs.Status: Was not put to a vote on the Senate Floor prior to the end of session. Position: Oppose.
4. Municipal Auditing Companies – Cities are hiring municipal auditing companies (MACs) to help them collect delinquent business license taxes (BLTs). It appears that legislative or legal action would not address the heavy-handed tax collection activities of the MACs, the primaryproblem with which REALTORS® are confronted with regard to this matter. Previously, C.A.R. staff received an oral opinion from the Office of the Legislative Counsel that cities cannot deputize an independent third party to collect delinquent BLTs. Upon further review, however, the office has more recently opined that cities can hire MACs to collect delinquent BLTs.III. Federal Taxation IssuesA. Discussion/Reporting Items:1. Federal Legislative Process A review of the federal legislative process from introduction of a bill to become federal law. (Please see attached IBP.)2. Estate Tax C.A.R. Position: SupportOutcome in the 109th Congress: Passed House
Summary of Issue: A permanent reform to the estate tax has taken various forms during the 109th Congress. There was first H.R. 8, which would be a total repeal of the estate tax. On April 13, 2005 the House passed H.R. 8 by a vote of 272-162. However, this bill never got a full vote in the Senate because on June 8, 2006 the Senate failed to reach cloture by a vote of 57-41. This was an expected outcome and the Senate then turned to trying to reach a compromise on permanent reform of the estate tax.
When it became evident that Senate Republican and Senate Democrats were unable to form a bipartisan compromise on the estate tax, Senator Frist asked for the House to pass compromise legislation that the Senate could then debate. House Weighs & Means Chairman Thomas then introduced H.R. 5638 and was able to get it passed through the House on June 22, 2006 by a vote of 269-156. This compromise bill put the exemption at $5 million (indexed for inflation) and set the tax rates at the capital gains rate for estates between $5million and $25 million and double the capital gains rate for estates over $25 million. However, this compromise was not accepted by either side of the aisle in the Senate. The Senate Republicans were worried that the rates could increase to20% and 40%, which they felt was too high. Senate Republicans felt that the exemption level was high and also refused to vote on estate tax until the issue of a minimum wage increase was addressed first. H.R. 5638 stalled in the Senate.
In response to the failure of H.R. 5638, the Senate Republican leadership decided to take a large risk. They had the House introduce and pass H.R. 5970, which was dubbed the “Trifecta” bill. With this bill Senator Frist triedto appease every side as well as force the hand of some Senators. H.R. 5970 included popular tax extensions (including the 15-year depreciation and Brownfield deductions that REALTORS® are looking to have extended), an increase to the minimum wage, and permanent reform to the estate tax instituted in stages, but ending with the exemption at $5 million (indexed for inflation) and set the tax rates at 15% for estates between $5 million and $25 million and 30% for estates over $25 million. Nonetheless, this risky move failed as many Senate Democrats were outraged that an increase in the minimum wage had to come with estate tax reform as well as problems with vague language concerning certain aspects of the minimum wage increase. There is little hope left that a permanent reform to the estate tax will be found during this session of Congress. While attempts might still be made, unless there are some changes to the exemption level or tax rates, it is doubtful that a compromise willbe reached. This issue will be reintroduced during the 110th Congress.
3. Tax Extenders C.A.R. Position: No PositionOutcome in the 109th Congress: Passed House
Summary of Issue: Originally included in the 2006 tax reconciliation package, H.R. 4297 where numerous tax extensions. Included in those extensions were two REALTOR® supported tax provisions. The first provision was forleasehold improvements which allowed for tenant improvement deductions to be amortized over 15-years instead of 39-years. This provision expired on December 31, 2005. Additional there was an extension that allowed for the deductions of costs for Brownfield improvements. This provision also expired on December 31, 2005. These provisions, along with the other tax extenders were moved from the reconciliation bill in order to get the bill under the required $70 billion cost. However, the belief at the time was that these popular deductions would be moved and passed with the pension reform bill. Nonetheless, in a move to try and force the hands of Senate Democrats, these provisions were included in the “trifecta”bill that included a minimum wage increase and permanent reform to the estate tax. After the “trifecta” bill failed in the Senate, these provisions went into limbo. While these are popular tax extenders, there is no guarantee thatthey will be passed this year. The belief is that before the 109th Congress ends these extenders will either be added to another bill and passed or passed as a stand alone bill. This issue will be readdressed when Congress returns for their lame duck session after the elections. At this point, Senator Frist and Rep. Thomas are standing firm on their demand that the extenders must be pass with a permanent relief to the estate tax attached.
4. Tenant Improvements Depreciation C.A.R. Position: SupportOutcome in the 109th Congress: No Movement
Summary of Issue: The one year provision that allowed for a landlord who made improvements to leased property in a nonresidential building was required to amortize the cost of those improvements over 15 years instead of the life of the underlying property, i.e. 39 years expired on December 31, 2005. There have been numerous attempts to extend this tax break within a package of other business tax extenders. However, to date those extensions have not passed. While these attempts were being made, there was also an attempt to make the 15-year depreciation a permanent tax break. Senators Conrad (D-ND) and Kyl (R-AZ) introduced S. 621, and Representative Clay Shaw (R-FL) introduced H.R. 1663, both of which would make the 15-year life permanent. S. 621 was introduced on March 15, 2005. It has 5 cosponsors and iscurrently in the Senate Committee on Finance. H.R. 1663 was introduced on April, 14, 2005, has 32 cosponsors, and is currently in the House Committee on Ways and Means. While neither of these bills will move during the 109th Congress, they will be reintroduced during the 110th Congress.
CA cosponsors: House: Rep. Calvert, Rep. Costa, Rep. Lofgren, and Rep. Gary Miller.Senate: None
5. FIRPTA C.A.R. Position: SupportOutcome in the 109th Congress: No Movement
Summary of Issue: Over the past several years as identity theft has become more of a concern for everyone, sellers have grown increasingly uneasy with providing their taxpayer identification numbers. The concern has become so great thatsome sellers are refusing to provide the required affidavit to the buyer or are providing an affidavit with the seller’s taxpayer identification number redacted. This creates a dilemma for buyer’s who may be liable for the sellers’ tax liability from the sale of the real property if they do not receive a fully completed sellers’ affidavit. C.A.R. believes a seller should be able to provide the information require by FIRPTA to escrow or another settlement provider as analternative to providing that information to the buyer.
NAR has presented proposed legislation to the House Ways and Means Committee Staff, and are working with them to finalize the wording. Nonetheless, to date there has been little movement on the language or finding the appropriate tax legislation to attach. At this point we are hoping to have final wording finalized and prepared for a bill to be introduced during the 110th Congress.
CA cosponsors: House: None Senate: None
6. Tax Reform C.A.R. Position: No PositionOutcome in the 109th Congress: No Movement
Summary of Issue: On November 1, 2005 the President’s Advisory Panel on Tax Reform published their recommendationson how to reform the federal tax code As with any revenue neutral legislation, the elimination of a revenue stream or the lowering of a tax rate must be offset by the elimination of deductions and/or increase in tax rates in another area. A major target of the panel was the elimination of the Alternative Minimum Tax (AMT). Unfortunately, the panel’s suggested offsets would significantly affect REALTORS®. A summary on Real Estate specific concerns from the report can be found at =
10. Flood Mitigation Assistance C.A.R. Position: SupportOutcome in the 109th Congress: Signed into law
Summary of Issue: On July 12, 2005, the U.S. House of Representatives passed by a voice vote H.R. 804. Thislegislation would make it so that benefits received from the National Flood Insurance Act of 1968 for flood mitigation activities will not be considered income of the property owner when determining eligibility for any income assistance or program that is funded in whole or in part by a federal agency or by appropriated federal funds. H.R. 804 was passed by both the House and Senate and become law on September 20, 2005. CA Yea Votes:
House: This bill passed by voice vote with no recorded voteSenate: This bill passed by unanimous consent
11. Eminent Domain Tax Relief C.A.R. Position: No PositionOutcome in the 109th Congress: No Movement
Summary of Issue: In the wake of the Supreme Court’s Kelo v. City of New London decision on eminent domain, Congress responded with proposed legislation to address what they view as an incorrect ruling and an attack on individual property rights. H.R. 3268, the Eminent Domain Tax Relief Act, and H.R. 2980,the Eminent Domain Relief Act, would both exclude from property owners’ gross income for tax purposes any capital gain derived from eminent domain compensation. These bills could be reintroduced during the 110th Congress.
CA cosponsors: House: Rep. Cardoza and Rep. RohrabacherSenate: None
12. REMIC C.A.R. Position: No PositionOutcome in the 109th Congress: No Movement
Summary of Issue: Legislation was introduced in both the House and the Senatethat would amend the section of the IRS Tax Code governing commercial-mortgage-backed securities, also known as real-estate mortgage investment conduits (REMIC), allowing for modifications and/or changes to be made to the properties. H.R. 1010, the REMIC Modernization Act, was introduced by Representative Mark Foley (R-FL) on March 1, 2005. It currently has 29 cosponsors and is pending before the House Committee on Ways and Means. Its companion bill in the Senate, S. 580, was introduced on March 9, 2005, has 9 cosponsors, and is currently in the Senate Committee on Finance. With the short cycle during an election year, this issue was unable to make it to the top of a long priority list. Neither of these bills will move duringthis session, but they anticipate that they will be reintroduced during the 110th Congress.
CA cosponsors: House: Rep. HergerSenate: None
13. Mortgage Insurance Premium Deduction C.A.R. Position: OpposeOutcome in the 109thCongress: Passed House
Summary of Issue: Under Current law, there is no deduction for private or government mortgage insurance payments, even when this insurance is required as a condition of sale. The House included a measurein their tax reconciliation that included a PMI deduction only for newly originated loans for the year 2007 and only those making less than $100,000 (married or single) a year would be eligible for the full deduction. For people who earn more then$100,000 a year, there is a 10% reduction for every $1000 in gross income. However, this provision did not make it through the reconciliation conference report. This provision has been included with the other tax extenders which have been moved from tax reconciliation, to the pension reform bill, and currently sit with the “trifecta” estate tax bill. It is believed that these extenders will be passed during the 109th Congress, since most are extraordinarily popular with the business community, but just how they will be passed has not been settled yet. They might come up as a stand alone bill, as an amendment to another bill, or in another attempt to pass estate tax reform.
14. Home Lead Safety Tax Credit Act C.A.R. Position: No PositionOutcome in the 109th Congress: No Movement
Summary of Issue: Representative Wm. Lacy Clay (D-MO) introduced H.R. 453, the Home Lead Safety Tax Credit Act. This legislation would allow owners of residential properties built in the U.S. before 1978 to take a tax credit for costs incurred for lead-based paint removal performed by a certified lead abatement contractor. The property owner would be allowed a credit of 50 percent of the cost, capped at $1,500 per dwelling unit.
No action was taken on H.R. 453 during the 109th Congress. This Congress struggled to pass new tax credits during both sessions. H.R. 453 was not seen as a high priority by many during this session. However, the Environmental Protection Agency has recently requested comments on new regulations for the abatement of lead paint. This move may help bring the issue moreattention and movement in the 110th Congress, as this bill will likely be reintroduced.
CA cosponsors: House: None Senate: None
15. TEA-LU C.A.R. Position: No PositionOutcome in the 109th Congress: Signed into law
Summary of Issue: On August 10, 2005, President Bush signed the Transportation Equity Act: a Legacy for Users. C.A.R. had been monitoring this legislation through the 108th Congress and the start of the 109th as various versions of theproposed legislation contained a gasoline tax. While the new law contains various fuel and fuel-related excise taxes, there are no provisions related to any gasoline taxes.
CA Yea Votes: House: The entire California delegation votedYea, expect for the following. Rep. Royce voted Nay and Rep. Capps, Rep. George Miller, and Rep. Pombo did not place a vote.Senate: Neither Senator Boxer of Feinstein voted on this bill.
16. Hearings on Depreciation C.A.R. Position:No PositionOutcome in the 109th Congress: No Movement
Summary of Issue: On July 21, 2005, the Senate Committee on Finance held a hearing on asset depreciation titled, “Updating Depreciable Lives: Is There Salvage Value in the Current System?” The primary focus of this hearing was for Committee members to hear experts on the current depreciation laws. The last change made to the laws was back in 1993, which only lengthened the life for structures largely as a revenue offset measure. With new technology being implemented every year by business, the depreciation life of an asset is becoming ever more distant from its actual applicable usage. A primary cause of this stems from a 1988 law passed by Congressto remove the Treasury Department’s authority to assign class lives. Business assets utilized by REALTORS® which may require reclassification so that the assets’ depreciation and economic life are more congruent are BlackBerry® devices, computers, computer programs, and other new technologies. While there were supposed to be a series of hearings, they were delayed due to the need to focus on issues arising from Hurricane Katrina. After that there were major debates overspending bills and election year topics such as estate tax that took the forefront. However, it is likely that Congress will revisit this issue either by itself and/or within the context of tax reform during the 110th Congress.
CA cosponsors: House: None Senate: None
17. Energy Bill C.A.R. Position: No PositionOutcome in the 109th Congress: Signed into law
Summary of Issue: On August 8, 2005, President Bush signed the Energy Policy Act of 2005. This is a comprehensive omnibus bill that covers a broad range of energy related issues. Included in the legislation are a number of tax related provisions that will impact real estate. Below is a link to an NAR summary of real estate related provisions in the new law: http://www.realtor.org/GAPublic.nsf/pages/retaxincentives?OpenDocument
CA Yea Votes: House: Rep. Baca, Rep. Bono, Rep. Calvert, Rep. Cardoza, Rep. Costa, Rep. Cox, Rep. Cunningham, Rep. Doolittle, Rep. Dreier, Rep. Gallegly, Rep. Herger, Rep. Hunter, Rep. Issa, Rep. Lewis, Rep. Lungren, Rep. McKeon, Rep. Gary Miller, Rep. Napolitano, Rep. Nunes, Rep. Pombo, Rep. Radanovich, and Rep. Thomas.Senate: Senator Boxer and Senator Feinstein both voted Nay