<p> SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular </p><p>Bill No: SB 537 Hearing Date: 5/6/15 Author: Cannella Tax Levy: Yes Version: 2/26/15 Fiscal: Yes Consultant: Grinnell</p><p>INCOME TAXES: DEDUCTION: AMOUNTS DUE ON REAL PROPERTY: TAX BILL </p><p>Allows taxpayers to deduct the amount due on the taxpayer’s real property tax bill.</p><p>Background and Existing Law</p><p>Section 1 of Article XIII of the California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law. The Constitution limits the maximum amount of any ad valorem, or according to value, tax on real property at 1% of full cash value, and precludes reassessment unless the property is newly constructed or changes ownership. </p><p>The Mello-Roos Community Facilities Act allows counties, cities, special districts, and school districts to levy special taxes (parcel taxes) to finance a wide variety of public works, including parks, recreation centers, schools, libraries, child care facilities, and utility infrastructure. A Mello-Roos Community Facilities District (CFD) issues bonds against these special taxes to finance the public works projects. Like all special taxes, Mello-Roos Act special taxes require 2/3-voter approval. If there are fewer than 12 registered voters, the affected landowners vote. </p><p>In addition to financing public or governmental capital facilities, Mello-Roos Act special taxes can fund a limited list of public services: police services, fire protection, recreation programs, library services, museum operations, park maintenance, flood protection, hazardous waste cleanup, street and road maintenance, lighting of parks, parkways, streets, roads, open space, plowing and removal of snow, graffiti management and removal.</p><p>California conforms to federal law regarding the deductibility of property taxes. While the tax must be ad valorem for a taxpayer to deduct it for personal property taxes, federal law doesn’t contain the same requirement for real property taxes, which has created significant confusion and subsequent disagreements between taxpayers and the Franchise Tax Board (FTB). Non-ad valorem assessments may be deductible only if they are levied "for the general welfare by a property taxing authority at a like rate on owners of all properties in the taxing authority's jurisdiction, and if the assessments are not for local benefits (unless for maintenance or interest charges)" [Treasury Regulations, Section 1.164-4(a).]. </p><p>Additional confusion has resulted from counterintuitive language interpreting the above regulation. The phrase "a like rate" is not defined in either the Internal Revenue Code or the Treasury Regulations, but a memorandum issued by the Office of Chief Counsel of the IRS SB 537 (Cannella) 2/26/15 Page 2 of 3 states that this term “requires that the rate must uniformly apply based upon an independent variable, such as property value or parcel or structure size, to be considered similar or 'like.' When the Franchise Tax Board inquired whether the state’s Fire Prevention Fee was deductible for federal (and therefore state) purposes, the IRS response concluded that a "charge of $150 against each structure no matter how large or small is not levied at a 'like' rate,” meaning that it can only be ‘like’ if applied within a certain property classification. Additionally, amounts assessed only on specific properties for a local benefit (such as for streets, sidewalks, and like improvements) cannot be deducted as real property taxes. In the response regarding the fire fee, IRS additionally stated that the regulation requires “a real property tax be levied for the general public welfare and not for a local benefit to be deductible.” Given California’s various means of financing public improvements and services, the author wants taxpayers to be able to deduct any amount due on a local property tax bill. </p><p>Proposed Law</p><p>Senate Bill 537 allows taxpayers to deduct the amount due on the taxpayer’s real property tax bill as a miscellaneous itemized deduction. The measure states several legislative findings and declarations supporting its purposes. </p><p>State Revenue Impact</p><p>According to FTB, SB 537 results in revenue losses of $3.6 million in 2015-16, $3.8 million in 2016-17, and $4 million in 2017-18. </p><p>Comments</p><p>1. Purpose of the bill. According to the author, “Under the Mello-Roos Community Facilities Act of 1982, a local government may establish a Community Facilities District (CFD), subject to approval by 2/3 of voters in the CFD, in order to finance public facilities and services for the district by levying Mello-Roos special taxes on properties located within district. Most commonly, local governments use Mello-Roos to ensure that new developments pay for the schools, roads, parks, libraries, utilities, emergency services and the like they will require. Unlike ad valorem property taxes (that is, based on the value of the property), Mello-Roos and other similar parcel taxes are generally not tax deductible in California. However, there is confusion on whether Mello-Roos assessments are deductible from federal and state income taxes. SB 537 would authorize an itemized deduction against a taxpayer’s personal income tax for the amount paid on his or her real property tax bill, to include Mello-Roos and other like assessments.”</p><p>2. Reverse nonconformity. Generally, when the federal government changes its tax laws, California must enact its own conformity legislation to reduce differences between the two codes. Conformity eases the tax preparation burden on taxpayers, tax preparers, and tax administration agencies by reducing differences between the Internal Revenue Code and the Revenue and Taxation Code. The Legislature last enacted a bill conforming to changes through January 1, 2009 (SB 401, Wolk). SB 537 would reduce confusion for taxpayers resulting from differences in interpretation over IRS regulations regarding property related taxes like parcel taxes, and fees, but it may create a new and different frustration for taxpayers by allowing a deduction for state purposes that isn’t allowed on federal returns. While California taxpayers will receive a benefit from SB 537, only Congress or the IRS can change the rules for federal taxes. SB 537 (Cannella) 2/26/15 Page 3 of 3</p><p>3. Who benefits? SB 537 clarifies that the deduction for property taxes for state income taxes includes property-related taxes, fees, and benefit assessments. As such, taxpayers that own property or live in areas that rely heavily on Mello-Roos, parcel taxes and benefit assessments for infrastructure and public services will be the bill’s primary beneficiaries. </p><p>4. Inequality. In some communities, service charges for garbage collection, sewer, and water are collected on the property tax bill, but in others, service providers send separate bills. As such, SB 537 would allow a deduction for a charge for one of these services for taxpayers in some areas, but not for others. </p><p>Support and Opposition</p><p>4/30/15</p><p>Support: Howard Jarvis Taxpayers’ Association</p><p>Opposition: Unknown.</p><p>-- END --</p>