BILL ANALYSIS SB 73 Page 1 Date of Hearing: August 20, 2001 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Ellen M. Corbett, Chair SB 73 (Dunn) - As Amended: June 19, 2001 SENATE VOTE : 32-2 Majority vote. Tax levy. Fiscal committee. SUBJECT : Taxation: credits: low-income housing SUMMARY : Increases the aggregate annual credit amount from $50,000,000 to $70,000,000 starting in 2001, and adjusts that amount annually for inflation. Specifically, this bill : 1)Permanently increases the maximum aggregate dollar amount of the low-income housing credits offered under existing insurance tax law (ITL), personal income tax law (PITL), and bank and corporation tax law (BCTL) to $70,000,000 for calendar year 2001 and each calendar year thereafter. 2)Increases the maximum aggregate dollar amount of the low-income housing credits offered under the ITL, PITL, and BCTL for the 2002 calendar year and each calendar year thereafter by the percentage increase, if any, in the Consumer Price Index (CPI). 3)Determines the increase in the CPI for any calendar year as the amount by which the CPI for the preceding calendar year exceeds the CPI for the 2001 calendar year. 4)Directs the California Tax Credit Allocation Committee (CTCAC) to review and evaluate the geographic apportionment methodology of the low-income housing credit program and to report back to the Legislature by June 30, 2002. The report shall consider, among other things, equitable distribution of the tax credits in accordance with local and regional housing needs. EXISTING FEDERAL AND CALIFORNIA TAX LAWS offer low-income housing credits to encourage investment in and production of low-income housing. Federal law allows a nonrefundable credit for investment in SB 73 Page 2 low-income housing units within a low-income housing project. Created as part of the Tax Reform Act of 1986, the credit is intended to stimulate investment in and production or rehabilitation of affordable rental housing. The federal credit is allowed over a 10-year period and is allocated to each state based upon a fixed per capital amount. Recent legislation increased the per capita amount allowed to each state to $1.50 for 2001 and $1.75 for 2002. The 2002 cap increases in subsequent years for the percentage increase in the federal CPI. In recognition of the high housing costs in California, the Legislature created a state low-income housing credit in 1987 to supplement the federal tax credit. The state low-income housing credit offsets a taxpayer's liability determined under the ITL, PITL or BCTL. The maximum aggregate credit allowed by California increased from $35 million to $50 million for calendar years 1998 and thereafter AB 168 (Torlakson), Chapter 9, Statutes of 1998, AB 1626, (Torlakson) Chapter 3, Statutes of. 2000. Each state is required to create an agency for allocating the credits, which agency allocates the credits in light of the following criteria: project location; housing needs characteristics; project characteristics; sponsor characteristics; participation of local tax-exempts; tenant populations with special needs; and public housing waiting lists. CTCAC, in the State Treasurer's office, administers both federal and state low-income housing tax credits. CTCAC allocates tax credits to a housing sponsor for a project located in California based upon numerous criteria including the project's need for the credit for economic feasibility. The housing sponsor then offers the credits to investors to raise funds for the project. The low-income housing tax credit authorized for California tax purposes is taken over four years in the following percentages: 30%, 30%, 30% and 10%. Typically, a credit is reserved by CTCAC for specific projects by September in each calendar year and must be allocated among the projects no later than December 31 of that year. The allocated credit may not be claimed as a reduction to tax until the project is completed and, then, only as the housing units are occupied. FISCAL EFFECT : The Board of Equalization and the Franchise Tax Board estimate that the full amount of the credit ($70 million) SB 73 Page 3 will be allocated among the competing taxpayers. Since the credit is spread over 4 years and because the right to use an allocated credit requires completion of the project, the increase of $20 million proposed by this bill does not directly impact revenue in the current year. This measure will result in an increasing revenue loss over time, beginning with a minor increase in fiscal year 2002-2003. Also, the amount of revenue loss increases in direct relation to increases in the CPI. The Franchise Tax Board estimates the revenue impact as follows: ----------------------------------------------------------------- |2001/2002 |2002/2003 |2003/2004 |2004/2005 |2005/2006 |2006/2007 | |----------+----------+----------+----------+----------+----------| | -- | (minor) | ($ 4 | ($ 10 | ($ 16 | ($19 | | | | million) | million) | million) |million) | ----------------------------------------------------------------- COMMENTS : 1)The author avers the effectiveness of the tax credit program in providing affordable housing opportunities in response to the severe housing shortage existing in California. Despite the recent increase in the maximum aggregate credit to $50 million, the author contends that the credits are oversubscribed by a ratio of 4:1. Information provided by the sponsor states that only 32% of the applicants (86 out of 270) received an allocation of credits in 2000. 2)The opposition acknowledges the need for more housing in the state, but contends that the impact to the general fund is significant and the increase is imprudent in light of the fiscal challenges currently before the state. Furthermore, the opposition cites the recent permanent increase to the maximum aggregate amount of the credit as additional incentive to address the lack of affordable housing, 3)The author and sponsors contend that the increase proposed by the bill is consistent with recent federal legislation increasing the per capita allocation of credit to the various states. The federal limit increased from $1.25 per state resident to $1.50 for 2001, $1.75 for 2002, and thereafter increased by a stated CPI factor. The increase of 40% from 2000 to 2002 is the same increase requested for the California credit (maximum aggregate amount of $50 million to $70 SB 73 Page 4 million). 4)The opposition states that the federal credit allocated to California (limited to $40 million) falls short of the maximum aggregate dollar amount under existing law ($50 million). The committee notes that the maximum amount of the federal credit as stated by the opposition is incorrect and that there is no direct correlation between actual dollar limitations between the federal and state credits. 5)The bill adopts the federal CPI as the standard for future increases to the aggregate credit amount. This provides consistency between the increases in the federal and the state credit amount and helps to avoid future disparity with some receiving one credit but not the other. 6)The opposition notes the existence of numerous federal CPIs (reflecting both geographical areas and expenditure components) and suggests the CPI reference should be clarified to identify the specific index to be used. REGISTERED SUPPORT / OPPOSITION : Support State Treasurer, Phil Angelides (co-sponsor) California Rural Legal Assistance Foundation (co-sponsor) Western Center on Law and Poverty (co-sponsor) AARP AFL-CIO Housing Investment Trust Alliance of American Insurers California Apartment Association California Bankers Association California Labor Federation, AFL-CIO City of Los Angeles City of Moreno Valley City of San Jose Housing California Jerricho League of California Cities Silicon Valley Housing Leadership Council Silicon Valley Manufacturing Group State Building and Construction Trades Council Opposition SB 73 Page 5 Department of Finance Analysis Prepared by : Kimberly Bott / REV. & TAX. / (916) 319-2098