BILL ANALYSIS                                                                                                                                                                                                    

                                                                  SB 73
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          Date of Hearing:   August 27, 2001

                               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  

           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  


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          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  

          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)  


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          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  


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          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.


          State Treasurer, Phil Angelides (co-sponsor)
          California Rural Legal Assistance Foundation (co-sponsor)
          Western Center on Law and Poverty (co-sponsor)
          AFL-CIO Housing Investment Trust
          Alameda County Board of Supervisors
          Alliance of American Insurers
          California Apartment Association
          California Bankers Association
          California Catholic Conference of Bishops
          California Labor Federation, AFL-CIO
          City of Los Angeles
          City of Moreno Valley
          City of San Jose
          City of Vista
          Housing California
          League of California Cities
          Silicon Valley Housing Leadership Council
          Silicon Valley Manufacturing Group


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          State Building and Construction Trades Council
          Department of Finance

           Analysis Prepared by  :    Kimberly Bott / REV. & TAX. / (916)