BILL ANALYSIS
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
1316 (Romero)
Hearing Date: 07/15/2010 Amended: 06/28/2010
Consultant: Mark McKenzie Policy Vote: Rev&Tax 3-0
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BILL SUMMARY: SB 1316 would eliminate state tax benefits
related to any "like-kind exchange" of California property for
out-of-state property for the 2011 calendar year that would
otherwise qualify for deferral of capital gains taxes. This
bill would also enact a New Markets Tax Credit for qualified
investments made in low income communities in the 2011 calendar
year. The State Treasurer's Office (STO) would administer the
new credit program and allocate credits in an amount equal to
the estimated revenue gains resulting from the temporary
elimination of specified like-kind property exchanges.
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Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12 2012-13 Fund
Denial of tax benefits ($2,500) ($3,900) ($600) General
(estimated revenue gains)
New tax credit revenue loss $2,500 $3,900
$600General
STO regulations $232 $116 $116 General
and administration
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STAFF COMMENTS: This bill meets the criteria for referral to the
Suspense File.
Existing federal law, the Internal Revenue Code (IRC) Section
1031, to which California conforms, generally allows taxpayers
to defer the payment of capital gains taxes when a qualifying
property is exchanged for property of a "like-kind" that is to
be held for productive use in a trade or business or for
investment. For example, if a taxpayer sells a store and
purchases another store or property of the same nature and
character any gains or losses from the sale of the store are not
realized for taxation purposes until the purchased property is
sold or otherwise ultimately disposed of. Like-kind tax
treatment does not apply to exchanges of stocks, bonds, or other
financial instruments.
SB 1316 would prohibit the application of tax deferrals related
to like-kind exchanges in which out-of-state property is
received in exchange for real property located in California in
the 2011 taxable year. The Franchise Tax Board (FTB) estimates
that a one-year elimination of like-kind exchange treatment for
out-of-state property would result in revenue gains of
approximately $7 million. Staff notes that FTB indicates this
provision is likely to be subject to a constitutional challenge
and could be interpreted by the courts as unlawful
discrimination against out-of-state taxpayers under the commerce
clause of the U.S. Constitution.
Existing federal law provides for a new markets tax credit for
taxpayers' qualified equity investments in community development
entities, the primary mission of which must be serving, or
providing investment capital for low-income communities or
low-income persons, as specified. The federal credit is equal
to 39% of the qualified equity
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SB 1316 (Romero)
investment, and is spread over seven years. The Department of
the Treasury administers the program and provides allocations of
the federal credits to eligible community development entities
through a competitive grant process when Congress makes the
credits available. Existing California law provides for a
Community Development Financial Institution credit until January
1, 2012, which allows taxpayers to claim a credit equal to 20%
of qualified investments in specified financial institutions
that have community development as their primary mission. The
credit is subject to a 60-month recapture period if the
investment is reduced or withdrawn.
AB 1316 would enact a new California New Markets Tax Credit
Program for the 2011 taxable year, which would allow taxpayers
to claim a credit against the personal income tax and the
corporation tax equal to 39% of a qualified equity investment in
a qualified community development entity (QCDE) that serves low
income communities or persons, as specified. This provision is
modeled after the federal new markets tax credit. The bill
would require the STO to prescribe regulations, guidelines, or
procedures to administer the tax credit program, and to allocate
the credits to qualifying applicants with priority given to
applicant entities that either have a record of successfully
providing capital or technical assistance to disadvantaged
businesses or communities, or entities that make qualified
investments in one or more businesses in which persons unrelated
to the entity hold the majority equity interest. AB 1316
provides for recapture of the tax credits within seven years of
the investment if the QCDE redeems the investment, the
investment ceases to be used in the required manner, or the
entity ceases to be a QCDE. The bill also requires FTB to
estimate the aggregate revenue increase attributable to the
one-year elimination of like-kind exchange treatment for
out-of-state property, and limits the amount of tax credits
available for allocation by the STO in any calendar year to the
amount estimated by FTB.
This bill would require the STO to promulgate regulations
pursuant to the requirements of the Administrative Procedures
Act within a short timeframe. The STO would also be required to
certify that applicants qualify as QCDEs, rate and rank
applications, and award and allocate grants. STO staff would
also monitor projects and investments over nine years to ensure
ongoing compliance and to enforce recapture provisions. The STO
indicates the bill would require the addition of two AGPA-level
staff positions at a cost of $232,000, and significant
assistance and time from STO legal and administrative staff,
particularly through the regulatory process. Staff estimates
that ongoing monitoring would require one PY of dedicated STO
staff time. Staff suggests an amendment to provide the STO with
the authority to charge a fee to tax credit applicants to help
defray some of the administrative costs. Depending on the
number of applicants, fees may not be sufficient to fully offset
STO costs.
Staff notes that the revenue impact noted in the above table is
based upon FTB estimates of the revenues generated as a result
of denying like-kind exchange treatment for non-California
property in the 2011 calendar year. To the extent that actual
revenue generated differs from the estimate, AB 1316 could
result in net General Fund revenue gains or losses. The margin
of error is unknown, but if actual revenues are 5% less than or
greater than estimated revenues, the bill would result in a
revenue loss or gain of approximately $350,000 over three years.