BILL ANALYSIS                                                                                                                                                                                                    

                   Senate Appropriations Committee Fiscal Summary
                           Senator Christine Kehoe, Chair

                                           1316 (Romero)
          Hearing Date:  08/12/2010           Amended: 08/02/2010
          Consultant: Mark McKenzie       Policy Vote: Rev&Tax 3-0
          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. 
                            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     

           CTAC regulations/admin__           $150        ongoing costs  
          offset by fees         Special*
          * California Tax Credit Allocation Fee Account              

          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 
          Page 2, 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 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.
          Proposed author amendments would: (1) specify that the  
          California Tax Credit Allocation Committee (CTAC) would  
          administer the program; (2) authorize CTAC to implementation  
          through guidelines rather than regulations; (3) appropriate  
          $150,000 from CTAC revenues to cover startup costs; and (4) add  
          double-jointing language.