BILL ANALYSIS
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|SENATE RULES COMMITTEE | SB 1316|
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THIRD READING
Bill No: SB 1316
Author: Romero (D)
Amended: 8/15/10
Vote: 21
SENATE REVENUE & TAXATION COMMITTEE : 3-0, 6/23/10
AYES: Wolk, Alquist, Padilla
NO VOTE RECORDED: Walters, Ashburn
SENATE APPROPRIATIONS COMMITTEE : 7-4, 8/12/10
AYES: Kehoe, Alquist, Corbett, Leno, Price, Wolk, Yee
NOES: Ashburn, Emmerson, Walters, Wyland
SUBJECT : Income taxes: property exchanges: investment
credits
SOURCE : Author
DIGEST : This bill eliminates 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 also enacts a New Markets Tax Credit for
qualified investments made in low income communities in the
2011 calendar year. The State Treasurer's Office 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. This bill appropriates $150,000 from
the Tax Credit Allocation account to the California Tax
CONTINUED
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Credit Allocation Committee to implement the New Market Tax
Credit Program.
ANALYSIS :
I. In Kind Exchange . 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.
This bill prohibits 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.
II. New Markets Tax Credit Program . 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 percent of
the qualified equity 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
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credit equal to 20 percent 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.
This bill enacts 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 percent 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. This bill 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 requires the STO to promulgate regulations
pursuant to the requirements of the Administrative
Procedures Act within a short timeframe. The STO is
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 requires the addition of two AGPA-level staff
positions at a cost of $232,000, and significant
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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.
FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes
Local: No
Fiscal Impact (in thousands)
According to the Senate Appropriations Committee analysis:
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 $2,500 $3,900$600General
Loss
CTAC regulations/admin
$150ongoing costs offset by fees Special*
California Tax Credit Allocation Fee Account
The Senate Appropriations Committee states 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, SB 1316 could result in net
General Fund revenue gains or losses. The margin of error
is unknown, but if actual revenues are five percent less
than or greater than estimated revenues, the bill would
result in a revenue loss or gain of approximately $350,000
over three years.
SUPPORT : (Verified 8/17/10)
Advantage Capital Partners
American Federation of State, County and Municipal
Employees
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TELACU
United Fund Advisors
OPPOSITION : (Verified 8/17/10)
Building Owners and Managers Association of California
California Apartment Association
California Association of Realtors
California Bankers Association
California Building Industry Association
California Business Properties Association
California Chamber of Commerce
California Financial Services Association
California Land Title Association
California Taxpayers' Association
Commercial Real Estate Development Association
Federation of Exchange Administrators
First American Corporation
International Council of Shopping Centers
Investment Property Exchange Services
ARGUMENTS IN SUPPORT : The author's office states,
"California currently offers a range of tax credits that
are of no direct benefit to the state. In a time of
economic uncertainty, it is prudent to examine such tax
credits and consider a better use of General Fund dollars.
One such program is the 1031 exchange program, offering tax
credits for real estate investments. A portion of this
program (ten percent) awards tax credits to private
investors who purchase out-of-state properties. This
portion of the 1031 exchange program is of no direct
benefit to California. With California's economy still
faltering, it is more prudent use of General Fund dollars
to stimulate direct investment in California, rather than
continue to fund tax credits for investments in
out-of-state properties - essentially subsidizing private
investment activity outside California."
Proponents of this bill state that state conformity is
undesirable because many taxpayers will make the same
transactions without state deferrals because federal tax
consequences are much greater than state ones, and add that
out-of-state exchanges make even less sense because the
taxpayer is rewarded for economic activity taking place in
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other states.
ARGUMENTS IN OPPOSITION : Opponents of this bill argue
that disqualifying exchanges for out-of-state property will
be less likely to invest in California if they know that a
subsequent transaction may be treated as taxable.
Opponents also assert that the tax benefit leads to
additional real estate investment, thereby stimulating the
economy. Opponents add that taking California out of
conformity with federal law will create additional
administrative burden,
DLW:do 8/17/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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