BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 624
                                                                  Page  1

          Date of Hearing:  May 2, 2011

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Henry T. Perea, Chair

                 AB 624 (John A. Perez) - As Amended:  March 31, 2011

                                      VOTE ONLY

          Majority vote.  Fiscal committee.
           
          SUBJECT  :  California Organized Investment Network:  tax credit 
          program.

           SUMMARY  :  Extends the operation of the Community Development 
          Financial Institution (CDFI) tax credit program for qualified 
          investments made by insurance companies, corporations, or other 
          taxpayers into a CDFI, as provided.  Specifically,  this bill  :

          1)Extends the existing CDFI tax credit provisions, from January 
            1, 2012 until January 1, 2017, that allow a credit to a 
            taxpayer against the insurance gross premiums tax, personal 
            income or corporation tax, in an amount equal to 20% of each 
            qualified investment made by the taxpayer during the taxable 
            year in a CDFI that is certified by the California Organized 
            Investment Network (COIN) of the Department of Insurance. 

          2)Requires the Insurance Commissioner to create and appoint a 
            COIN Advisory Board with the duty to advise on the best 
            methods to increase the level of insurance industry capital in 
            safe and sound investments while providing fair returns to 
            investors and social benefits to underserved communities.  

           EXISTING LAW:

           1)Authorizes a credit against the insurance gross premiums tax, 
            personal income or corporation tax, in an amount equal to 20% 
            of a qualified investment made into a CDFI, not to exceed in 
            the aggregate amount $10 million per calendar year.  

          2)Defines "qualified investment" as an investment that is a 
            deposit or loan that does not earn interest, or an equity 
            investment, or an equity-like debt instrument meeting federal 
            or state agency standards.  The duration of the investment 
            must be for 60 months or more and the amount must equal 








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            $50,000 or more. 

          3)Defines a "community development financial institution" as a 
            private financial institution located in California that is 
            certified by the COIN Office of the Department of Insurance, 
            that has community development as its primary mission, and 
            that lends in urban, rural, or reservation communities in this 
            state.  The term "CDFI" includes a community development bank, 
            a community development loan fund, a community development 
            credit union, a microenterprise fund, a community development 
            corporation-based lender, and a community development venture 
            fund.

          4)Limits the annual certification of total qualified investments 
            made by all taxpayers to all CDFIs to $10 million for each 
            calendar year, but if the qualified investments are less than 
            that amount in one year, the difference may be carried over to 
            future years. 

          5)Provides that the amount of total qualified investments 
            certified in any calendar year from any  one  CDFI cannot exceed 
            the lesser of $10 million or 40% of the aggregate qualified 
            investments authorized.

          6)Requires that, until July 1 of each year, 25% of the aggregate 
            qualified investment amount be reserved for investments by 
            admitted insurers, but permits the Insurance Commissioner to   
                  announce a different amount via regulations. 

          7)Requires that, until July 1 of each year, $3 million of the 
            aggregate qualified investment be reserved for investments by 
            individuals in amounts not to exceed $300,000, but permits the 
                 Insurance Commissioner to announce a different amount via 
            regulations.

          8)Allows a carryforward of the unused credit up to four taxable 
            years.

          9)Requires the Legislative Analyst, on or before December 31, 
            2010, to prepare an analysis of the tax credits investments 
            made, including the credits' fiscal impact, the explanation of 
            programs, projects, and other uses funded or carried out by 
            CDFIs and supported, in whole or in part, by the tax credit 
            investments, and the resulting benefits to economically 
            disadvantaged communities.  








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          10) Repeals the CDFI tax credit effective January 1, 2012.

           FISCAL EFFECT  :  The staff at the Franchise Tax Board (FTB) 
          estimates that the  income tax  provisions of this bill will 
          result in an annual revenue loss of $200,000 in fiscal year (FY) 
          2011-12, $420,000 in FY 2012-13, $450,000 in FY 2013-14, and 
          $450,000 in FY 2014-15.  These estimates  do not  include the 
          revenue impact of the tax credit allowed against the insurance 
          gross premiums tax. 

           COMMENTS  :   

           1)Author's Statement  .  The author states that, "Community 
            development investments make sound business sense and provide 
            solid returns while bringing much needed capital to low-income 
            communities.  These investments are leveraged to provide loans 
            such as small business loans, mortgage loans, and construction 
            loans.  More than $100 million has been invested into some of 
            California's most under-served communities from 1997 through 
            2009."

           2)Arguments in Support  .  The sponsor of this bill states that, 
            "COIN's goal is to help address unmet capital needs supporting 
            economic development and affordable housing in or benefitting 
            low-income urban and rural people or communities in 
            California, either directly, or through fiscal 
            intermediaries," and that, through the CDFI tax credit 
            program, more than $100 million has been invested into some of 
            California's most under-served communities. The proponents of 
            this bill give an example of a Los Angeles-based financial 
            development corporation that "received a $500,000 COIN 
            investment from a bank and was able to leverage that 
            investment into $3.9 million in small business loans to 40 
            borrowers, 60% of whom are located in low-moderate income 
            communities." The proponents also assert that, "Ýt]he state's 
            small investment in this program helps leverage far more for 
            our state," promotes development projects of special benefit 
            to seniors and assists "persons in low income communities to 
            secure financing for economic development and affordable 
            housing."

           3)Background:  The COIN Program  .  The COIN Program was created 
            in 1996 as a public-private partnership by the Department of 
            Insurance, the insurance industry, state government leaders, 








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            and community development organizations with the goal of 
            helping to address the unmet capital needs for economic 
            development and affordable housing in low-income urban and 
            rural communities throughout California. This voluntary 
            program was established at the request of the insurance 
            industry, "as an alternative to state legislation that would 
            have required insurance companies to invest in low-income 
            urban and rural communities, similar to the federal Community 
            Reinvestment Act (CRA) that applies to the banking industry." 
            (Insurance Commissioner Urges California Insurers to Invest in 
            Low-Income Communities, Press Release, August 6, 2001).  The 
            COIN program serves as a liaison between insurers that are 
            seeking investment opportunities and the community 
            organizations that are seeking investment capital for 
            projects.  CDFIs work with COIN - an office within the 
            California Department of Insurance - as financial 
            intermediaries providing access to credit, loans, and 
            investments to small businesses and non-profits that serve 
            economically disadvantaged communities.  CDFIs also offer 
            administrative and technical assistance in these low-income 
            communities.  Generally, CDFIs lend to borrowers that do not 
            satisfy the criteria for conventional lenders and focus on a 
            particular community or certain groups of people. 

           4)The CDFI Tax Credit Program  .  The existing state law provides, 
            until January 1, 2012, for the CDFI tax credit, which allows 
            taxpayers to claim a credit equal to 20% of each qualified 
            investment made in a specified private financial institution 
            located in California - a CDFI - that has been certified by 
            the COIN as eligible.  The COIN must certify each CDFI and 
            each qualified investment.  A CDFI, among other requirements, 
            must apply to COIN for certification of its status and, on 
            behalf of a taxpayer, for certification of the credit amount 
            allocated to the taxpayer.  The COIN office generally approves 
            applications on a first-come, first-served basis, although it 
            has some discretion in certifying CDFIs.  Currently, 81 CDFIs 
            are certified by COIN as eligible to participate in the tax 
            credit program.  The COIN is required to provide the FTB, 
            which is charged with administering the state income tax laws, 
            with an annual list of taxpayers, their identification 
            numbers, the amount of their investments and the total amount 
            of all qualified investments. 

          The goal of the CDFI tax credit program is to provide incentives 
            to attract private capital investments that otherwise would 








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            not be available to CDFIs.  This tax credit may be claimed by 
            taxpayers against the insurance gross premium tax, the state 
            corporation tax, or the state personal income tax.  The 
            statewide amount of the credit for all recipients is capped at 
            $2 million per year for the three taxes combined.  Thus, each 
            year qualified investments up to $10 million are eligible to 
            receive the tax credits.  However, if less than $10 million is 
            invested in qualified CDFIs in any calendar year, the 
            remaining amount may be carried over to the next year and any 
            succeeding year during which the credit remains in effect.  
            The credit is subject to a 60-month recapture period if the 
            investment is reduced or withdrawn.  According to the FTB's 
            tax expenditure report, the total amount of credit claimed 
            under the Corporation Tax (CT) and the Personal Income Tax 
            (PIT) Laws in 2007 was $52,000, and was allowed on 48 PIT and 
            3 CT tax returns.  As stated in the COIN report dated January 
            10, 2011, approximately $1.65 million in qualified investments 
            have been approved by the COIN and $330,000 of the tax credits 
            have been certified for the 2010 calendar year.  The total 
            remaining amount of investment still available for 2010 
            calendar year is $13.7 million, which translates into over 
            $2.75 million of tax credits available for certification.  

          Most investments that qualify for the CDFI tax credit also 
            qualify for the federal New Markets tax credit.  Furthermore, 
            those investments may also qualify for the low-income housing 
            tax credit and/or the enterprise zones (EZs) and targeted tax 
            areas deductions.  The low-income housing tax credit and EZ 
            zone programs are state tax programs that are also intended to 
            generate new investment and economic activity in targeted 
            communities. 

           5)Federal "New Markets" Tax Credit Program  .  Existing federal 
            law provides for a "new markets" tax credit that permits 
            individuals and corporate taxpayers to receive a credit 
            against their federal income taxes for making equity 
            investments in investment vehicles known as Community 
            Development Entities (CDEs).  The primary mission of a CDE is 
            to serve, or provide investment capital for, low-income 
            communities or low-income persons, as specified.  The federal 
            credit amount is equal to 39% of the qualified equity 
            investment, and is spread over seven years.  Thus, in each of 
            the first three years, the federal credit amount is equal to 
            5% of qualified contributions and, in each of the remaining 
            four years, the amount of credit is increased to 6% of 








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            qualified contributions.  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.  The federal limit of the total qualified 
            investments from all taxpayers for 2010 was $3.5 billion, of 
            which $901 million were allocated to California companies.  

           6)Gross Premiums Tax  .  Unlike the federal "New Markets" tax 
            credit, the CDFI tax credit is also available to insurers that 
            are subject to the gross premiums tax pursuant to the 
            California Constitution (Section 28, Article. XIII, California 
            Constitution).  The gross premiums tax is an excise tax on 
            insurers for the privilege of transacting insurance in this 
            state.  The statutory provisions relating to the assessment 
            and collection of the tax are contained in Part 7 (commencing 
            with Section 12001) of Division 2 of the Revenue and Taxation 
            Code.  This tax is imposed in lieu of other state and local 
            taxes and fees, making an insurer exempt from paying those 
            charges, other than real property and motor vehicle taxes and 
            fees.  

          The economics of the insurance industry provide a key reason for 
            the special treatment of insurance companies.  Most corporate 
            taxpayers calculate their income by subtracting costs incurred 
            in the production of goods or services from the revenues 
            received from their sale.  Insurance companies, by contrast, 
            collect their revenues up front, then make payments to 
            policyholders based on contingent events that occur many 
            months or years later.  Thus, it can be difficult to "match 
            up" revenues to related expenses.  In an income tax framework, 
            insurers ideally would be allowed to deduct the current value 
            of all future obligations (claims) covered by the insurance 
            policies they have written when calculating their taxable 
            income for a given year.  Because the actual amount of these 
            obligations is uncertain, as are the amount of investment 
            earnings on accumulated premiums received during the 
            intervening period, an accurate determination of the 
            theoretically appropriate amount of taxable income proves very 
            difficult to achieve in practice.  Insurers subject to the 
            gross premiums tax do not pay tax on other forms of income, 
            such as investment income, or income earned from other trades 
            or businesses.  

           7)The CDFI Tax Credit Program Utilization.   As stated in the 








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            letter sent by the Insurance Commissioner to insurance company 
            executives on February 17, 2011, the CDFI tax credit has been 
            underutilized in recent years and, currently, $4.75 million in 
            tax credits are available for investments in underserved 
            communities.  In 2009, the COIN certified 23 CDFI qualified 
            investments, but 22 of those investments were made by banks 
            and one or more individuals and the single largest investment 
            - a $5 million investment resulting in a $1 million tax credit 
            - was made by Metropolitan Life Insurance, the only insurance 
            company that applied and received the credit.  AB 41 
            (Solorio), Chapter 340, Statutes of 2010, requires insurance 
            companies to develop and file with the Insurance Commissioner 
            a policy statement on community development investment and 
            community development infrastructure investments by July 1, 
            2011.  The goal of this new law is to increase the number and 
            amount of community development investments by requiring the 
            adoption of Community investment policy statements. 

           8)The Report by the Legislative Analyst's Office (LAO).   As 
            required by existing law, on April 14, 2011, the LAO issued an 
            analysis of the CDFI tax credit, discussing the credits' 
            fiscal impact and the resulting benefits to economically 
            disadvantaged communities and low-income people in California. 
             The LAO report noted all the following:

              a)   Economic Impact.   While the LAO was unable to estimate 
               the economic impact of the tax credits, it states that "in 
               many cases investments in the CDFIs would not have been 
               made in the credit's absence."  The report admits that 
               "some of the credits have benefited larger CDFIs that are 
               capable of raising funds in other ways and for which the 
               credit-funded investments represent a smaller portion of 
               their total assets."  However, the LAO found that, even in 
               those cases, the tax credits "helped generate investment 
               activity that otherwise might not have been funded."  
              
              b)   Credit Percentage Seems Reasonable  .  The credit refunds 
               a percentage of the invested amount, which translates into 
               approximately "2.5 to 3 percentage points on a ten-year 
               loan at prevailing interest rates," which is "about 
               one-half of the interest spread between a fairly safe 
               investment and a very risky one."  While the LAO did not 
               find a 20% subsidy to be too high or too low, it noted that 
               "changing conditions in financial markets in the future 
               could warrant a different subsidy percentage for this 








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               credit."  
              
              c)   Owned Versus Rental Housing  .  In light of the higher 
               credit standards for home purchase loans since the collapse 
               of the housing market, the LAO suggests that, in order to 
               benefit low-income individuals, the CDFI tax credit program 
               should focus on investments in rental housing, at least in 
               the near future.  
              
              d)   First-Come, First-Served Tax Credits Can Be Problematic  . 
                Even though the tax credit is currently underutilized, at 
               some point in prior years, it was fully used.  The LAO 
               advises to authorize COIN or some other entity to award the 
               credits competitively, instead of a first-come, 
               first-served basis, to allow the state to prioritize CDFI 
               investment, if there is more demand for the credit in the 
               future. 
              
          9)Tax Credit Versus Grant  .  A disadvantage of using tax credits 
            as a means of encouraging or rewarding particular behavior is 
            that they could only be utilized by taxpayers with a tax 
            liability.  For example, charities or other tax-exempt 
            organizations have very little use for a tax credit; nor does 
            a tax credit have any immediate value to a business that has 
            losses.  The CDFI tax credit has been largely underutilized in 
            recent years. While it leverages billions of dollars of 
            investment into businesses and real estate projects in 
            communities with high rates of poverty and unemployment, it 
            appears that a stand-alone tax credit may not be sufficient to 
            attract enough of those investments.  An alternative way of 
            encouraging investment in CDFIs and increasing the CDFI tax 
            credit program's utilization rate would be to temporarily 
            convert the program into a partial grant program, similarly to 
            a temporary federal tax credit for qualified investments in 
            solar, wind or other qualified projects.  Under the federal 
            grant program, a qualified taxpayer may elect to receive a 
            grant -  in lieu of the tax credit - for a qualified project 
            placed in service either in 2009 or 2010.  The ability to 
            choose whether to receive the credit or grant helps owners in 
            financing the solar, wind, or other qualified project.  The 
            Committee may wish to consider whether a temporary grant 
            program would be a better vehicle in achieving the goal of 
            encouraging investments in underserved communities and of 
            allocating a fixed, budgeted amount among the most worthy 
            depositors or the most necessary projects.   The Committee may 








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            also wish to consider amending the bill to authorize COIN to 
            award grants, in addition to allocating tax credits, subject 
            to the total aggregate amount of $2 million, and to allow a 
            qualified taxpayer to make an irrevocable election to choose 
            either the tax credit or a grant in lieu of the credit.  

           10)Double-referral  .  This bill was doubled-referred with the 
            Assembly Committee on Insurance, and passed out of that 
            Committee with a 10-0 vote on March 30, 2011.  For additional 
            discussion of this bill, please refer to that committee's 
            analysis.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 

           California Department of Insurance (sponsor)
          Association of Financial Development Corporations
          Local Initiatives Support Corporation
          Rural Community Assistance Corporation

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916) 
          319-2098