BILL ANALYSIS Ó
AB 32
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Date of Hearing: May 13, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 32 (Pérez) - As Amended: April 17, 2013
SUSPENSE
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Insurance taxes: income taxes: credits: community
development financial institution investments.
SUMMARY : Increases from $10 million to $50 million the annual
aggregate amount of qualified investments eligible for the
Community Development Financial Institution (CDFI) tax credit
under the Insurance Gross Premiums Tax (IT), Personal Income Tax
(PIT) and Corporation Tax (CT) Laws, as provided. Specifically,
this bill :
1)Increases the $10 million annual limitation on the aggregate
amount of qualified investments eligible for the DCFI tax
credit to $50 million.
2)Prohibits the total amount of investments certified by the
California Organized Investment Network (COIN) in a calendar
year to any one CDFI, together with its affiliates, from
exceeding 30% of the annual aggregate amount of qualified
investment, except as provided.
3)Requires that each year 10% of the annual aggregate amount of
qualified investments be reserved for investment amounts of
less than or equal to $200,000, except as specified.
4)Allows COIN to certify investments for the CDFI tax credit
until January 1, 2017.
5)Revises the order of priority that must be used in granting
applications for the CDFI tax credit.
6)Takes effect immediately as a tax levy.
EXISTING LAW :
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1)Authorizes a credit against the IT, PIT or CT, in an amount
equal to 20% of a qualified investment made by a taxpayer into
a CDFI.
2)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 calendar year, the difference may be
carried over to future years and added to the aggregate amount
authorized for those years.
3)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
$50,000 or more.
4)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.
5)Provides that, in the event the total amount of qualified
investments exceeds $10 million in a calendar year, priority
shall be granted to those applications that meet any or all of
the following:
a) Directly benefit low-income persons.
b) Prioritize rental housing, mortgages for community-based
residential programs, and self-help housing ahead of
single-family owned housing.
c) Represent investments from insurance companies subject
to tax under Section 12201 of the Revenue and Taxation Code
(R&TC) or under Section 28 of Article XIII of the
California Constitution.
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6)Allows a carryforward of the unused CDFI credit up to four
taxable years, or until the credit has been exhausted,
whichever occurs first.
7)Authorizes COIN to certify investments for the credit on or
before January 1, 2015.
8)Provides that the CDFI tax credit is effective until December
31, 2017, and as of that date is repealed.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that the PIT and CT tax provisions of this bill will result in
an annual revenue loss of $1.2 million in fiscal year (FY)
2013-14, $1.2 million in FY 2014-15, and $1.5 million 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. From 1997 through 2012 more than $135 million has been
invested into some of California's most underserved
communities through the COIN program.
"In the recent past, CDFIs across the state have made notable
investments, including:
A mortgage loan for a nonprofit residential alcohol
treatment facility
Micro-loans of $500 to $5,000 to self-employed
business owners
Loan for six childcare centers to serve 500
low-income children
Pre-development loans to Habitat for Humanity to
construct affordable homes
A loan to a church to build a child care center for
low income residents
A loan for 953 water hook ups in two small, rural
communities
A short-term loan to close escrow on housing for
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low-income foster youth.
"The annually allocated tax credit has remained at $2 million
since 1997.
"Insurer demand for COIN CDFI tax credits continues to
increase due to the reinvigoration of COIN. Unmet insurer
appetite and underutilized CDFI capacity means the state could
gain significantly more insurer investment if the amount of
available COIN CDFI tax credits was increased. COIN staff
estimates a $98 million peak demand for COIN CDFI tax
credits."
1)Arguments in Support . The sponsor of this bill states that
COIN's goal is "to help address unmet capital needs by
supporting economic development, affordable housing and other
such investments that benefit low-income and rural communities
in California." The COIN received a record number of CDFI tax
credit applications in 2011 and 2012, which required the COIN
to allocate unused tax credits from prior years. Furthermore,
according to the sponsor, within days of opening the first
2013 CDFI tax credit application cycle, "investors and CDFIs
reported their intended community investment to be nearly $80
million on $16 million of tax credits." Due to this increased
demand for tax credits, potential investors are turned away
and community-based projects are not receiving the full
benefit of this community investment. The sponsor argues that
AB 32 is necessary to meet the large demand for CDFI tax
credit in order to increase community development investment
in programs and projects serving rural and underserved areas,
such as, for example, low-income investment fund,
Clearinghouse CDFI, and the Pacific Coast Regional Small
Business Development Corporation.
The proponents of this bill assert 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 ?
small business loans, mortgage loans, and construction loans"
and to secure additional sources of matching funds for
projects such as, for example, construction of affordable
housing or extension of health clinic services to the
uninsured.
The proponents state that California's underserved communities
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"are in desperate need of community development investment"
and that investment "in low income communities has been
insufficient, resulting in a low level of economic vitality,
underperforming schools substandard housing, and a decline in
the quality of life in many rural and urban areas." The
proponents argue that the COIN program is "one way to improve
the quality of life for Californians in the State's most
underserved neighborhoods."
2)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,
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.
3)The CDFI Tax Credit Program . In 1997, the COIN CDFI Tax
Credit program was created to attract and leverage private
capital to fund investments into CDFIs that yield economic and
social benefits for California's underserved markets, as well
as investments that yield environmental benefits. The program
was set to expire at the end of 2011, but was extended until
January 1, 2017. The amount of the credit is equal to 20% of
each qualified investment of $50,000 or more made in a
specified private financial institution located in California
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- 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. If however, the COIN
determines that total qualified investments will exceeds $10
million, then priority must be granted to those applications
that (a) directly benefit low-income persons, (b) prioritize
rental housing, mortgages for community-based residential
programs, and self-help housing ahead of single-family owned
housing, or (c) represent investments from insurance
companies. The COIN is required to provide the State Board of
Equalization or the FTB, whichever is applicable, with an
annual list of the names and identification numbers of any
taxpayers who make any withdrawal or partial withdrawal of a
qualified investment before the expiration of 60 months from
the date of the qualified investment.
The goal of the CDFI tax credit program is to provide incentives
to attract private capital investments that otherwise would
not be available to CDFIs. This tax credit may be claimed by
taxpayers against the insurance gross premium tax, the state
CT, or the state PIT. The statewide amount of the credit for
all recipients is capped at $2 million per year for the three
taxes combined. Every $1 of the tax credit yields $5 of
private investment, with the total tax credit allocation of $2
million generating up to $10 million of private investments in
COIN-certified CDFIs. 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.
Private investments have a minimum term of 60 months, and the
tax credit is allocated in year one of the five-year
investment period. 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 CT and the PIT Laws in 2009
was $250,000, and was allowed on 89 PIT and an unknown number
of CT returns.
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As stated in the COIN report dated January 10, 2011,
approximately $1.65 million in qualified investments were
approved by the COIN and $330,000 of the tax credits were
certified for the 2010 calendar year. The total remaining
amount of investment still available for 2010 calendar year
was $13.7 million. However, by July 2011, the COIN had
allocated $6.75 million in tax credits to insurance companies
and other investors, which included $2 million for 2011 and
$4.75 million of unused credit from prior years. The
allocation translated into $33.75 million of qualified
community investments.
Most investments that qualify for the CDFI tax credit may 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
programs are state tax programs that are also intended to
generate new investment and economic activity in targeted
communities.
4)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 value 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 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 2011 was $3.5 billion, of
which $1.210 billion were allocated to California companies.
5)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
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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 R&TC. 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.
6)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
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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
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.
7)Related Legislation .
AB 624 (Pérez), Chapter 436, Statutes of 2011, extended the CDFI
tax credit program from January 1, 2012 until January 1, 2017.
AB 2832 (Ridley-Thomas), Chapter 580, Statutes of 2006, extended
the operation of the CDFI tax credit program from January 1,
2007, until January 1, 2012.
SB 409 (Vincent), Chapter 535, Statutes of 2001, extended the
operation of the CDFI tax credit program from January 1, 2002
until January 1, 2007.
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AB 1520 (Vincent), Chapter 947, Statutes of 1997, established
the CDFI tax credit program until January 1, 2002.
REGISTERED SUPPORT / OPPOSITION :
Support
3CORE
Association of California Insurance Companies
Association of California Life and Health Insurance Companies
California Department of Insurance (sponsor)
California State University
California United Bank
Century Housing
Community Loan Fund
Diana Singleton (individual)
Donald Stone (individual)
Enterprise Community Investments, Inc.
FAME Assistance Corporation
Farmers Insurance Group
Grossman Financial Management
Los Angeles LDC
National Association of Mutual Insurance Companies
Nehemiah Community Reinvestment Fund
Northeast Community Federal Credit Union
Northern California Community Loan Fund
Opportunity Fund
Pacific Association of Domestic Insurance Companies
Pacific Coast Regional
Pacific Community Ventures
Pacific Life Insurance Company
Personal Insurance Federation of California
ProAmerica Bank
Roxborough, Pomerance, Nye & Adreani, LLP
Rural Community Assistance Corporation
Self-Help Federal Credit Union
The Association of Financial Development Corporations
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
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