BILL ANALYSIS Ó AB 32 Page 1 Date of Hearing: May 24, 2013 ASSEMBLY COMMITTEE ON APPROPRIATIONS Mike Gatto, Chair AB 32 (John A. Pérez) - As Amended: April 17, 2013 Policy Committee: Revenue and Taxation Vote: 9-0 Urgency: No State Mandated Local Program: No Reimbursable: SUMMARY This bill 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, personal income tax, and corporation tax, as provided. FISCAL EFFECT 1)The tax credit is equal to 20% of the invested amount, up to $50 million, for a statewide total tax credit capped at $10 million, compared to current law, which caps the tax credit at $2 million. The actual cost year to year will vary because if the aggregate amount of the qualified investments made in any calendar year is less than $50 million, the unused amount may be carried over to the next year and any succeeding year. 2)Franchise Tax Board (FTB) staff estimates the proportion of total revenue loss resulting from the PIT and CT tax provisions will be approximately $1.5 million annually. 3)The Department of Insurance estimates the costs to implement would be approximately $500,000 annually, given the increase in the workload associated with certifying CDFIs, marketing the CDFI Tax Credit program, and qualifying, monitoring and reporting CDFI Tax Credit investments. COMMENTS 1)Purpose . The author states community development investments make sound business sense and provide solid returns while AB 32 Page 2 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. The author notes from 1997 through 2012 more than $135 million has been invested into some of California's most underserved communities through the California Organized Investment Network (COIN) program. According to the author, insurer demand for CDFI tax credits continues to increase due to the reinvigoration of COIN. The author contends unmet insurer appetite and underutilized CDFI capacity means the state could gain significantly more insurer investment if the amount of available tax credits was increased. 2)Support . The California Department of Insurance, the sponsor of this bill, states COIN helps address unmet capital needs by supporting economic development, affordable housing and other such investments that benefit low-income and rural communities in California. The sponsor notes 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. 3)Background . The personal income tax law, corporation tax law and insurance gross premiums tax law each provide a 20% credit, capped at a maximum of $2 million per year, for qualified investments in CDFIs. Qualified investments include: a) deposits or loans that do not earn interest b) equity investments c) an equity-like debt instrument that conforms to the specifications for these instruments as prescribed by the U.S. Department of the Treasury CDFI Fund, or its successor. To qualify for the 20% tax credit, an investment must be equal to or greater than $50,000 and for a minimum of 60 months. State law limits the aggregate amount of qualified deposits made by all taxpayers to $10 million for each calendar year. A CDFI must be certified by COIN by demonstrating that it is a AB 32 Page 3 private financial institution located in this state, its primary mission is community development, and that it lends in urban, rural, or reservation-based communities in this state. COIN is a collaborative effort between the California Department of Insurance, the insurance industry, community economic development organizations, and community advocates. COIN was established in 1996 at the request of the insurance industry as an alternative to state legislation that would have required insurance companies to invest in underserved communities, similar to the federal Community Reinvestment Act that applies to the banking industry. CDFIs may be banks, credit unions or non-regulated non-profit institutions organized to provide private capital for community development lending or investing. CDFIs provide private capital for minority small businesses and low-income borrowers who traditionally have been underserved by conventional lending institutions. There are almost 50 CDFIs in California, located mostly in the state's urban areas. 4)The Report by the Legislative Analyst's Office (LAO) . In April 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. While the LAO was unable to estimate the economic impact of the tax credits, it stated in many cases investments in the CDFIs would not have been made in the credit's absence. 5)Related Legislation . a) AB 624 (John A. Pérez), Chapter 436, Statutes of 2011, extended the CDFI tax credit program from January 1, 2012 until January 1, 2017. b) 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. Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081