BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 32 (John Perez) - Insurance Taxes: Income Taxes: Credits: Community Development Financial Institution Investments Amended: August 21, 2013 Policy Vote: G&F 7-0 Urgency: Yes Mandate: No Hearing Date: August 26, 2013 Consultant: Robert Ingenito This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 32 would extend and expand the Community Development Financial Institution (CDFI) tax credit. Fiscal Impact: The tax credit is equal to 20 percent 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 each 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. The Franchise Tax Board (FTB) estimates the proportion of total revenue loss resulting from the Personal Income Tax (PIT) and Corporation Tax (CT) provisions would be approximately $1.5 million annually. FTB indicates that the bill would not significantly impact its costs. The Department of Insurance (DOI) would incur costs of $428,000 in 2003-14, $571,000 in 2014-15, and $604,000 in 2015-16 to implement the provisions of the bill, specifically, certifying Community Development Financial Institutions (CDFIs), marketing the CDFI tax credit program, and qualifying, monitoring and reporting CDFI tax credit investments. Background: To promote the availability of investment capital for low-income communities, current state law contains the CDFI tax credit, administered by DO). Taxpayers may claim a credit AB 32 (John Perez) Page 1 against the Gross Premiums Tax, PIT, or CT equal to 20 percent of qualified investments in the form of non-interest bearing deposits, loans, or equity investments of at least $50,000 held for at least 60 months. The credit can be carried over for four years, and is currently schedule to sunset at the end of the 2016 tax year. However, but DOI can only certify new deposits for credits until January 1, 2015. For deposits to generate credits, CDFI must be certified by the California Organized Investment Network (COIN), an office within DOI, by demonstrating that (1) it is a private financial institution located in California, (2) its primary mission is community development, and (3) that it lends in urban, rural or reservation-based communities in California. CDFIs may be banks, credit unions, or non-regulated non-profit institutions organized to provide private capital for community development or investing. There are currently 27 CDFIs in California, down from 50 in 2011. CDFIs must use the proceeds of the investment for a purpose that is consistent with its community development mission and for the benefit of economically disadvantaged communities and low-income people in California. CDFIs must apply to COIN on behalf of the taxpayer. COIN certifies the amount of the investment and the credit, which is capped at a total of $10 million each year, but any unused amount from past years may be carried over to future ones. COIN generally allocates the credits on a first-come, first-served basis; however, if COIN determines that the total amount of investment will exceed the cap, it can prioritize applications with investments that directly benefit low-income persons, or prioritize rental housing, mortgages for community-based residential housing, and self-help housing ahead of single-family housing. DOI or FTB may recapture the credit within the 60 month period if the taxpayer reduces or withdraws the investment. Proposed Law: This bill would, among other things, do the following: Increase from $10 million to $50 million the amount of investments COIN can certify for CDFI credits each year. The measure would restrict the amount of investments COIN can certify for any one CDFI, combined with its affiliates to 30 percent of the annual total, unless COIN determines AB 32 (John Perez) Page 2 after October 1 that the supply of credits exceeds demand. Additionally, the measure sets aside 10 percent of the annual total for investments of less than $200,000, again unless COIN determines after October 1 that the supply of credits exceed demand. Modify the requirement for COIN to prioritize applications when credit demand exceeds supply to place priority on affordable rental housing, housing for veterans, and self-help housing ahead of single-family homes. Extend the date before which COIN can certify investments from January 1, 2015 to January 1, 2017. Require the Insurance Commissioner to establish tax credit issuance cycles throughout the year as necessary in order to issue tax credit certificates to those applications granted the highest priority. Require the Legislative Analyst's Office (LAO) to submit a report by June 30, 2016 to the Legislature on the effects of the tax credits allowed, with a focus on employment in low-to-moderate income and rural areas, and on the benefits of these tax credits to low-to-moderate income and rural persons. Related Legislation: AB 624 (John A. Pérez), Chapter 436, Statutes of 2011, extended the CDFI tax credit program from January 1, 2012 until January 1, 2017. Staff Comments: In April 2011, the LAO analyzed the CDFI tax credit, discussing the credit's 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. The LAO also noted that the tax credit program has not fully realized the full $2 million tax credit capacity in recent years. AB 32 (John Perez) Page 3