BILL ANALYSIS Ó AB 32 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 32 (John A. Pérez) As Amended September 3, 2013 2/3 vote. Urgency ----------------------------------------------------------------- |ASSEMBLY: |77-1 |(May 28, 2013) |SENATE: |39-0 |(September 9, | | | | | | |2013) | ----------------------------------------------------------------- Original Committee Reference: REV. & TAX. 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.
The Senate Amendments : 1)Require a CDFI to provide, in its application for a CDFI tax credit, a detailed description of the intended use of the investment funds and specified information about the taxpayer. 2)Prohibit public disclosure of the information included in the application, other than the taxpayer's name. 3)Require the California Organized Investment Network (COIN), when accepting and evaluating applications for certification from any CDFI, to grant highest priority to those applications where the intended use of the investments has the greatest aggregate benefit for low-to-moderate income areas or households, or rural areas or households. 4)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. 5)Require the Legislative Analyst's Office to submit a report to the Legislature, on or before June 30, 2016, on the effects of the CDFI tax credits, 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. AB 32 Page 2 6)Authorize the Insurance Commissioner to adopt, amend, or repeal regulations to implement the CDFI tax credit and deem the initial adoption of the regulations to be emergency regulations, as specified. EXISTING LAW : 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. AB 32 Page 3 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. 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 : According to the Senate Appropriations Committee, the fiscal effect of this bill would be as following: 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 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. 2)The Franchise Tax Board (FTB) estimates the proportion of total revenue loss resulting from the PIT Law and CT Law provisions would be approximately $1.5 million annually. The FTB indicates that the bill would not significantly impact its costs. 3)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 CDFIs, marketing the CDFI tax credit program, and qualifying, monitoring and reporting CDFI tax credit investments. COMMENTS : AB 32 Page 4 1)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. 2)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 - 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 AB 32 Page 5 discretion in certifying CDFIs. If however, the COIN determines that total qualified investments will exceed $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. 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 AB 32 Page 6 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. Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0002407