BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 32
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          CONCURRENCE IN SENATE AMENDMENTS
          AB 32 (John A. Pérez)
          As Amended  September 3, 2013
          2/3 vote. Urgency
           
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          |ASSEMBLY:  |77-1 |(May 28, 2013)  |SENATE: |39-0 |(September 9,  |
          |           |     |                |        |     |2013)          |
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           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.  








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          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.









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             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  :    
           








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           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  








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            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  








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            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 


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