BILL ANALYSIS Ó
AB 305
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Date of Hearing: April 9, 2013
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
AB 305 (V. Manuel Pérez) - As Introduced: February 12, 2013
SUBJECT : Income taxes: hiring credits: investment credits
SUMMARY : Creates a $200 million state New Markets Tax Credit
(NMTC) Program for the purpose of stimulating economic
development and hasten California's economic recovery. In
general, the new state credit parallels the federal NMTC.
Specifically, this bill :
1)Authorizes the creation of the NMTC Program, administered
through the California Tax Credit Allocation Committee (TCAC),
for the purpose of allocating tax credits in tax years 2013
through 2019 to a qualified community development entity
(CDE).
2)Authorizes TCAC to allocate up to $30 million in tax credits
annually to qualified CDEs for a total allocation of $200
million. As a condition of receiving the credits, CDEs must
annually report to TCAC on the use and impact of the credits.
Unused credits are to be returned for reallocation.
3)Authorizes a qualified CDE to re-award these credits to
private investors who make qualified equity investment in the
CDE. Moneys received from these investments are to be used to
make qualified low-income community investments, which may
include loans and capital investments in businesses (including
start-ups), real estate and other qualified CDEs that
undertake development projects in eligible low-income areas.
4)Authorizes the 39% credit, spread over seven years, to be
applied against the tax payer's personal and corporate tax
liability. There would be no credit allowance in the first
two years, 7% for the third year; and 8% for each of the final
four years. The bill provides for the recapture of the value
of the credit if the investment is withdrawn from the CDE
prior to the close of the seventh year, as specified.
5)Defines a qualified equity investment to mean an equity
investment of cash made by the tax payer to the qualified CDE.
This cash must be substantially used by the CDE to make
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qualified low-income community investments within five years
of the CDE receiving the credit allocation from TCAC.
6)Defines a qualified low income community to mean a census
tract where any of the following applies:
a) The tract has a poverty rate of at least 20%.
b) The tract is not located within a metropolitan area, and
the median family income does not exceed 80% of the greater
statewide median income.
c) The tract is located in a metropolitan median area, and
the median family income does not exceed 80% of the greater
of the statewide or metropolitan median family income.
The bill also authorizes the use of census block group data
from the American Community Survey once the U.S. Census Bureau
discontinues using the decennial census to report median
family income on a census tract basis.
7)Defines qualified low-income community investments to mean:
a) Any capital or equity investment in, or loan to a
qualified low-income business, as defined;
b) Any capital or equity investment in, or a loan to, a
real estate project in a low-income community;
c) The purchase of a loan from another CDE that meets the
other requirements for a low-income community investment;
d) Financial counseling and other services in support of
business activities to businesses and residents of a
low-income community; or
e) Any equity investment in, or a loan to, a CDE.
8)Defines a qualified CDE as a domestic corporation or
partnership that has a primary mission of serving or providing
investment capital for low-income communities or low-income
persons; has low-income residents on its governing or advisory
board; and is certified by the TCAC. A CDE also includes any
entity that has an allocation agreement with the federal
Community Development Financial Institution Fund (CDFI Fund).
9)Excludes Small Business Investment Companies and Community
Development Financial Institutions from being an eligible CDE
under the state program, although they are considered CDEs for
the purposes of the federal program.
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10)Defines an equity investment as any stock, other than
nonqualified preferred stock, in a corporation or any capital
interest in any partnership.
11)Requires TCAC to establish guidelines for implementing the
NMTC program and set fees to cover the costs for administering
the program. These guidelines will include the allocation
process, which, among other things, is required to create an
equitable distribution of the credits including a 15% reserve
for environmental justice communities, 15% agriculture-related
businesses, and 20% for inner city businesses.
12)Appropriates $150,000 from Tax Credit Allocation Fee Account
to the TCAC for the purpose of administering the new tax
credit program. These moneys are only available for
expenditure until January 1, 2020 and it is the Legislature's
intent that these moneys would be reimbursed through fees on
the New Market Tax Credit application.
13)Reduces the cumulative total of the use of Small Business
Hire Credit (SBHC) from $400 million to $100 million. Once
the Franchise Tax Board (FTB) estimates that is has received
original tax returns claiming credits that total $100 million,
no additional credits may be claimed following the end of
that calendar year quarter.
14)Takes immediate effect as a tax levy.
EXISTING LAW STATE LAW :
1)Authorizes a qualified tax payer, on their personal or
corporate tax return, to claim a $3,000 credit against state
tax liability for each net increase in full-time employees
hired during the taxable year. Credits must be claimed on an
original return and be filed prior to FTB estimating it has
received returns claiming $400 million in credits, as defined.
Qualified tax payers are limited to businesses with fewer
than 20 employees as of the last day of the preceding taxable
year.
2)Authorizes a taxpayer to claim a state credit equal to 20% of
qualified investments in community development financial
institutions. The credit may be used against the tax payers'
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personal income tax, corporation tax, and insurance premiums
tax for non-interest bearing investments of at least $50,000,
which are held for a minimum of 60 months. Total qualified
investment for all tax payers are capped at $10 million per
year ($2 million in credits).
EXISTING FEDERAL LAW authorizes a tax payer to claim a federal
tax credit for qualified investments made to qualified CDEs, as
specified. The value of the federal NMTC is 39% of the
qualified equity investment. The credit is applied by the tax
payer over a seven-year period.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author Purpose : According to the author, "California can no
longer afford to leave millions in federal money on the table,
year after year, by failing to implement a state New Markets
Tax Credit Program to jump-start economic productivity in our
low-income areas. Such a program will enable us to leverage
many times more in federal funds than it would cost the state
to implement, and lead directly to capital investment in small
businesses, a proven model for helping to end an economic
recession. At least nine other states have successfully
implemented such a program already, on average leveraging 13
times more in federal monies than they allocated in planned
revenue to fund the tax credit. This bill means community
empowerment because the program in question has a proven track
record of job creation."
2)Framing the Policy Issue : This measure proposes the
establishment of a new state tax credit to help spur
investments in low-income neighborhoods. Funding for the new
credit is provided through the phasing-out of an
underperforming small business tax credit.
While there have been several attempts to improve and expand
the existing credit, Members may want to consider whether
using tax credits to serve the access to capital needs of
small businesses is the best method to provide support. Many
small size businesses have few taxable revenues making tax
credits of limited assistance. AB 305 takes an alternative
approach for assisting these same small size businesses in
low-income neighborhoods. This bill provides a proven
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mechanism for locally-based CDEs to provide loans, equity
investments, and financial counseling. In addition, CDEs can
investment in real estate and other projects that benefit
local businesses and residents.
The analysis includes a discussion of how the NMTC may address
the state's increasing income disparities, challenges
businesses face in accessing capital, background on the
federal NMTC program, and examples of NMTC programs in other
states.
3)Economic Justice : Research shows that the inequality between
the residents in low-income communities and those that reside
in California's most affluent communities has dramatically
increased in the past several decades. For example, the
average inflation-adjusted income of the top 1% of
California's taxpayers increased by 50.2% between 1987 and
2009, from $778,000 to $1.2 million. In contrast, the average
income of taxpayers in each of the bottom four-fifths of the
distribution lost purchasing power. This economic disparity
has significant social and economic ramifications for everyone
in the state and directly challenges the state's global
competitiveness and long-term economic success.
Programs like the NMTC program proposed in this measure are
based on the economic principle that targeting significant
incentives to lower income communities allows these
communities to more effectively compete for new businesses and
retain existing businesses, which results in increased tax
revenues, less reliance on social services, and lower public
safety costs. Residents and businesses also directly benefit
from these more sustainable economic conditions through
improved neighborhoods, business expansion, and job creation.
4)Challenges to Accessing Capital : Access to debt and equity
financing is critical for promoting the efficient operation
and expansion of small businesses. Small businesses rely on
adequate short-term (working capital) and long-term debt as
well as equity financing to purchase new equipment, replenish
inventories, fund ongoing operations, and market their
services long before those activities generate revenue.
While financial institutions routinely extend working capital
and long-term debt products to established, larger businesses,
smaller businesses are often bypassed because they lack the
collateral and threshold operating and revenue generating
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history of larger businesses.
The same dynamic occurs when small businesses attempt to
access equity financing, with investment funds often bypassing
smaller businesses because they lack the operating history and
revenue generating track record of larger businesses. The
situation often results in a "chicken and egg" scenario
whereby businesses are told they need to grow in order to
access financing, while at the same time being denied access
to the financing they need to grow.
It should be noted that in the aftermath of the recession,
many banks moved to tighten lending standards. In fact,
according to the U.S. Chamber of Commerce, a record 74.5% of
banks reported raising lending standards in the fourth quarter
of 2008. While it is unclear if banks have since moved to
further tighten lending standards, what is clear is that banks
are not yet comfortable lowering their standards to increase
liquidity to small businesses, making it difficult for small
businesses to flourish and grow. AB 305 would support the
development of new capital resources for businesses in
low-income neighborhoods.
5)Federal New Market Tax Credit Program : Congress enacted the
NMTC with the Community Renewal Tax Relief Act of 2000 for the
purpose of stimulating equity investments in low-income
communities. Under the program, CDE's apply to the U.S.
Treasury's CDFI Fund, for an allocation of federal tax
credits, which the CDE can then offer to individual and
corporate investors in exchange for making an equity
investment in the CDE or its subsidiary.
In this way, the CDE serves as a community and financial
intermediary between sources of private capital and low-income
communities. The value of the federal credit to the investor
is 39% of the original investment amount, claimed over a
period of seven years (5% for each of the first three years,
and 6% for each of the remaining four years). The investment
in the CDE cannot be redeemed before the end of the seven-year
period.
On January 3, 2013, President Obama signed the American
Taxpayer Relief Act of 2012 which included an extension of the
New Markets Tax Credit Program for 2012 and 2013. The tax
credit allocation authority is $3.5 billion for each year.
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Since its inception, The CDFI Fund has made 664 awards
allocating a total of $33 billion in NMTC authority to CDEs
through its competitive application process. This $33 billion
includes $3 billion in Recovery Act Awards and $1 billion of
special allocation authority to be used for the recovery and
redevelopment of the Gulf Opportunity Zone.
Supporters of the bill have expressed concern that California
has not received its fair share of federal NMTC allocations.
States that regularly receive larger shares have parallel
state tax credit programs or other resources that encourage
the community development within lower income communities. In
2012, 29 California CDEs received federal NMTC allocations
totaling $17 million. Individual allocations range from $1.4
million for Northern California Community Loan Fund to
$100,000 to the Women's Economic Ventures of Santa Barbara.
6)Other State New Market Tax Credits : Since the inception of
federal NMTC, at least nine other states have enacted matching
programs to help leverage more federal dollars in NMTC
investments including: Ohio, Florida, Missouri, Louisiana,
Mississippi, Kentucky, Illinois, Oklahoma, and Connecticut.
According to information provided by the author's office,
several of these states have experienced a return on
investment of 13 to 1. In addition, the author states:
In Missouri, in the first two years the state New
Markets Tax Credit paid for itself, bringing in more in
additional investment dollars that was allocated in state
funds for the entire seven-year period.
In Illinois, federal allocations of NMTC funds more than
doubled after the Legislature implemented a matching state
program in 2008. In the first year of implementation,
allocations jumped to $875 million. Prior to the 2008 law,
federal allocations never exceeded $400 million.
1)NMTC Research Findings : In 2010, the General Accounting
Office released a report on the New Market Tax Credit program
that found:
a) Since 2003, NMTC investments totaling $26 billion have
been made in all 50 states, the District of Columbia and
Puerto Rico.
b) NMTC investments in low-income community businesses
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generally use leveraged structures, where equity is left in
the businesses, or subsidized loan structures, where below
market interest rate loans are offered.
c) At the time of the report, the CDFI Fund did not collect
data that could identify the portion of the subsidy
channeled to businesses, such as data on credit pricing,
transaction fees, and the amount of equity left in the
businesses.
According to a January 2011 case study prepared by Pacific
Community Ventures on the NMTC program, Impact Investing: A
Framework for Policy Design and Analysis:
Through 2009, CDEs made more than $16 billion in NMTC
investments in low income communities.
Approximately 95% of NMTC funds are invested in
designated areas of distress, and 90% in metropolitan
areas.
For every dollar of forgone tax revenue, NMTC leverages
$12-$14 of private investment.
1)Possible Amendments - Technical and Substantive : The author
has used the federal NMTC program as a model for this bill and
for the purposes of tax simplification, it is important that
definitions remain consistent. There are, however, several
technical and substantive issues that the committee may want
to address:
a) CDFIs and SBICs : AB 305 excludes CDFIs and SBICs from
participating on the state NMTC Program unless the entity
has received a federal NMTC allocation. These entities are
important financial and community development
intermediaries within low-income communities and should
perhaps be allowed to become certified and participate in
the state program. The author may have excluded CDFI
because they are eligible to receive state CDFI tax
credits. As long as the basis of the tax credit isn't
counted for both credits there should be no problem in
double dipping.
b) Remaining Small Business Credit : AB 305 reduces the
size of the Small Business Hire credit to $100 million. As
of March 2013, over $142 million has been applied. The
author may want to allow for up to $175 million in credits
to be applied before shutting down the credit.
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c) Major Community Development Projects : The state NMTC
Program will provide new community development moneys to
low income communities. In order to ensure these moneys
provide the greatest leveraging, it may be useful to
protect the ability to use a range of incentives on a
single project, as long as no single segment of the
financing is counted twice for the purposes of a tax
incentive. For large scale projects it is not uncommon
that multiple funding sources and incentives are needed.
d) Define Start-up Business : AB 305 specifically includes
financing and assistance to start-up businesses. A
question arises as to what is a start-up business. Since
many traditional financial institutions require businesses
to have not less than a five-year track record before
providing a loan, it may serve as a useful dividing point.
2)The Existing Small Business Hiring Credit Program :
Implementation of this bill will reduce the authorized credits
under the SBHC program and use the amount of the reduction to
fund the credits authorized in the NMTC program. Concerns
have previously been raised, including by the Governor during
his 2013 State of the State speech, that the SBHC Program was
a poor preforming tax credit. According to the Franchise Tax
Board, 24,345 personal income tax and business entity returns
had been filed (March 2013) using the SBHC Program with a
cumulative credit value of $142.4 million.
3)Related Legislation : Below is a list of related legislation:
a) AB 32 (John A. Pérez) Expansion of the CDFI Credits :
This bill increases the aggregate amount of CDFI tax
credits that may be annually allocated from $10 million to
$20 million under the Insurance Gross Premiums Tax,
Personal Income Tax and Corporation Tax Laws, as provided.
Status: Pending in the Assembly Committee on Revenue and
Taxation's Suspense File.
b) AB 643 (Davis and V. Manuel Pérez) State New Market Tax
Credit : This bill would have enacted a New Markets Tax
Credit for qualified investments made in low income
communities in the 2012 calendar year. The State
Treasurer's Office would administer the new credit program
and allocate credits in an amount equal to $300 million
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over six years. Status: Held in the Assembly Committee on
Appropriations in 2012.
c) AB 624 (John A. Pérez) California Organized Investment
Network : This bill extended the operation of the Community
Development Financial Institution Investments tax credit
until January 1, 2017, and requires the Insurance
Commissioner to establish a California Organized Investment
Network Advisory Board, as specified, to advise the
California Organized Investment Network on the best methods
of increasing insurance investments while providing fair
returns to investors and social benefits to underserved
communities. Status: Signed by the Governor, Chapter 436,
Statutes of 2011.
d) SB 1316 (Romero) State New Market Tax Credit : This bill
would have enacted a New Markets Tax Credit for qualified
investments made in low income communities in the 2011
calendar year. The State Treasurer's Office would
administer the new credit program and allocate credits in
an amount equal to the estimated revenue gains resulting
from the temporary elimination of specified like-kind
property exchanges. Status: Died on the Senate inactive
file in 2010.
4)Double Referral : This measure was referred to two policy
committees by the Assembly Committee on Rules. Should AB 305
pass the Assembly Committee on Jobs, Economic Development and
the Economy, the bill will be referred to the Assembly
Committee on Revenue and Taxation for further action.
REGISTERED SUPPORT / OPPOSITION :
Support
TELACU (sponsor)
California League of Cities
California Bankers Association
Opposition
None received
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
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319-2090