BILL ANALYSIS Ó
AB 305
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Date of Hearing: May 13, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 305 (V. Manuel Pérez) - As Amended: April 16, 2013
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : California New Markets Tax Credit Program
SUMMARY : Establishes the California New Markets Tax Credit
Program (Program), with the stated purpose of stimulating
economic development and hastening California's economic
recovery by authorizing tax credits for investment in
California. Specifically, this bill :
1)Contains the following legislative findings:
a) California is entering the sixth year of the worst
economic recession since the Great Depression.
b) Due to a systemic budget problem, the state is suffering
from chronic revenue shortfalls based in part on increasing
reliance on revenues from personal income tax rolls.
c) Investment in small business ventures is a proven method
of stimulating economic activity, creating new jobs, and
generating revenue by expanding the tax base.
d) The federal New Markets Tax Credit (NMTC) Program,
created in 2000 with bipartisan support, has been an
effective means of stimulating state and regional economies
due to its ability to leverage federal funds to drive
private investment in communities that would otherwise not
have had access to capital. These investments accrue to
small businesses, schools, and other business-related real
estate projects.
e) As of 2010, nine states (Connecticut, Florida, Illinois,
Kentucky, Louisiana, Mississippi, Missouri, Ohio, and
Oklahoma) had enacted matching state programs. On average,
these states successfully leveraged $13 in federal NMTC for
every dollar of state credits initially allocated for the
state program.
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f) As of December 29, 2012, $261.5 million of California's
small business hiring tax credit are still available.
g) Given the current economic climate and the lack of use
of the state hiring tax credit, it is reasonable for the
Legislature to search for and consider other alternatives
to stimulate hiring and generate economic activity to
shorten the current recession and promote permanent
economic recovery.
h) There are low-income communities in the state that face
multiple challenges in attracting private investment,
including developing and maintaining a workforce that meets
the skill needs of local employers, an infrastructure that
connects local businesses to external markets, and
neighborhoods that are not disproportionately burdened with
environmental pollutants, including air, soil, and water
contamination.
i) Given the Program's ability to stimulate private
investment activity in areas that would otherwise not have
access to investment capital, it is appropriate that the
state consider prioritizing a portion of the Program to
encourage private investment in areas that face multiple
challenges in attracting investment capital.
2)Requires the California Tax Credit Allocation Committee
(Allocation Committee) to administer the Program.
3)Allows, for taxable years beginning on or after January 1,
2013, and before January 1, 2020, a credit in an amount
determined in accordance with Internal Revenue Code (IRC)
Section 45D, as modified. For a taxpayer holding a "qualified
equity investment" on that investment's "credit allowance
date", the credit shall equal a percentage of the amount paid
to a "qualified community development entity" for such
investment at its original issue. The applicable percentage
shall be:
a) 0% with respect to the first two "credit allowance
dates";
b) 7% with respect to the third "credit allowance date";
and,
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c) 8% with respect to the remainder of the "credit
allowance dates".
4)Provides that the credit shall be allowed only if the taxpayer
holds the "qualified equity investment" on the "credit
allowance date" and each of the six following anniversary
dates of that date.
5)Defines a "qualified equity investment" as any "equity
investment" in a "qualified community development entity" if
all the following conditions are met:
a) The taxpayer acquires the investment at its original
issue, directly or through an underwriter, solely in
exchange for cash;
b) Substantially all of the cash is used by the "qualified
community development entity" to make "qualified low-income
community investments"; and,
c) The investment is designated by the "qualified community
development entity."
6)A "qualified equity investment" shall not include any "equity
investment" issued by a "qualified community development
entity" more than one year after the date that such entity
receives an allocation.
7)Defines "credit allowance date" to mean, with respect to any
qualified equity investment, the date on which the investment
is initially made, and each of the six anniversary dates of
such date thereafter.
8)Defines "equity investment" as any:
a) Stock, other than nonqualified preferred stock as
defined in IRC Section 351(g)(2), in a corporation; or,
b) Capital interest in a partnership.
9)Defines a "qualified community development entity" as a
domestic corporation or partnership that:
a) Has a primary mission of serving, or providing
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investment capital for, low-income communities or
low-income persons;
b) Maintains accountability to residents of low-income
communities through their representation on any governing
board of the entity or on any advisory board to the entity;
and,
c) Is certified by the Allocation Committee.
10)Defines a "qualified low-income community investment" as any
of the following:
a) Any capital or equity investment in, or loan to, a
qualified active low-income community business, as defined,
or any real estate project or any operating business that,
at the time the initial investment is made, has 250 or less
employees and is located in a low-income community;
b) The purchase from another qualified community
development entity of any loan made by that entity, which
is a qualified low-income community investment;
c) Financial counseling and other services to businesses
located in, and residents of, low-income communities; or,
d) Any equity investment in, or loan to, a qualified
community development entity.
11)Requires the Allocation Committee to adopt guidelines to
carry out the Program's purposes. The guidelines shall not
disqualify a low-income community investment for the single
reason that public or private incentives, loans, equity
investments, technical assistance, or other forms of support
have been or continue to be provided.
12)Provides that the adoption of these guidelines shall not be
subject to the rulemaking provisions of the Administrative
Procedure Act (Government Code Section 11340 et seq.).
13)Requires the Allocation Committee to establish and impose
reasonable fees upon entities that apply for a credit
allocation, with revenues used to defray administrative costs.
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14)Caps the aggregate amount of credit that may be allowed [sic]
in any calendar year at $40 million. However, the Allocation
Committee must limit the cumulative allocation of credits to
no more than $200 million.
15)Requires the Allocation Committee to reserve annually at
least:
a) 15% of the tax credits for community development
entities that target businesses located in low-income
communities facing disproportionate environmental
pollution;
b) 15% of the tax credits for community development
entities that target rural areas, including businesses
providing equipment or supplies to agricultural producers,
packers, handlers, and processors; and,
c) 20% of the tax credits for community development
entities that target businesses in inner-city areas.
16)Reduces the credit allocation for the existing New Jobs Tax
Credit from roughly $400 million to roughly $200 million.
Provides that the "cut-off date" for the New Jobs Tax Credit
shall be the last day of the calendar quarter within which the
Franchise Tax Board (FTB) estimates that it will have received
returns claiming credits that cumulatively total $200 million
(instead of $400 million) for all taxable years.
17)Deletes duplicative sections of the Revenue and Taxation Code
as a housekeeping matter.
18)Sunsets the Program provisions on December 1, 2020.
19)Appropriates $150,000 from the Tax Credit Allocation Fee
Account to the Allocation Committee for purposes of
implementing the Program.
20)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits under both the Personal Income Tax
Law and the Corporation Tax Law. These credits are generally
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designed to encourage socially beneficial behavior or to
provide relief to taxpayers who incur specified expenses.
2)Provides for the following geographically-targeted economic
development areas (G-TEDAs): Enterprise Zones, Manufacturing
Enhancement Areas, Targeted Tax Areas, and Local Agency
Military Base Recovery Areas. Special tax incentives are
provided to taxpayers conducting business activities within a
G-TEDA. These incentives include a hiring credit equal to a
percentage of wages paid to qualified employees.
3)Allows a credit for taxable years beginning on or after
January 1, 2009, to qualified employers equal to $3,000 for
each net increase in qualified full-time employees hired
during the taxable year. The credit is limited to small
businesses (i.e., taxpayers with 20 or fewer employees as of
the last day of the preceding taxable year). The credit is
capped at roughly $400 million for all taxable years.
4)Allows a credit equal to 20% of each qualified investment into
a Community Development Financial Institution (CDFI) that is
certified by the California Organized Investment Network
(COIN). The aggregate amount of qualified investments is
generally capped at $10 million for each calendar year. Thus,
the statewide total for all credits allowed under the program
is capped at $2 million per year (i.e., 20% of $10 million).
FISCAL EFFECT : The FTB estimates that this bill would result in
General Fund (GF) revenue gains of $42 million in fiscal year
(FY) 2013-14, $31 million in FY 2014-15, and $12.5 million in FY
2015-16.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
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
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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)Proponents of this bill state:
Over the last several years, while other states have
focused on attracting new businesses and creating jobs,
California has dismantled one economic development program
and placed another under attack. With the enterprise zone
program capped and currently on hold pending new
regulations, California has few tools with which to focus
on job creation, especially in low-income areas. These tax
credits will provide significant incentives for additional
private investment in our communities.
3)The FTB notes certain implementation concerns in its staff
analysis of this bill, including the following:
a) "This bill uses terms that are undefined, e.g., "real
estate project" and "time of initial investment." The
absence of definitions to clarify these terms could lead to
disputes with taxpayers and would complicate the
administration of this credit. The author may wish to
amend this bill for clarity."
b) "The bill requires that if an investment is made in an
operating business, the business must have 250 or less
employees. The language is silent as to the timing and
method of determining the number of employees, (e.g., Head
count at year end? Full-time equivalents?). The author
may wish to amend the bill to clarify this issue."
c) "The California New Markets Tax Credit section would be
in effect only until
December 1, 2020, and would be repealed as of that date.
The result would be that the credit could not be taken
after that date. Investors making an investment might be
barred from utilizing the full amount of their credit. For
example, an investor making a qualified investment in 2018
would have zero credit allowable for the first two years
because the allowed percentage is zero for the first two
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years. The credit would repeal as of December 1, 2020, and
with the investor filing their return in 2021 for the 2020
taxable year no credit would be allowed because of the
repeal of this section. If this is contrary to the
author's intent, the author may wish to amend the bill."
4)Committee Staff Comments:
a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, United
States Treasury officials began arguing that these features
of the tax law should be referred to as "expenditures,"
since they are generally enacted to accomplish some
governmental purpose and there is a determinable cost
associated with each (in the form of foregone revenues).
b) How is a tax expenditure different from a direct
expenditure? : As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. This can offer taxpayers greater certainty, but it
can also result in tax expenditures remaining a part of the
tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue
losses associated with any given tax expenditure. Finally,
it should also be noted that, once enacted, it takes a
two-thirds vote to rescind an existing tax expenditure
absent a sunset date. This effectively results in a
"one-way ratchet" whereby tax expenditures can be conferred
by majority vote, but cannot be rescinded, irrespective of
their efficacy, without a supermajority vote.
c) This proposal : This bill would enact a new tax
expenditure program modeled after the federal NMTC, with
the stated purpose of stimulating economic development and
hastening California's economic recovery by authorizing tax
credits for investment in California. The Program would be
"funded" by reducing the credit allocation for the existing
New Jobs Tax Credit by roughly $200 million.
d) The federal NMTC : Enacted in 2000, the federal NMTC is
a non-refundable tax credit designed to encourage capital
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investment in qualified low-income communities.
Specifically, federal law allows a NMTC for a taxpayer's
qualified equity investments (QEIs) in a community
development entity (CDE), which must be a corporation or
partnership. The CDE's primary mission must be serving, or
providing investment capital for, low-income communities or
low-income persons, as certified by the Secretary of the
Treasury. The taxpayer's federal NMTC totals 39% of the
QEI made in the CDE, but is spread over a seven-year period
as follows:
i) A 5% credit for the year the QEI is purchased and
for the first two years thereafter (i.e., 15% for the
first three years); and,
ii) A 6% credit for years four through seven (i.e., 24%
for the subsequent four years).
Before a CDE can sell QEIs eligible for the federal NMTC,
it must apply for and be granted an allocation from the
CDFI Fund through a competitive application and review
process. Geographic diversity is not a consideration in
the evaluation process.
e) How would the Program differ from the federal NMTC? :
The Program would differ from the federal NMTC in numerous
respects, including the following:
i) Different credit percentages over the seven-year
period : While the proposed state credit, like the
federal credit, totals 39% of the taxpayer's investment
in a qualified community development entity, the state
credit would be spread out over the seven-year period as
follows:
(1) 0% for the year the investment is purchased
and the following year (i.e., 0% for the first two
years);
(2) A 7% credit for the third year; and,
(3) An 8% credit for years four through seven
(i.e., 32% for the subsequent four years).
It is Committee staff's understanding that this
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"back-loading" of the credit percentages is designed to
reduce the Program's upfront cost to the GF.
ii) Expanded definition of a qualified low-income
community investment : Federal law defines a qualified
low-income community investment to include any capital or
equity investment in, or loan to, a qualified active
low-income community business, as specified. This bill
would expand the definition of a qualified low-income
community investment, for state purposes, to include any
capital or equity investment in, or loan to, "any real
estate project or any operating business that, at the
time the initial investment is made, has 250 or less
employees and is located in a low-income community."
As presently drafted, this additional language is both
vague and susceptible to multiple conflicting
interpretations. For example, what exactly is a "real
estate project"? Does the 250-employee limitation apply
only to operating businesses or does it apply to real
estate projects as well? Must a real estate project be
located in a low-income community to qualify? One could
argue that, as presently drafted, an investment in any
real estate project could meet the definition of a
qualified low-income community investment. This
expansive interpretation is only buttressed by additional
language in the bill requiring operating businesses to
meet the other conditions of a qualified active
low-income community business, but making absolutely no
reference to real estate projects.
iii) Modified definition of a qualified active low-income
community business : This bill modifies the definition of
a qualified active low-income community business.
Specifically, this bill deletes the requirement that a
substantial portion of the services performed for the
business by its employees are performed in a low-income
community. It is not entirely clear to Committee staff
what this deletion is designed to accomplish.
iv) Requires that 50% of the tax credits be reserved
annually for specified community development entities :
Specifically, this bill would require that at least:
(1) 15% of the credits be reserved for community
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development entities that target businesses located in
low-income communities facing disproportionate
environmental pollution;
(2) 15% of the credits be reserved for community
development entities that target rural areas, as
specified; and,
(3) 20% of the credits be reserved for community
development entities that target businesses in
inner-city areas.
f) Does California have any similar tax credit programs? :
While California does not conform to the federal NMTC,
state law does allow a 20% credit for each "qualified
investment" in a CDFI certified by COIN. The aggregate
amount of qualified investments is generally capped at $10
million for each calendar year.<1> Thus, the statewide
total for all credits allowed under the program is capped
at $2 million per year (i.e., 20% of $10 million). Unlike
the federal NMTC, the "qualified investment" in the CDFI
must be at least $50,000, be for a minimum duration of 60
months, and may consist of either an equity investment or a
deposit or loan that does not earn interest.
Existing law defines a CDFI, in turn, as a private
financial institution located in California that has
community development as its primary mission, and that
lends in urban, rural, or reservation communities in this
state. Specifically, a "CDFI" may be a community
development bank, a community development loan fund, a
community development credit union, a microenterprise fund,
a community development corporation-based lender, or a
community development venture fund.
The existence of California's stand-alone CDFI tax credit
raises some interesting issues. Namely, the state already
has a tax credit program specifically designed to encourage
private investment in underserved markets. Given this
fact, does it makes sense to establish a second tax credit
program with the same goal? If this bill were enacted in
-------------------------
<1> State law provides that if the aggregate amount of qualified
investments made in a calendar year is less than $10 million,
the difference may be carried over to the next year, and any
succeeding year during which the credit remains in effect, and
added to the aggregate amount authorized for those years.
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its present form, we would have two similar tax credit
programs, administered by two separate entities, with an
unclear level of coordination between the two. Moreover,
would it be possible for a CDFI to also be certified as a
qualified community development entity? If so, could a
taxpayer potentially receive the benefit of both credits
for the same investment? The author may wish to consider
amendments providing greater specificity on these issues.
g) The Legislative Analyst's Office (LAO) Report : On April
14, 2011, the LAO issued an analysis of the CDFI tax
credit, discussing the credit's fiscal impact and the
resulting benefits to economically disadvantaged
communities and low-income individuals in California. The
LAO report noted the following:
It is very difficult to estimate the impact of the tax
credits, although we suspect that in many cases
investments in the CDFIs would not have been made in the
credit's absence. It is true that some of the credits
have benefited larger CDFIs that are capable of raising
funds in other ways and for which the credit-funded
investments represent a smaller portion of their total
assets. Even in these cases it seems likely that the tax
credits helped generate investment activity that
otherwise might not have been funded.
h) Related legislation : Committee staff notes the
following related bills introduced in the 2011-12
Legislative Session:
i) AB 11 (Portantino) would have reduced the New Jobs
Tax Credit allocation from roughly $400 million to
roughly $200 million, and allowed a new credit equal to
20% of annual workers' compensation premiums paid by
qualified taxpayers. The total amount of the new credit,
in turn, would have been capped at roughly $200 million.
AB 11 was held in this Committee.
ii) AB 234 (Wieckowski) would have modified and expanded
the existing New Jobs Tax Credit by, among other things,
providing a credit of $9,100 for each net increase in
qualified full-time employees paid more than $16 per
hour. AB 234 was held in this Committee.
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iii) AB 236 (Swanson) would have reallocated $50 million
from the New Jobs Tax Credit to establish a new credit
designed to encourage the hiring of the chronically
unemployed. AB 236 was held in the Assembly
Appropriations Committee.
iv) AB 246 (Wieckowski) would have modified and expanded
the existing New Jobs Tax Credit by, among other things,
providing a credit of $9,100 for each net increase in
qualified full-time employees paid more than $16 per
hour. AB 246 died in the Senate Committee on Governance
and Finance.
v) AB 248 (Perea) would have reallocated $150 million
from the New Jobs Tax Credit to establish a credit equal
to 25% of the value of qualified medical services
personally provided by a physician during the taxable
year. AB 248 was held in the Assembly Appropriations
Committee.
vi) AB 304 (Knight) would have allowed a tax credit,
under both the Personal Income Tax Law and the
Corporation Tax Law, for each "qualified employee"
employed by a "qualified employer," as specified. AB 304
was held in this Committee.
vii) AB 643 (Davis) would have reallocated $300 million
from the New Jobs Tax Credit to establish a state New
Markets Tax Credit program designed to stimulate economic
development. AB 643 was held in the Assembly
Appropriations Committee.
viii) AB 1009 (Wieckowski) would have recast the existing
New Jobs Tax Credit by, among other things, modifying the
definition of a "qualified full-time employee" to apply,
for taxable years beginning on or after January 1, 2012,
only to individuals who were unemployed for the 30 days
immediately prior to being hired. AB 1009 was held in
this Committee.
ix) AB 1195 (Allen, Perea, and Wieckowski) would have
expanded the New Jobs Tax Credit's definition of a
"qualified employer" to include taxpayers that, as of the
last day of the preceding taxable year, employed 50 or
fewer employees (instead of 20 or fewer employees per
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current law). AB 1195 was held in the Senate
Appropriations Committee.
x) AB 1596 (Cook) would have modified the New Jobs Tax
Credit by allowing the credit to employers with up to 50
employees. AB 1596 was held in this Committee.
xi) AB 2037 (Davis) would have established the
California New Markets Tax Credit Program. AB 2037 was
held in the Assembly Appropriations Committee.
xii) SB 156 (Emmerson) would have modified the New Jobs
Tax Credit by allowing the credit to employers with up to
50 employees. SB 156 failed passage out of the Senate by
the constitutional deadline.
i) Double-referral : This bill was double-referred to the
Assembly Committee on Jobs, Economic Development and the
Economy, and passed out of that Committee on a 8-0 vote on
April 9, 2013. For additional discussion of this bill's
provisions, please refer to that Committee's analysis.
j) Suggested technical amendments :
i) On page 3, in line 24, strike "(I)" and insert
"(i)";
ii) On page 8, in line 23, insert "community" after
"low-income";
iii) On page 8, in line 34, strike "'Substantial portion'
shall be defined as 40 percent or" and strike lines 35
and 36;
iv) On page 9, in line 18, strike "allowed" and insert
"allocated";
v) On page 10, in line 22, strike "commission's" and
insert "committee's";
vi) On page 10, in line 34, strike "organization" and
insert "entity";
vii) On page 12, in line 37, insert "community" after
"low-income";
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viii) On page 13, in line 9, strike "'Substantial portion'
shall be defined as 40 percent or" and strike lines 10
and 11; and,
ix) On page 13, in line 33, strike "allowed" and insert
"allocated".
REGISTERED SUPPORT / OPPOSITION :
Support
California Banker's Association
City of Roseville
City of Sacramento
Enhanced Capital Partners, Inc.
Greenlining Institute
Los Angeles County Division of the League of California Cities
Valley Economic Development Center
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098