BILL ANALYSIS Ó
AB 305
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Date of Hearing: May 24, 2013
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 305 (V. Manuel Pérez) - As Amended: May 21, 2013
Policy Committee: RevenueVote:9-0
JEDE 8-0
Urgency: Yes State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill creates a state New Markets Tax Credit program (NMTC)
for the purpose of stimulating economic development.
Specifically, this bill:
1)Authorizes the creation of the California New Markets Tax
Credit Program, administered through the California Tax Credit
Allocation Committee (TCAC), for the purpose of allocating tax
credits to qualifying community development entities (CDE).
2)Authorizes a tax credit valued at 39% of a taxpayer's
qualified equity investment in a CDE, beginning in 2013 and
ending in 2019, and allows the credit to be applied against
the tax payer's personal and/or corporate tax liability.
3)Establishes that allowable investments are limited to
qualified low-income community investments, which may include
loans and capital investments in businesses, real estate and
other CDEs that undertake development projects in eligible
low-income areas, as defined.
4)Requires the TCAC to establish guidelines for implementing the
NMTC program and set fees to cover the costs for administering
the program.
5)Appropriates $150,000 from the 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.
AB 305
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6)Reduces the cumulative total of the use of Small Business Hire
Credit (SBHC) from $400 million to $200 million in order to
fund the NMTC.
7)Takes immediate effect as a tax levy.
FISCAL EFFECT
1)The funds appropriated for developing the new tax credit
program would be a loan that would be paid back through fees
on the NMTC application. All other funds for administration
would come from NMTC fees.
2)The current hiring credit is capped at $400 million and the
funds for this credit would come from that capped allocation,
thus it does not result in any additional revenue loss overall
as compared to continuing the SBHC. This bill is structured
so no credits are paid in the first two years so the bill
results in General Fund (GF) savings compared to the SBHC.
FTB estimates that this bill would result in 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, then GF revenue
losses occur as taxpayers start using this credit.
COMMENTS
1)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. The author contends such a program will
enable California to leverage federal funds and lead 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, on
average leveraging 13 times more in federal monies than they
allocated in revenue to fund the tax credit.
2)Federal New Market Tax Credit Program . Congress enacted the
NMTC with the Community Renewal Tax Relief Act of 2000 (Public
Law 106-554) for the purpose of stimulating equity investments
in low-income communities. Under the program, CDEs apply to
the US Treasury, for an allocation of federal tax credits,
which the CDE can then offer to individual and corporate
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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.
The federal NMTC expired in 2011. However, it was
retroactively renewed in H.R. 8, the American Taxpayer Relief
Act of 2012 for 2 years.
3)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.
4)Impact on the existing Small Business Hiring Credit Program .
Implementation of this bill will reduce the authorized credits
under the SBHC and use the amount of the reduction to fund the
credits authorized in the NMTC program. According to the FTB
and information provided by the Assembly Committee on Revenue
and Taxation, 12,903 personal income tax and business entity
returns had been filed as of December 2011using the SBHC with
a cumulative credits value of only $76 million. Concerns have
previously been raised that the SBHC was being significantly
underutilized.
5)Previous legislation.
a) AB 643 (Davis) and AB 2037 (Davis of 2012) were similar to
AB 305. Both were held on this committee's Suspense File.
b) SB 1316 (Romero) of 2010 would have enacted a New Markets
Tax Credit for qualified investments made in low income
communities in the 2011 calendar year. This bill died on
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the Senate inactive file.
6)There is no registered opposition to this bill.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081