BILL ANALYSIS Ó AB 952 Page 1 Date of Hearing: May 13, 2013 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Raul Bocanegra, Chair AB 952 (Atkins) - As Amended: May 2, 2013 Majority vote. Tax levy. Fiscal committee. SUBJECT : Low-income housing tax credits SUMMARY : Makes changes to the state Low-Income Housing Tax Credit (LIHTC) Program. Specifically, this bill : 1)Allows the Tax Credit Allocation Committee (TCAC) to award state LIHTCs to developments in a Qualified Census Tract (QCT) or a Difficult to Develop Area (DDA) if the project is also receiving federal LIHTC under the following conditions: a) Developments restrict at least 50% of the units to special needs households; and, b) The state credits do not exceed 30% of the eligible basis of the building. 1)Allows TCAC to replace federal LIHTC with state LIHTC of up to 30% of a project's eligible basis if the federal LIHTC is reduced in an equivalent amount. 2)Requires TCAC to determine what is an equivalent amount of state LIHTC necessary to replace the federal LIHTC a taxpayer would have received. EXISTING LAW : 1)Prohibits TCAC from awarding state LIHTCs in QCTs and DDAs where the eligible basis of the project is 130%, unless the federal credits are reduced so that the combined federal and state credit does not exceed the total credit allowed. [Revenue and Taxation Code (R&TC) Section 12206]. 2)Defines QCT as a census tract that is designated by the Secretary of Housing and Urban Development (HUD) in which either 50% or more of the households have an income that is less than 60% of the area median gross income or has a poverty AB 952 Page 2 rate of at least 25%. [Internal Revenue Code (IRC) Section 42]. 3)Defines a DDA as any area designated by HUD as an area that has high construction, land, and utility costs relative to area median gross income. (IRC Section 42). FISCAL EFFECT : Unknown. COMMENTS : 1)The author has included the following statement in support of this bill: Under current law, the California Tax Credit Allocation Committee is authorized to award $90 million in California Low Income Housing Tax Credits. California receives financing for affordable housing projects when investors buy these credits, and the investor receives a credit against their tax liability. Unfortunately, due to restrictions on where these credits can be used, as many as $25 million in state credits have gone unused in recent years. AB 952 will remove the restriction on using California Low Income Housing Tax Credits in the areas that need them most. Housing projects that wish to access this financing tool will need to set aside 50% of their units to serve special needs populations such as the homeless, pregnant and parenting teens, and the disabled. Removing the restriction on using California Low Income Housing Tax Credits in the neediest areas makes sense from both a business and humanitarian viewpoint. AB 952 will ensure that no state tax credits go unused, while also benefiting Californian's with the greatest need for housing. 2)Proponents of the measure state: The Low Income Housing Tax Credit (LIHTC) is one of the most important and most successful affordable housing production programs around the country. In California, LIHTC generates approximately 15,000 housing units per year. Designated by the U.S. Department of Housing and AB 952 Page 3 Urban Development, DDAs are metropolitan or nonmetropolitan areas in which construction, land, and utility costs are high relative to incomes, and QCTs are census tracts in which at least half of the households have incomes that are less than 60 % of the area median income or have a poverty rate of at least 25 %. Under federal law, affordable rental housing projects in these areas are eligible for up to 30% more tax credits than they otherwise would be because these areas have the greatest concentration of homeless and special needs populations. However, under existing state law, only federal low-income housing tax credits may be used in DDAs and QCTs. This bill would allow state low-income housing tax credits to be used in conjunction with federal credits, so long as 50% of a development's occupants are special needs households. 3)Committee Staff Comments: a) Background : The LIHTC is an indirect federal subsidy developed in 1986 to incentivize the private development of affordable rental housing for low-income households. Tax credits are awarded to developers for qualified projects. The developer then sells the tax credits to raise capital for the project, which reduces the debt borrowed for a project, leading to lower rents. Two types of credits are available - the nine% and four% credits. These terms refer to the approximate percentage of a project's "qualified basis" a taxpayer may deduct from their annual federal tax liability in each of 10 years. In California, responsibility for administering the federal program is assigned to the California TCAC. In 1987, the Legislature authorized a state LIHTC Program to augment the federal tax credit program. State tax credits can only be awarded to projects that also receive federal LIHTCs, except for farmworker housing projects, which can receive state credits without federal credits. Investors claim the state LIHTC over four years. Federal LIHTC can be used anywhere in the state, but projects are given an additional 30% on their eligible basis if the project is located in a DDA or a QCT. Because these areas by definition have a higher-poverty level and there is a higher concentration of extremely low-income or AB 952 Page 4 homeless individuals and families, housing requires a larger subsidy to make it affordable. Existing state law does not allow state tax credits to be awarded in DDAs and QCTs. The rationale for this prohibition is that projects in these areas can qualify for more federal tax credits and therefore are already advantaged. b) Deficiency in Current Law : In 2012, the total state credit available was $109 million. The amount of state credit requested was approximately $285 million. Despite the demand, as much as $25 million of state credit will go unused in 2013 according to the Treasurer's Office. This is because federal LIHTCs are much more financially desirable than state LIHTCs. As such, California will, at times, accumulate a large sum of state credits at the end of each year. By regulation, TCAC may place state LIHTCs into projects in exchange for federal LIHTCs. In 2011, the TCAC performed a large number of exchanges in an effort to reduce the existing amount of available state credit. Those efforts were continued in 2012, exchanging state credits in six projects originally requesting only federal credits. Approximately $21.7 million in state credits were delivered to the six projects in exchange for $1.3 million in federal credits. The federal credits were then used by TCAC for future project obligations. c) Purpose of this bill : Federal LIHTCs can be used for projects in DDA or a QCT, but as an incentive to increase funding for these areas, DDA and QCT projects are given an additional 30% on the eligible basis. Existing state law does not allow state LIHTCs to be awarded in DDAs and QCTs. AB 952 broadens the scope of projects that qualify for state LIHTCs. Specifically, it would allow state credits to be used in DDA and QCT projects that dedicate 50% of the units for special needs individuals. Projects designated for special needs individuals located in these DDA and QCT areas require a lot of assistance in order to make the rents sufficiently low and affordable. Allowing these kinds of projects to receive state LIHTCs of up to an additional 30% of the projects eligible basis, makes them more likely to provide assistance to individuals who need it the most. AB 952 Page 5 d) Eliminating the need to Exchange Credits : As noted earlier, TCAC, over the last few years, has had to exchange state LIHTCs for federal LIHTCs to eliminate unutilized state credits. By expanding the projects that may apply for state LIHTC, the sponsor of this bill hopes to eliminate the need to exchange state LIHTCs for federal LIHTCs in the future. e) Double-referral : This bill was heard in the Assembly Committee on Housing and Community Development on April 3, 2013, and passed out of that Committee on a vote of 7 to 0. For a more comprehensive understanding of this bill, please refer to that Committee's analysis. REGISTERED SUPPORT / OPPOSITION : Support Bridge Housing California Housing Consortium California State Treasurer Bill Lockyer (sponsor) The Non-Profit Housing Association of Northern California Western Center on Law & Poverty Opposition None on file Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916) 319-2098