BILL ANALYSIS Ó Senate Appropriations Committee Fiscal Summary Senator Kevin de León, Chair AB 952 (Atkins) - Low-Income Housing Tax Credits Amended: June 26, 2013 Policy Vote: T&H 9-0, G&F 7-0 Urgency: No Mandate: No Hearing Date: August 26, 2013 Consultant: Robert Ingenito This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 952 would make specified changes to the State's Low-Income Housing Tax Credit (LIHTC) Program. The bill would specifically do the following: Allow the California Tax Credit Allocation Committee (TCAC) to award state housing credits to developments in a Qualified Census Tract (Tract) or a Difficult to Develop Area (DDA), if the project is also receiving the federal housing credits, as specified. Allow TCAC to replace the federal Housing Credit with a state Housing Credit of up to 30 percent of a project's eligible basis, if the federal Housing Credit is reduced in an equivalent amount. Require TCAC to determine the equivalent amount of state Housing Credit necessary to replace the federal Housing Credit a taxpayer would have received. Fiscal Impact: TCAC indicates no additional costs would result from the bill, as any additional state credit awards would occur as applications are being considered for federal tax credits. The Franchise Tax Board (FTB) would not incur any additional costs. The bill would result in a reduction to state revenues. Specifically, TCAC has authority to award roughly $90 million in state tax credits annually but has up to $25 million in credits remaining at the close of the year resulting from lack of demand. To the extent that this bill AB 952 (Atkins) Page 1 increases the amount of credits awarded by TCAC annually, it would lower state revenues. The amount is unknown, but could be in the millions of dollars annually (General Fund). Background: In 1986, the federal government authorized the LIHTC program to enable affordable housing developers to raise private capital through the sale of tax benefits to investors. TCAC administers the program and awards credits to qualified developers who can then sell those credits to private investors who use the credits to reduce their federal tax liability. The developer in turn invests the capital into the affordable housing project. 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 may claim the state credit over four years. Projects that receive either state or federal tax credits are required to keep the housing at affordable levels for 55 years. Both the federal and state tax credits are capped, which limits the amount of credit that TCAC can award each year. Each state receives an annual ceiling of federal credits. In 2012 it was $2.25 per capita, which worked out to about $85 million in credits in California that can be taken by investors each year for 10 years. Federal LIHTCs are oversubscribed by a 3 to 1 ratio. TCAC has authority for approximately $90 million in state tax credits each year but has as many as $25 million in credits remaining at the end of the year due to lack of demand. Tax credits are generally equal to 100 percent of a project's eligible basis, or its cost less non-depreciable items. However, the eligible basis is reduced by the applicable percentage, a measure of the amount of affordable units of floor space in the project as a share of the entire project. For example, a project with $5 million in total development costs but $1 million in land acquisition costs has a $4 million basis. If half of the units will be affordable, the total basis is $2 million, which is multiplied by 9 percent to determine the annual amount of the credit of $180,000, for a ten-year value of AB 952 (Atkins) Page 2 $1.8 million. However, as credit supply usually exceeds demand, developers typically must exchange credits at a discount, so the $1.8 million in credits will usually draw approximately $1.35 million in project capital from investors at the general 75 percent discount rate. However, federal law also allows credits equal to 130 percent of eligible basis if the project is located in a Qualified Census Tract (QCT) or a Difficult to Develop Area (DDA), a so-called "basis boost." QCTs are designated by the Secretary of the United States Department of Housing and Urban Development (HUD) in which either 50% or more of the households have an income that is less than 60 percent of the area median gross income or has a poverty rate of 25%. The Secretary of HUD also draws DDAs using a ratio of construction, land, and utility costs to area median gross income. This "basis boost" is significant. In the above example, the housing developer instead has a $5.2 million basis ($4 million * 130%) if the project is located in a QCT or DDA, and would instead be able to raise $1.75 million in project capital ($5.2 million * 50% * 9% * 75% * 10 = $1.75 million). State law prohibits CTCAC from allocating state credits in QCTs or DDAs unless it swaps out federal credits willing to forgo the "basis boost," so that the combined credit amount doesn't exceed 130% of basis. Additionally, CTCAC regulation allows CTCAC to swap state credits for federal credits for any authorized project when the state has unused credits at the end of the year; CTCAC subsequently awards the swapped out federal credits to different projects. Proposed Law: This bill makes changes to the state Low-Income Housing Tax Credit Program, and allows TCAC to (1) award state tax credit for developing buildings located in designated difficult development areas or qualified census tracts where at least 50 percent of its occupants are special needs households, and the state credit does not exceed 30 percent of the eligible basis of the building; (2) replace federal tax credit with state tax credit for up to 30 percent of a projects requested eligible basis if the federal tax credit is reduced by that much, and (3) determine the amount of state tax credit necessary to replace the federal tax credit the taxpayer would have received. AB 952 (Atkins) Page 3