BILL ANALYSIS Ó
AB 1999
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Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 1999 (Atkins) - As Amended: May 15, 2014
Policy Committee: Revenue &
Taxation Vote: 9-0
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill allows a tax credit under the personal income tax and
corporation tax laws, for taxable years beginning on or after
January 1, 2015 and before January 1, 2021, for qualified costs
paid or incurred by a taxpayer in rehabilitation of a certified
historic structure, in modified conformity with the federal
income tax laws, subject to an aggregate annual cap of $100
million. Specifically, this bill:
1)Allows an income tax credit in an amount equal to 25% of the
qualified rehabilitation expenditures with respect to a
certified historic structure, defined as a structure located
in California that appears on either the National Register of
Historic Places or the California Register of Historic Places.
2)Increases the applicable percentage to 30% in the case of a
certified historic structure that meets one of the following
criteria:
a) The structure is located on federal, state, or local
surplus property.
b) The rehabilitated structure includes affordable housing
for lower-income households.
c) The structure is located in a census tract determined by
the Department of Finance to have an unemployment rate
within the top 25% of all census tracts within the state
and has a poverty rate within the top 25% of all census
tracts within the state.
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d) The structure is a part of a military base reuse
authority.
e) The structure is a transit-oriented development that is
a higher-density, mixed-use development within a walking
distance of one-half mile of a transit station.
3)Requires the Governor's Office of Business and Economic
Development (GO-Biz) to establish criteria and procedures for
applications and the allocation and certification of credits,
and determine and allocate an aggregate amount of the tax
credits, and any carryover of unallocated credits from prior
years, subject to the following allocation criteria:
a) The number of jobs created by the rehabilitation
project, both during and after the rehabilitation of the
structure.
b) The expected increase in state and local tax revenues
derived from the rehabilitation project, including those
from increased wages and property taxes.
c) Any additional incentives or contributions included in
the rehabilitation project from federal, state, or local
governments.
4)Authorizes the taxpayer to carry forward the tax credit up to
eight years or until the credit is exhausted.
5)Provides that the credit shall be allocated to the partners of
a partnership owning the historic rehabilitation project in
accordance with the partnership agreement, regardless of how
the federal historic rehabilitation tax credit, with respect
to the project, is allocated to the partners, or whether the
allocation of the credit under the terms of the agreement has
substantial economic effect; and provides that, to the extent
the allocation of the credit lacks substantial economic
effect, any loss or deduction allowable that is attributable
to the sale or disposition of that partner's interest made
prior to the expiration of the federal credit shall be
deferred until the first taxable year immediately following
the taxable year in which the federal credit period expires.
6)Requires the Legislative Analyst Office, beginning January 1,
2016, to collaborate with GO-Biz to review the effectiveness
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of the historic building tax credit program, including an
analysis of the demand for the tax credit, the types and uses
of projects receiving the tax credit, the jobs created by the
use of the tax credit, and the economic impact of the tax
credit; and requires GO-Biz to provide the Franchise Tax Board
(FTB) with an annual list of taxpayers that were allocated a
credit.
FISCAL EFFECT
1)Potentially significant costs to GO-Biz and FTB to develop
processes and regulations to administer the program.
2)The bill creates an aggregate annual cap of $100 million of
credits, the effects of which will phase in over the first few
years of implementation. Estimated GF revenue decreases of
$27 million, $70 million, and $95 million in FY 2014-15, FY
2015-16, and FY 2016-17, respectively.
COMMENTS
1) Purpose. According to the author, California is one of the
few states that do not provide an incentive for the
preservation of its historic buildings. This credit is
designed to leverage the federal rehabilitation credit to help
stimulate public and private investment and will improve local
economies, revitalize downtown areas, promote and increase the
supply of affordable housing, support smart growth through
infill redevelopment, and encourage property maintenance and
rehabilitation. The author contends this bill will create
construction jobs, increase state tax revenues through
additional employment and wages, increase local property tax
values and revenues, and increase local sales tax revenues
through additional consumption and heritage tourism.
2) Federal Historic Tax Credit. The Federal Historic
Preservation Tax Incentives Program was created in 1976 to
promote community revitalization and encourage private
investment through historic building rehabilitation. Over
39,600 projects to rehabilitate historic buildings have been
undertaken using the program's incentives. These projects
come in all sizes. The National Park Service reported that in
fiscal year 2013, almost 8% of the certified projects were
under $100,000, 46% were under $500,000, and the majority of
all projects - 59% - involved less than $1 million in costs.
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Housing has been the single most important use for
rehabilitated historic buildings under the federal program.
Over the past five years, between 36% and 69% of the projects
have included housing, and more than 130,000 of low- and
moderate-income housing units have been created under the
program.
To qualify for the federal historic preservation credit, the
structure must be individually listed on the national Register
of Historic Places or be certified as contributing to a
registered historic district, or for a lesser credit, be built
before 1936 and used for income-producing, non-residential
purposes. The developer must submit an application with
details of the rehabilitation plan to the Department of the
Interior for approval, and once completed must submit a
certificate of completion. A historic preservation credit is
then issued and usually must be claimed in the tax year in
which the building was placed in service. The federal rules
contain a "recapture provision" that requires a portion of the
credit to be repaid if the rehabilitated building is sold or
otherwise ceases to qualify within five years of being placed
into service.
3) Typical Rehabilitation Financing Structure. In many cases,
historic preservation and rehabilitation using the federal tax
credit and other tax and financial incentives is accomplished
through a partnership or joint venture structure. Developers
will often partner with third party investors, selling or
syndicating the tax credits to the investors in exchange for a
cash contribution to the venture. Investors may also be
allocated a share of profits over the minimum five year
holding period required to avoid recapture, while developers
charge fees and act as the managing partner, possibly taking a
portion of rents or profits from the building. At the end of
the five year holding period, the financing structure is
usually unwound and investors exit the partnership by selling
to the developer or another third party. This bill also
ensures that any capital losses that may be claimed by a
selling investor are deferred until the period following the
expiration the federal credit.
4) Experience of other States. 35 other states offer tax
incentives of various kinds for historic preservation and
rehabilitation projects, many of them similar to the federal
program. These state programs typically seek to leverage the
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federal tax credits, and studies have concluded those states
with the strongest credits regularly lead the nation in the
use of the federal credit. For example, an annual report of
the Ohio historic preservation tax credit program states the
$327 million in tax credits approved are projected to leverage
more than $2 billion in private investment and federal tax
credits, which translates to $6.25 of investment for every
dollar of the state tax credit. According to a 2011 economic
impact study conducted by Cleveland State University, the $246
million in approved tax credits is expected to result, during
the construction period alone, in nearly $10 billion in
economic activity in the state between 2007 and 2025.
Similarly, studies in Minnesota and North Carolina found that
every dollar of the state historic tax credit created $8.32
and $12.51, respectively, in economic activity.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081