BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1999 HEARING: 6/25/14
AUTHOR: Atkins FISCAL: Yes
VERSION: 5/15/14 TAX LEVY: Yes
CONSULTANT: Bouaziz
PERSONAL INCOME AND CORPORATION TAXES: REHABILITATION
CREDIT
Allows a 25% or 30% tax credit for rehabilitation of a
certified historic structure.
Background and Existing Law
Congress enacted the Federal Historic Preservation Tax
Incentives Program in 1976 to promote community
revitalization and encourage private investment through
historic building rehabilitation. Over 39,600 projects in
all sizes to rehabilitate historic buildings have been
undertaken using the program's incentives. 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. 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
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rehabilitated building is sold or otherwise ceases to
qualify within five years of being placed into service.
Proposed Law
Assembly Bill 1999 allows a tax credit under the personal
income tax and corporation tax laws 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. The bill takes effect immediately as
a tax levy, and applies to taxable years beginning on or
after January 1, 2015 and before January 1, 2021.
The tax credit is 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. The credit increases the applicable percentage to
30% in the case of a certified historic structure that
meets one of the following criteria:
The structure is located on federal, state, or
local surplus property.
The rehabilitated structure includes affordable
housing for lower-income households.
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.
The structure is a part of a military base reuse
authority.
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.
Assembly Bill 1999 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, as well as carrying
over unallocated credits from prior years. GO-Biz must
allocate the credit according to the following criteria:
AB 1999 -- 05/15/14 -- PageC
The number of jobs created by the rehabilitation
project, both during and after the rehabilitation of
the structure.
The expected increase in state and local tax
revenues derived from the rehabilitation project,
including those from increased wages and property
taxes.
Any additional incentives or contributions included
in the rehabilitation project from federal, state, or
local governments.
The bill authorizes the taxpayer to carry forward the tax
credit up to eight years or until the credit is exhausted
and provides that the credit shall be allocated to the
partners of a partnership owning the historic
rehabilitation project in accordance with the partnership
agreement. If 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.
AB 1999 requires the Legislative Analyst Office, beginning
January 1, 2016, to collaborate with GO-Biz to review the
effectiveness 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.
State Revenue Impact
FTB estimates that this bill will result in an annual
revenue loss of $27 million in the fiscal year (FY)
2014-15, $75 million in FY 2015-16, and $95 million in FY
2016-17.
Comments
1. Purpose of the bill . According to the author,
AB 1999 -- 05/15/14 -- PageD
"California is one of the few states to not provide an
incentive for the preservation of our historic buildings.
A state tax credit for this purpose would help stimulate
local economies, revitalize downtown areas and communities,
promote and increase the supply of affordable housing,
support smart growth through infill development, encourage
property maintenance and rehabilitation, and leverage use
of the federal rehabilitation tax credit. Additionally, it
would increase construction and building industry job
creation, increase state tax revenues through increased
employment and wages, increase local property tax revenues
through increased property values, and increase local tax
revenues through sales tax and heritage tourism. AB 1999
helps communities adjust to the phase-out of redevelopment
dollars and stimulates public and private investment, all
while building civic pride as we celebrate our heritage and
preserve California's past."
2. Effectiveness in 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 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.
3. Tradeoffs . Tax benefits generally do two things:
First, they reward behavior that would have occurred
without the tax benefit, so-called "deadweight loss." Some
investors will invest in low-income community businesses
because they think they will earn a return better than
alternatives, not because of a tax credit. In these
instances, the state receives no marginal benefit, and
transfers wealth from purposes it would otherwise spend
AB 1999 -- 05/15/14 -- PageE
money on for government purposes to the investor. Second,
the bill may generate economic activity resulting from
in-vestments that wouldn't have occurred but for the
credit; the credit will provide sufficient incentive for an
investor to invest in qualified entity, who in turn invests
to a qualified business in a low-income area. A successful
tax credit would lead to more economic activity at the
margin than its deadweight loss, but no tax credit has yet
conclusively demonstrated that its benefits outweigh its
costs.
Additionally, enacting a new tax benefit requires cuts in
spending or higher taxes to match the amount of foregone
revenue resulting from AB 1999. Tax credits do not pay for
themselves: the state's last effort of "dynamic revenue
analysis" indicates that while dynamic effects are
definitely present and visible, their effects are generally
relatively modest. <1>
4. 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. AB 1999 ensures that any
capital losses that may be claimed by a selling investor
are deferred until the period following the expiration the
federal credit.
5. Owner occupied homes . As currently written, AB 1999
would allow a homeowner renovating his or her primary
residence to apply for the tax credit, if they had their
home designated on the California Register of Historical
Resources. Under the federal program, owner-occupied
-------------------------
<1>
"Whatever Happened to Dynamic Revenue Analysis in
California?" John David Vasche, prepared for the
Federation of Tax Administrators, September, 2006.
AB 1999 -- 05/15/14 -- PageF
buildings are not eligible for the credit. While restoring
and preserving historic homes is a laudable goal, should it
be subsidized through with foregone General Revenue funds?
The committee may wish to consider excluding owner-occupied
property.
6. Credit amount . AB 1999 proposes tax credit percentages
that are higher than the federal program rates.
Furthermore, the bill sets the allocation cap at $100
million, an amount that as a tax expenditure, will mean
foregone revenue from the General Fund for other programs.
The Committee may wish to consider whether the proposed
percentages and credit cap should be reduced.
7. Technical Amendment . Committee staff suggests the
following technical amendments.
On page 4, line 2, strikeout "a walking distance".
On page 4, line 3, strikeout "of".
Assembly Actions
Assembly Revenue and Taxation9-0
Assembly Appropriations 17-0
Assembly Floor 75-0
Support and Opposition (06/19/14)
Support : American Institute of Architects California
Council; Applied Architecture Inc.; Architectural Resources
Group, Inc.; Barstow Area Chamber of Commerce; Brunzell
Historical; California Building Industry Association;
California Conference of Machinists; California Conference
of the Amalgamated Transit Union; California Historical
Route 66 Association; California-Nevada Conference of
Operating Engineers; California Preservation Foundation;
California Teamsters Public Affairs Council; City and
County of San Francisco; City of San Gabriel; City of
Sonoma; City of Woodland; Daniel Malmuth, Fine Arts
Commissioner and Historical Preservation Commissioner;
Engineers & Scientists, IFPTE, Local 20; Eric Garcetti,
Mayor of the City of Los Angeles; Hollywood Heritage Inc.;
International Longshore and Warehouse Union, Coast
Division; League of California Cities; Northern California
Community Loan Fund; Palm Springs Modern Committee;
Professional & Technical Engineers, IFPTE Local 21;
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Structural Engineers Association of California; The
Glendale Historical Society; Todd Gloria, Council
President, City of San Diego; Tuolumne County Visitors
Bureau; UNITE HERE; Utility Workers Union of America,
Local 132; 1 individual.
Opposition : None
received.