BILL ANALYSIS Ó AB 1999 Page A CONCURRENCE IN SENATE AMENDMENTS AB 1999 (Atkins) As Amended August 22, 2014 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |75-0 |(May 27, 2014) |SENATE: |36-0 |(August 26, | | | | | | |2014) | ----------------------------------------------------------------- Original Committee Reference: REV. & TAX. SUMMARY : Allows a temporary income tax credit for qualified costs paid or incurred by a taxpayer in rehabilitation of a certified historic structure, as defined ("the Historic Preservation Tax Credit"), in modified conformity with the federal income tax laws, subject to an aggregate annual cap of $50 million. The Senate amendments : 1)Extend the Historic Preservation Tax Credit program for an additional two years, until January 1, 2023. 2)Reduce the applicable tax credit percentages from 25% to 20% and from 30% to 25%. 3)Reduce the aggregate amount of the tax credit that may be allocated, under both the Personal Income Tax (PIT) and the Corporation Tax (CT) laws, from $100 million to $50 million, plus the unused allocation tax credit amount, if any, for the preceding calendar year. 4)Delete provisions authorizing the Governor's Office of Business and Economic Development (GO-Biz) to reserve and allocate the Historic Preservation Tax Credit, and instead grant this authority to the California Tax Credit Allocation Committee (CTCAC), in consultation with the Office of Historic Preservation (OHP). 5)Allow the CTCAC to adopt a reasonable fee in an amount sufficient to cover its expenses and the expenses by the OHP incurred in administering the Historic Preservation Tax Credit program. AB 1999 Page B 6)Specify that the Historic Preservation Tax Credit may be allowed for qualified rehabilitation expenditures for a qualified residence only if the residence is determined jointly by the CTCAC and the OHP to have a public benefit in the year of completion. The amount of the Historic Preservation Tax Credit shall only be allowed in an amount equal to or more than $5,000, not to exceed $25,000; and the tax credit shall be allowed to a taxpayer once every 10 taxable years. 7)Define a "qualified residence" by reference to Internal Revenue Code (IRC) Section 163(h)(4), as a residence that will be owned and occupied, or will be occupied after the rehabilitation, by an individual taxpayer as a taxpayer's principal residence, provided that the taxpayer's modified adjusted gross income is $200,000 or less. 8)Define the term "qualified rehabilitation expenditure" by reference to IRC Section 47(c), but modify the federal definition to provide that "qualified rehabilitation expenditures" may include both of following: a) Expenditures in connection with the rehabilitation of a building even if the building is, or is reasonably expected to be, tax exempt use property. b) Expenditures incurred by the taxpayer with respect to a qualified principal residence for the rehabilitation of the exterior of the building or rehabilitation necessary for the functioning of the home, including, but not limited to, rehabilitation of the electrical, plumbing, or foundation of the principal residence. 9)Require a taxpayer to request a reservation of the Historic Preservation Tax Credit from CTCAC, in the form and manner prescribed by CTCAC. 10)Specify that a tax credit reservation provided to a taxpayer shall not constitute a determination by CTCAC regarding a taxpayer's eligibility for the Historic Preservation Tax Credit. 11)Provide that rehabilitation must commence within 18 months of the issuance of the tax credit reservation; otherwise, the reservation shall be forfeited and the credit amount AB 1999 Page C associated with the tax credit reservation shall be treated as an unused allocation tax credit amount. 12)State that a taxpayer shall be allocated the Historic Preservation Tax Credit pursuant to the taxpayer's tax credit reservation, upon receipt by CTCAC a cost certification for the qualified rehabilitation expenditures. 13)Require, for projects with qualified rehabilitation expenditures in excess of $250,000, the cost certification to be issued by a licensed certified public accountant. 14)Require CTCAC to set aside $10 million of tax credits each calendar year for taxpayers with qualified rehabilitation expenditures of less than $1 million. To the extent that this amount is not fully reserved in any calendar year, the unused portion shall become available for reservation to other taxpayers. 15)Add a five-year tax credit recapture provision, in conformity with IRC Section 50(a), when the property, or interest in the property, is sold. 16)Specify that tax credits awarded to an "S" corporation shall be allocated among the shareholders of that corporation pro-rata in accordance with their respective pro rata shares determined in accordance with specified provisions of the IRC. 17)Allow the Historic Preservation Tax Credit to be used to reduce the taxpayer's tax liability below the tentative minimum tax. 18)Make various technical, non-substantive changes. AS PASSED BY THE ASSEMBLY , this bill: 1)Declared legislative intent to preserve and restore California's historic buildings, which are an important asset to communities throughout California, and to create tools to incentivize economic development and revitalize economically distressed areas. 2)Allowed an income tax credit, under both the PIT and the CT laws, in an amount equal to 25% of the qualified AB 1999 Page D rehabilitation expenditures with respect to a certified historic structure, as defined. 3)Increased 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, as defined; b) The rehabilitated structure includes affordable housing for lower-income households, as defined by Health and Safety Code Section 50079.5; c) The structure is located in a designated census tract, as defined in Revenue and Taxation Code Section 17053.73(b)(7); d) The structure is a part of a military base reuse authority established pursuant to Title 7.86 commencing with Government Code Section 67800; or, 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. 4)Allowed the credit for taxable years beginning on or after January 1, 2015, and before January 1, 2021. 5)Defined a "certified historic structure" as a structure located in California and appearing on either the National Register of Historic Places or the California Register of Historical Resources. 6)Authorized the taxpayer to carry forward the tax credit to the following tax year, and succeeding seven years, if necessary, until the credit is exhausted. 7)Disallowed any deduction for the amount of paid or incurred by the taxpayer for which a credit is allowed to the taxpayer. 8)Required GO-Biz to do all of the following: a) On and after January 1, 2015, and before January 1, 2021, to allocate tax credits to applicants, as provided. AB 1999 Page E b) Establish a procedure for applicants to file with the GO-Biz a written application, on a form jointly prescribed by GO-Biz and OHP for the allocation of the tax credit. c) Establish criteria for allocating tax credits, consistent with the requirements of the tax credit program. Criteria shall include, but not be limited to, all of the following: i) The number of jobs created by the rehabilitation project, both during and after the rehabilitation of the structure; ii) The expected increase in state and local tax revenues derived from the rehabilitation project, including those from increased wages and property taxes; and, iii) Any additional incentives or contributions included in the rehabilitation project from federal, state, or local governments. d) Determine and designate, in consultation with the OHP, applicants that meet the specified requirements to ensure that the rehabilitation project upholds historical values in terms of architectural and aesthetic standards. e) Process and approve, or reject, all applications. f) Allocate an aggregate amount of the tax credits, and any carryover of unallocated credits from prior years, subject to the annual cap of $100 million. g) Certify tax credits allocated to taxpayers. h) Provide the Franchise Tax Board (FTB) an annual list of the taxpayers that were allocated a credit, as specified, including each taxpayer's taxpayer identification number and the amount allocated. 9)Limited the total aggregated amount of the tax credit that may be allocated in any calendar year to $100 million, plus the unused allocation tax credit amount, if any, for the preceding calendar year. AB 1999 Page F 10)Provided 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, within the meaning of IRC Section 704(b). 11)Required the Legislative Analyst Office, beginning January 1, 2016, to collaborate with GO-Biz to review the effectiveness of the historic building tax credit program. 12)Provided that the review shall include 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. 13)Takes effect immediately as a tax levy. FISCAL EFFECT : The Franchise Tax Board staff estimates that this bill will result in an annual General Fund revenue loss of $18 million in the fiscal year (FY) 2014-15, $41 million in FY 2015-16, and $48 million in FY 2016-17. COMMENTS : The author has provided the following statement in support of this bill: 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, AB 1999 Page G 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. Federal Historic Tax Credit (HTC). The Federal Historic Preservation Tax Incentives Program, created in 1976, is administered by the National Park Service in partnership with the OHP. The goal of the program is to promote community revitalization and encourage private investment through historic building rehabilitation. To qualify for the historic tax credit, a project must satisfy the requirements of IRC Section 47 and related regulations, as well as architectural standards regulated by the National Parks Service. Certification of historic significance is the first step in establishing eligibility for the HTC. A building must be individually listed in the national Register of Historic Places or be certified as contributing to a registered historic district in order to qualify for the 20% credit. A building that has been certified as non-significant (i.e., not contributing to a National Register historic district), but was built before 1936, can qualify for a 10% tax credit, if it is rehabilitated for income-producing, non-residential purposes. Second, a developer must submit an application detailing the plans and specifications for the rehabilitation. The plans must satisfy the Secretary of Interior Standards for Rehabilitation. Once the project is completed, a request for certification of completion is submitted. If the request is granted, the rehabilitation is considered a "certified rehabilitation." A certification of a completed project is issued only when all work has been finished on the certified historic building. Generally, the HTC must be claimed in the tax year in which the rehabilitated building is placed in service. However, the credit may be claimed before the date the property is placed in service under the rules for qualified progress expenditures (IRC Section 47(d).) Existing federal law contains a so-called "recapture provision," which provides that a portion of the tax credit must be recaptured (returned to the federal government) if the rehabilitated building is sold or otherwise ceases to qualify within five years from the date the building is placed AB 1999 Page H in service. The Proposed Historic Preservation Tax Credit: a Different Kind of Credit? This bill creates a historic preservation tax credit program modeled after the federal HTC. Unlike the federal HTC, however, the proposed credit is not permanent; it is allowed only for eight taxable years, beginning with the 2015 tax year. This bill also provides for an increased tax credit rate of 20% and allows an additional 5% for certain projects, such as low-income housing; a transit-oriented development; and a structure located on federal, state, or local surplus property, in a designated census tract, on a specified military base. A building that is not included in the National Register of Historic Places may still qualify for the state credit if it appears on the California Register of Historical Resources. The proposed credit is different from other state tax credits, where a certain class of individuals or businesses may claim a credit based on membership in a certain industry or business location. In contrast to many tax incentives in California, the proposed tax credit is targeted, is capped at $50 million per calendar year, and is required to be allocated to taxpayers by the GO-Biz on a competitive basis. In many respects, the proposed credit is similar to a grant program. This bill prescribes certain criteria for GO-Biz to utilize in determining whether a project should be awarded the state HTC, including the estimated number of jobs and potential state and local tax revenues to be generated by the project. Thus, the proposed credit is intended to result in a quantifiable public benefit. Finally, the Legislative Analyst's Office is required to review the effectiveness of this tax credit program on an annual basis. The credit cannot be used after January 1, 2023, and is not refundable. How Effective Are Historic Tax Credit Programs in Other States? Thirty-five states offer state tax incentives of various kinds for historic preservation rehabilitation projects. In many states, the income tax credit programs are similar to the federal HTC program. Several studies conducted by Rutgers University have shown that "in many parts of the country, $1 million in historic rehabilitation yields markedly better effects on employment, income? and state and local taxes than an equal investment in new construction or many other economic AB 1999 Page I activities (e.g., manufacturing or services)."<1> It was concluded that states with the strongest historical preservation tax credit statutes regularly lead the nation in the use of the federal HTC, which, due to its leverage and multiplier effects, benefits both state economies and the national economy. For example, an annual report of the Ohio Historic Preservation tax credit program states that 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.<2> The Ohio Historic Preservation tax credit is capped at $60 million per year and allocated to applicants. According to a 2011 economic impact study conducted by Cleveland State University, the $246 million in approved tax credits is expected to result in nearly $10 billion in economic activities during the construction period alone between 2007 and 2025. Recognizing the economic impact and job creation of the program, the Ohio General Assembly renewed the Program in the state's FY 2012-13 Budget. Similarly, it was found that in Minnesota and North Carolina, respectively, every dollar of the state historic tax credit creates $8.32 in economic activity and $12.51 in economic benefit. Owner-Occupied Buildings. Under the federal HTC program, owner-occupied residential buildings are not eligible for the credit. This bill takes a different approach in that it would allow both income-producing properties and owner-occupied residential buildings to qualify for the state tax credit. Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0005431 --------------------------- <1> Annual Report on the Economic Impact of the Federal Historic Tax Credit for FY 2012, Rutgers University, E. Bloustein School of Planning and Public Policy, p. 5. <2> Ohio Historic Preservation Tax Credit Program, 2012 Annual Report, prepared by the Ohio Development Services Agency, the Ohio Historical Society and the Ohio Department of Taxation, April 2013, p. 15.