BILL ANALYSIS Ó
AB 1999
Page A
CONCURRENCE IN SENATE AMENDMENTS
AB 1999 (Atkins)
As Amended August 22, 2014
Majority vote
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|ASSEMBLY: |75-0 |(May 27, 2014) |SENATE: |36-0 |(August 26, |
| | | | | |2014) |
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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.
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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
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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
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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.
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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.
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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,
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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
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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
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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
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<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.