BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 355 HEARING: 4/10/13
AUTHOR: Beall FISCAL: Yes
VERSION: 4/29/13 TAX LEVY: Yes
CONSULTANT: Grinnell
CONSERVATION: TAX CREDITS
Allows taxpayers to transfer natural heritage preservation
tax credits; directs Resources Agency to facilitate
transfers.
Background and Existing Law
The Legislature enacted the Natural Heritage Preservation
Tax Credit to compensate landowners who donate land to the
state for preservation purposes (SB 1647, O'Connell, 2000).
To qualify for the credit, landowners must apply to the
Wildlife Conservation Board (WCB) for approval to donate a
parcel of property and for certification that the property
meets certain requirements. If the WCB approves the
contribution, the landowner may claim a tax credit equal to
55% of the property's fair market value, and carryover the
credit for eight years. Unlike other tax credits, WCB must
reimburse the Natural Heritage Preservation Tax Credit Fund
within the General Fund within 60 days of FTB's
notification that a taxpayer claimed a WCB awarded tax
credit.
After its enactment in 2000, the Legislature suspended the
program for budgetary reasons, but also expanded and
extended the Credit program. The Legislature suspended the
credit for the 2002 and 2003 taxable years (AB 3009,
Committee on Budget), and again for the 2004 and 2005
taxable years unless WCB reimbursed the general fund for
the credit's costs (SB 1100, Committee on Budget, 2004).
The Legislature then allowed bond funds to reimburse the
general fund for the tax credit's costs (AB 2722, Laird,
2004). WCB awarded $48.6 million in credits through
2006-07, but taxpayers only claimed $23.4 million, for an
average of $4 million per year. In 2010, the Legislature
again reauthorized the credit until 2015, but hasn't yet
awarded any credits (AB 94, Evans, 2010).
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Generally, the state doesn't allow taxpayers to buy and
sell credits against its taxes: however, the motion picture
production tax credit allows taxpayers that make
independent films to sell tax credits (ABx3 15 Kerkorian,
2009/SBx3 15 Calderon, 2009). The California Tax Credit
Allocation Committee allocates Low Income Housing Tax
Credit to housing developers, who then form partnership
agreements with private investors who provide capital
contributions necessary to build a housing project in
exchange for tax credits. Additionally, corporations may
transfer tax credits from one subsidiary or affiliate to
another within its commonly-controlled group (AB 1452,
Committee on Budget, 2008).
Proposed Law
Senate Bill 355 allows taxpayers approved for Natural
Heritage Preservation tax credits to transfer the entire
tax credit or parts of it to an unrelated taxpayer.
Taxpayers must indicate interest in transferring the credit
to the Agency when applying. The Agency must maintain a
list of parties interested in acquiring a credit, and shall
collect all required information necessary to transfer the
credit. The Agency shall match projects with donors, but
all parties must agree to a transfer. The Agency shall
establish procedures as needed to facilitate transfers,
including escrow accounts, and shall supply the Franchise
Tax Board (FTB) with a certificate evidencing the transfer.
State Revenue Impact
According to the Franchise Tax Board, SB 355 results in
revenue losses of $2.2 million in 2013-14, $5.2 million in
2014-15, and $3.6 million in 2015-16.
Comments
1. Purpose of the bill . According to the author, "The
Natural Heritage Preservation Tax Credit (NHPTC) has
protected 8,006 acres with the authorization of $48.5
million in tax credits for a total of 14 projects. And, it
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has delivered high value for the state's dollar. While
this success cannot be overlooked or minimized, not a
single eligible entity had taken advantage of the NHPTC
since 2005. Prior to 2005, many landowners were interested
but were unable to make it work for them. The primary
reason is that most landowners are simply unable to take
advantage of the state tax credit because they lack the
state tax liability that would make the tax credit under
NHPTC attractive to them. In contrast, California business
entities frequently have state tax liabilities. In
recognition of this mismatch between the realities of
landownership and state tax liabilities, SB 355 proposes to
modify the existing NHPTC so that landowners who are unable
to utilize the tax credit can transfer the tax credit to
interested corporate entities who can utilize the tax
credit."
2. Gimme shelter . The Natural Preservation Tax Credit
provides a powerful financial incentive for individuals to
donate land: a credit equal to 55% of the land's fair
market value. Normally, taxpayers could take a charitable
deduction for the fair market value amount of the donation;
however, the alternative minimum tax limits the value of
deductions, so the credit provides better compensation. SB
355 allows land donors to then transfer whole or parts of
credits to unrelated parties, presumably in exchange for
cash at a discount to the credit's face value. As such,
the measure allows individuals with enough cash to buy
these tax credits to purchase tax shelters that reduce
their tax attributable to other economic activity. Many
tax shelters are perfectly legal, and in the case of the
Low Income Housing Credit endorsed by the Legislature, but
they essentially allow wealthy persons to buy down their
tax bill at a discount in ways that taxpayers without such
resources can't. Should the Committee decide that it wants
to allow the shelter, it may want to limit the credit
discount, and therefore the shelter effect to a certain
percentage such as 90%. The Committee may wish to consider
whether allowing the Natural Heritage Preservation Tax
Credit to change into a tax shelter, and its attendant harm
to the integrity of the tax system, is worth the additional
margin of capital deployed by the bill to preserve land.
3. Know your role . Currently, taxpayers manage their own
credit sales and assignments, to the extent authorized by
law. SB 355 would have the Resources Agency maintain a
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list of persons interested in buying credits, collect
information from them, and match them with interested
donors, providing a potentially highly valuable service.
Why should the state assume the duty of matching land
donors awarded tax credits with individuals with the tax
appetites necessary to use them? The Committee may wish to
consider whether the duties SB 355 adds to the Resources
Agencies are appropriate for state government.
4. A different kind of credit . The Natural Heritage
Preservation Tax Credit operates differently from other tax
credits in the following ways:
First, state or local agencies receive
appropriations of funds from bonds to pay for the
State General Fund loss from the tax credits, then
offer the credit as consideration when negotiating
with private landowners to acquire land, instead of
applying to a general class of taxpayers who invest in
specified items like regular tax credits.
Second, WCB subsequently reviews tax credit
applications and the agreements between the state,
local, or non-profit agency and the landowner to
ensure it complies with the statute. If so, WCB
generally approves the credit.
WCB and FTB exchange information to ensure that
only approved taxpayers may claim the credit.
5. Technicals. Committee Staff and FTB recommend the
following amendment:
In the tax credit sections, delete "any credit
under this section," and replace with "any credits
from prior years whose carryover period has not
expired."
Support and Opposition (04/25/13)
Support : California Coalition of Land Trusts; California
Rangeland Trust; Land Trust of Santa Cruz County; Marin
Agricultural Land Trust; Peninsula Open Space Trust;
Sequoia Riverlands Trust; Trust for Public Land; Wildlife
Heritage Foundation.
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Opposition : None received.