BILL ANALYSIS                                                                                                                                                                                                    






                                                                      AB 35


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          Date of Hearing:  May 11, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 35  
          (Chiu) - As Amended April 16, 2015


          


          Majority vote.  Fiscal committee.  Tax levy.


          SUBJECT:  Income taxes:  credits:  low-income housing:   
          allocation increase


          SUMMARY: Modifies the existing Low-Income Housing Tax Credit  
          (LIHTC) program and increases the aggregate credit amount that  
          may be annually allocated to low-income housing projects by $300  
          million for the 2015 calendar year and each calendar year  
          thereafter.  Specifically, this bill:  


          1)Beginning in 2015 and each year thereafter, increases the  
            amount of state LIHTC by an additional $300 million, as  
            adjusted for inflation beginning in 2016.











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          2)Provides that a low-income housing building that has received  
            an award of 9% federal LIHTC is not eligible for an allocation  
            from the additional $300 million of state LIHTC, but shall  
            remain eligible for the existing $70 million allocation, as  
            annually adjusted.    


          3)Modifies the allocation of state LIHTC that may be awarded to  
            a federally subsidized low-income housing project receiving  
            federal 4% LIHTC as follows:


             a)   A new qualified low-income housing building is eligible  
               for a cumulative state LIHTC over four years of 50% of the  
               qualified basis of the building, provided that the building  
               is not located in a Difficult to Develop Area (DDA) or a  
               Qualified Census Tract (QCT).


             b)   An existing qualified low-income housing building that  
               is not located in a DDA or a QCT is eligible for a  
               cumulative state LIHTC over four years of 13% of the  
               qualified basis of the building.    


             c)   A new or existing low-income housing building that is  
               located in a DDA or QCT may be awarded a cumulative state  
               LIHTC in an amount not to exceed 50% of the qualified basis  
               of the building, provided that the federal LIHTC is  
               replaced with state LIHTC, as specified. 


             d)   A qualified low-income building is eligible for a  
               cumulative state LIHTC of 95% of the qualified basis over  
               four years if it meets all of the following requirement:













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               i)     It is at least 15 years old;


               ii)    It is a SRO, special needs housing building, is in a  
                 rural area, or serves households with very-low income or  
                 extremely low-income residents;


               iii)   It is serving households of very low-income or  
                 extremely low-income residents, provided that the average  
                 income at the time of admission is no more than 45% of  
                 the median gross income adjusted for household size; and,  



               iv)    It would, otherwise, receive insufficient state  
                 credits, due to the building's low appraised value, to  
                 complete substantial rehabilitation.  


          4)Revises the definition of a "taxpayer" for purposes of the  
            state LIHTC program to include members of a limited liability  
            company.


          5)Revises the definition of a "housing sponsor" for purposes of  
            the LIHTC program to include a limited liability company. 


          6)Adds the following definitions:


             a)   "Extremely low-income" has the same meaning as Health  
               and Safety Code (H&SC) Section 50053;



             b)   "Rural area" means a rural area as defined in H&SC  
               Section 50199.21; 











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             c)   "Special needs housing" has the same meaning as  
               paragraph (4) of Subdivision (g) of Section 10325 of Title  
               4 of the California Code of Regulations; and,



             d)   "SRO" means single room occupancy.



             e)   "Very low-income" has the same meaning as in H&SC  
               Section 50053.   


          1)Makes technical, non-substantive changes to the provisions of  
            the LITHC program. 


          2)Takes effect immediately as a tax levy. 


          EXISTING LAW: 


          1)Allows a state tax credit for costs related to construction,  
            rehabilitation, or acquisition of low-income housing.  This  
            credit, which mirrors a federal LIHTC, may be used by  
            taxpayers to offset the tax under the Personal Income Tax  
            (PIT), the Corporation Tax (CT), and the Insurance Tax (IT)  
            laws. 

          2)Requires the California Tax Credit Allocation Committee (TCAC)  
            to allocate each year the California LIHTC based upon  
            qualification of the applicant and proposed project.  The  
            California LIHTC is available only to projects that received  
            an allocation of the federal LIHTC.  











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          3)Limits the annual aggregate amount of the state LIHTC to $70  
            million, as adjusted for an increase in the California  
            consumer price index from 2002, plus any unused LIHTC for the  
            preceding calendar year and any LIHTC returned in the calendar  
            year.  The California LIHTC awarded may be claimed as a credit  
            against tax over a four-year period.


          4)Requires TCAC to certify the amount of tax credit amount  
            allocated.  In the case of a partnership or an S Corporation,  
            a copy of the certificate is provided to each taxpayer.  The  
            taxpayer is required, upon request, to provide a copy of the  
            certificate to the Franchise Tax Board (FTB).





          5)Allows any unused credit to be carried forward until the  
            credit is exhausted.



          6)Allows TCAC to award state LIHTCs to developments in a QCT or  
            a DDA, if the project is also receiving federal LIHTC, under  
            the following conditions: 

             a)   The amount of state credit is computed on 100% of the  
               qualified basis of the building; or,

             b)   If the usage of at least 50% of the units in a  
               low-income housing building is restricted to special needs  
               households, the amount of an allowable state LIHTC may not  
               exceed 30% of the eligible basis of the building. 

          1)Allows TCAC to replace federal LIHTC with state LIHTC of up to  
            30% of a project's eligible basis of a building, if the  
            federal LIHTC is reduced in an equivalent amount. 











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          2)Defines a "QTC" as any census tract designated by the federal  
            Department of Housing and Urban Development (HUD) in which  
            either 50% or more of the households have an income that is  
            less than 60% of the area median gross income or that has a  
            poverty rate of at least 25%.

          3)Defines a "DDA" as an area designated by HUD on an annual  
            basis that has high construction, land, and utility costs  
            relative to area median gross income.

          4)Provides that a low-income housing development that is a new  
            building and is receiving 9% federal LIHTC credits is eligible  
            to receive state LIHTC over four years of 30% of the qualified  
            basis of the building. 

          5)Provides that a low-income housing development that is a new  
            building receiving federal LIHTC that is "at risk of  
            conversion" is eligible to receive state LIHTC over four years  
            of 13% of the qualified basis of the building. 

          6)Defines "at risk of conversion" to mean a property that  
            satisfies all of the following criteria:

             a)   A multifamily rental housing development in which at  
               least 50% of the units receive government assistance  
               pursuant to any of the following:
             b)   Project based Section 8 vouchers;


             c)   Below-Market-Interest-Rate Program;


             d)   Federal Rental Housing Assistance Program; 


             e)   Programs for rent supplement assistance pursuant to  
               Section 101 of the Housing and Urban Development Act of  
               1965;











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             f)   Programs pursuant to Section 515 of the Housing Act of  
               1949; and,


             g)   Federal LIHTC.    


          FISCAL EFFECT:  The Franchise Tax Board (FTB) staff estimates  
          that this bill would result in an annual revenue loss of $190  
          million in the fiscal year (FY) 2015-16, $180 million in FY  
          2016-17, and $180 million in FY 2017-18.  


          COMMENTS:


           1)Author's Statement  . The author has provided the following  
            statement in support of this bill:

          "California's shortfall of 1.5 million affordable rentals  
            impedes our state's economic growth by slowing job creation  
            and driving Californians into poverty.  When housing costs are  
            accounted for, the proportion of people unable to meet their  
            basic needs - food, shelter, transportation - rises from 16  
            percent to 23 percent, the highest rate of poverty in the  
            nation.

          "A recent report from the California Housing Partnership depicts  
            a growing statewide crisis driven by a growing divide between  
            incomes and rents.  Statewide, median incomes have fallen 8  
            percent since 2000; meanwhile, rental prices have soared by 21  
            percent in the same timeframe.  There isn't a single county in  
            California with enough affordable rentals for families  
            struggling to make ends meet.

          "Rising rents are locking broad swaths of Californians - people  
            who are key contributors to our communities - out of San  











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            Francisco, San Diego and many other California cities and  
            crowding their families into unsafe housing.  Twenty-one of  
            the nation's least affordable cities are in California; our  
            home-health aides, child-care workers, and teachers'  
            assistants have virtually nowhere to live in the communities  
            where they work, even if they work full-time.

          "Small businesses and creators of entry-level jobs face  
            particular difficulties recruiting employees.  Closing our  
            communities to struggling workers reverberates through our  
            entire economy and impacts all taxpayers.'

          "California leaders must act to replace the $1.5 billion annual  
            state investment wiped out when voter-approved housing bonds  
            were expended and redevelopment funding was eliminated.  AB 35  
            would take a step in the right direction by increasing the  
            California Low-Income Housing Tax Credit, a proven  
            public-private-partnership model, by $300 million per year,  
            and enable the state to attract $600 million in additional  
            federal funding that would otherwise not come to California."

           2)Arguments in Support  .  The proponents state that the lack of  
            affordable housing is "the main reason why California has the  
            second lowest homeownership rate in the nation."  The  
            proponents note that, while the state "has invested a  
            considerable amount of money through the sale of  
            voter-approved bonds and other measures to incentivize the  
            construction of affordable housing, the cost of housing is  
            either out of reach for many people or consumes a significant  
            portion of their family budget."  The proponents, citing a  
            February 2015 report by Standard and Poor's, assert that the  
            lack of affordable housing "contributes to a relatively weaker  
            business climate in California."  They argue that, although  
            this bill "will not make up for the dissolution of the state's  
            redevelopment agencies that previously served as a critical  
            source of capital for affordable housing projects, it does  
            have the potential to allow California to pull down hundreds  
            of millions of dollars in federal tax credits and federal  
            tax-exempt bonding authority each year to create and preserve  











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            affordable homes for low income Californians."  This bill  
            would not only increase "California investment in low-income  
            housing, but it will help leverage an additional $600 million  
            in federal housing resources." Finally, the proponents assert  
            that "increasing the aggregate housing state credit dollar  
            amount that may be allocated among low-income housing  
            developments and allowing the state to more effectively  
            leverage federal tax-exempt bond financing will help fill the  
            gap in funding affordable housing units across our communities  
            and the state."  

          3)Federal LIHTC Program:  Background  .  The LIHTC is an indirect  
            federal subsidy developed in 1986 to incentivize the private  
            development of affordable rental housing for low-income  
            households.  As explained by the CTCAC, the federal LIHTC  
            program replaced traditional housing tax incentives, such as  
            accelerated depreciation, with a tax credit that enables  
            low-income housing sponsors and developers to raise project  
            equity through the allocation of tax benefits to investors.   
            Two types of federal tax credits are available:  the 9% and 4%  
            credits.  These terms refer to the approximate percentage of a  
            project's "qualified basis" a taxpayer may deduct from his/her  
            annual federal tax liability in each of 10 years.  For  
            projects that are not financed with a federal subsidy, the  
            applicable rate is 9%.  For projects that are federally  
            subsidized (including projects financed more than 50% with  
            tax-exempt bonds), the applicable rate is 4%.  Although the  
            credits are known as the "9% and 4% credits", the actual tax  
            rates fluctuate every month, based on the determination made  
            by the Internal Revenue Service on a monthly basis.   
            Nonetheless, Congress has established the minimum applicable  
            percentage of 9% for allocations made for non-federally  
            subsidized new buildings before January 1, 2015.  

          Each year, the Federal Government allocates funding to the  
            states for LIHTCs on the basis of a per-resident formula.   
            State or local housing authorities review proposals submitted  
            by developers and select projects based on a variety of  
            prescribed criteria.  Only rental housing buildings, which are  











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            either undergoing rehabilitation or newly constructed, are  
            eligible for the LIHTC programs.  In addition, the qualified  
            low-income housing projects must comply with both rent and  
            income restrictions.  Rents on tax credit units cannot exceed  
            30% of an imputed income based on 1.5 persons per bedroom.   
            Furthermore, the initial incomes of households in those units  
            may not exceed either 60% or 50% of the area median income,  
            adjusted for household size.  A project developer or sponsor  
            who applies for the tax credit allocation must also elect to  
            set aside a minimum of either 40% of the units to be occupied  
            by households with incomes of 60% or less of the area median  
            gross income or 20% of the units to household with incomes of  
            50% or less of the area median gross income.  Finally, credit  
            projects must remain affordable for at least 30 years.   
            However, in California, project developers or housing sponsors  
            must agree to a minimum of 55 years rent and income  
            restrictions.  

            The federal law specifies that each state must designate a  
            "housing credit agency" to administer the federal LIHTC  
            program.  In California, responsibility for administering the  
            federal program is assigned to the California TCAC.  

              a)   The 9% credit:  projects not financed with a federal  
               subsidy  .  In 2014, the amount of the 9% LIHTC credit  
               allocated by the Federal Government to each state was based  
               on $2.30 per capita.  In addition, states annually qualify  
               for a pro rata share of credits in a national pool of  
               unused credits.  From the total amount of federal LIHTC  
               available to California calendar year, the TCAC allocates  
               this credit to housing sponsors of qualified projects,  
               based on the estimated amount of eligible costs, as defined  
               in Internal Revenue Code (IRC) Section 42, minus  
               non-depreciable costs (such as land, permanent financing  
               costs, rent reserves and marketing expenses).  The amount  
               of the credit is calculated by multiplying this "eligible  














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               basis" of the project by the "applicable fraction"<1> and  
               then by the LIHTC 9% rate (in reality, that rate fluctuates  
               monthly and currently is set at 7.70%).  If the development  
               is located in the HUD-designated DDA or QCT, the  
               development's "eligible basis" receives a 30% increase or  
               "basis boost." This "boost" allows qualified low-income  
               housing projects to receive a credit equal to 130% of its  
               "eligible basis."  The 9% credit is awarded on a  
               competitive basis so that only those projects that meet the  
               highest housing priorities and public policy objectives, as  
               determined by the TCAC, have access to this credit.  

              b)   The 4% credit:  federally subsidized projects  . Unlike  
               the 9% credit, the amount of 4% credit allocated to states  
               is not limited on a per capita basis.  In order to access  
               the 4% credit, a developer must first obtain an allocation  
               of tax-exempt private activity mortgage revenue bonds,  
               which are allocated to states on a per capita basis.  The  
               amount of the 4% credit is calculated in the same manner as  
               the 9% credit, other than an "eligible basis" is multiplied  
               by the federal tax credit summarized as 4%.  The actual  
               rate also fluctuates and currently TCAC uses 3.36% to  
               determine a project's initial tax credit reservation. 

             Tax-exempts bonds are debt obligations issued by state or  
               local government agencies for multi-family rental housing,  
               infrastructure improvements and other qualified municipal  
               endeavors having a public purpose.  Federal tax law  
               provides that interest on any obligation issued by, or on  
               behalf of, any state or political subdivision is excluded  
               from gross income [IRC Section 103(a)].  Federal tax law  
               limits this exemption in the case of private activity bonds  
               [IRC Section 103(b)], but allows certain facilities to be  
               financed with tax-exempt bonds.  Qualified private activity  
               bonds are issued by government agencies on behalf of  
             --------------------------
          <1> The "applicable fraction" is defined as the smaller of:  (1)  
          the percentage of low-income units to total units, or (2) the  
          percentage of square footage of the low-income units to the  
          square footage of the total units.  










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               private businesses and may be issued for various purposes  
               including low-income, multi-family housing.  Unlike typical  
               municipal bonds, the payment of principal and interest on  
               private activity bonds is not the responsibility of the  
               issuing government agency.  Instead, the payment is the  
               responsibility of the private business receiving the  
               proceeds.  The interest rate on tax-exempt bonds is lower  
               than conventional bank financing, and these savings can  
               promote housing affordability.  These bonds assist  
               developers of multifamily rental housing units to acquire  
               land and construct new units or purchase and rehabilitate  
               existing units.  The developers, in turn, produce market  
               rate and affordable rental housing for low- and very  
               low-income households by reducing rental rates to these  
               individuals and families.  Projects that receive an award  
               of bond authority have the right to apply for  
               non-competitive 4% LIHTC allocations.  

             Federal law imposes a limit on how much private activity  
               bonds can be issued in a state each year.  Agencies and  
               organizations authorized to issue tax-exempt private  
               activity bonds or mortgage credit certificates must receive  
               an allocation from the California Debt Limit Allocation  
               Committee (CDLAC).   The limit is determined by a state's  
               population, multiplied by a specified dollar amount.  Out  
               of the 2015 state debt ceiling of over $3.8 billion,  
               multifamily housing reservations account for $1.25 billion.  
                

             In 2014, California developers, according to the California  
               Housing Partnership, used $80.5 million in annual federal  
               4% credits, which is a significantly lower amount  in  
               comparison to prior years, when the redevelopment and  
               Proposition 1C funding was still available. 

           4)State LIHTC Program  .  In 1987, the Legislature authorized a  
            state LIHTC Program to augment the federal tax credit program.  
             State tax credits can only be awarded to projects that have  
            also received, or are concurrently receiving, an allocation of  











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            the federal LIHTCs.  The amount of state LIHTC that may be  
            annually allocated by the TCAC is limited to $70 million,  
            adjusted for inflation.  In 2014, the total credit amount  
            available for allocation was $103 million (representing all  
            four years of allocation) plus any unused or returned credit  
            allocations from previous years.  

          Current state tax law generally conforms to federal law with  
            respect to the LIHTC, except that it is limited to projects  
            located in California.  While the state LIHTC program is  
            patterned after the federal LIHTC program, there are several  
            differences.  First, investors may claim the state LIHTC over  
            four years rather than the 10-year federal allocation period.   
            Second, the rates used to determine the total amount of the  
            state tax credit (representing all four years of allocation)  
            are 30% of the qualified basis of a project that is not  
            federally subsidized and 13% of the qualified basis of a  
            project that is federally subsidized, in contrast to 70% and  
                                                      30% (representing all 10 years of allocation on a  
            present-value basis), respectively, for purposes of the  
            federal LIHTCs.  Furthermore, state tax credits are not  
            available for acquisition costs, except for previously  
            subsidized projects that qualify as "at-risk" of being  
            converted to market rate. 

          TCAC is authorized to replace federal LIHTC with state LIHTC of  
            up to 30% of a project's eligible basis if the federal LIHTC  
            is reduced in an equivalent amount.  This provision allows  
            TCAC to increase the number of projects funded with the  
            limited federal credits in a given year.  As discussed, the  
            maximum federal tax credit that can be awarded (the 9% credit)  
            is generally equal to 70% (on a present-value basis) of a  
            taxpayer's qualified basis in the project, spread over a  
            ten-year period.  Thus, a project that receives the maximum in  
            both state and federal credits receives an amount equal to  
            100% of the taxpayer's qualified basis over a 10-year period.

           5)DDAs and QCTs.   Federal LIHTCs can be used anywhere, but a  
            project is given an additional 30% on its eligible basis (a  











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            "basis boost") if the project is located in a DDA or a QCT.   
            These areas, by definition, have a higher poverty level and a  
            higher concentration of extremely low-income or homeless  
            individuals and families, who typically need larger housing  
            subsidies.  Prior to 2014, TCAC was not allowed to award state  
            tax credits for projects located in DDAs and QCTs.  The  
            rationale for this prohibition was that projects in these  
            areas could qualify for more federal tax credits through a  
            basis "boost" and therefore are already advantaged.  State  
            law, however, was recently amended to authorize TCAC, in  
            limited cases, to award state LIHTCs for use in DDAs or QCTs,  
            in addition to the federal credits.  To qualify, a development  
            must restrict at least 50% of the units to special needs  
            households.  Projects that serve special needs populations  
            need greater subsidy in order to offer deeply affordable  
            rents.   
              


           6)The Financing Structure  .  In order to raise funds for  
            construction or rehabilitation of low-income housing  
            buildings, the project developers or housing sponsors usually  
            enter into various financing transactions with private  
            entities.  Investment partnerships are a primary source of  
            equity financing for LIHTC projects.  A typical arrangement is  
            to match a corporate tax credit investor with a project  
            developer or sponsor, creating a partnership (such as a  
            general partnership or a LLC) where the investor is allocated  
            the LIHTCs in exchange for cash and the developer acts as a  
            general partner (or managing member).  The money that  
            investors pay for the partnership interest is paid into the  
            LIHTC project as equity financing.  Although investors are  
            buying an interest in a rental housing partnership, this  
            process is commonly referred to as "buying" tax credits  
            because they receive tax credits in return for their  
            investment.  According to the TCAC report, partnership equity  
            contributed to the project in exchange for the credit usually  
            finances 30% to 60% of the capital costs of project  
            construction.   











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            The financing of a low-income housing building construction or  
            rehabilitation using the LIHTC, thus, requires the  
            participation of a private investor (mostly a taxable  
            corporation) that could take advantage of the credits to  
            reduce its income tax liability.   Once the LIHTC project is  
            placed in service, or ready for occupancy, investors can  
            receive their share of the federal and/or state credits each  
            year of the 10-year or 4-year credit period, whichever is  
            applicable, and can use the credit to offset federal or state  
            income taxes otherwise owed on their tax returns as long as  
            the project meets the LIHTC requirements. An investor must  
            retain ownership of the property (i.e. remain in the  
            partnership) for at least 15 years after the project is placed  
            in service in order to receive the full benefit of the tax  
            credits, or the tax credits will be subject to recapture.  

           7)Deficiency in Current Law  :  According to the California  
            Housing Partnership, California used more of the federal 4%  
            LIHTC than any other state during the early part of last  
            decade.  However, with the elimination of California's  
            redevelopment agencies and the exhaustion of state housing  
            bond funding, developers of low-income housing have been left  
            with very few resources to leverage the 4% credit.  As a  
            result, the number of newly constructed LIHTC units that have  
            been funded with the 4% credit has plummeted in the last two  
            years, from 4,000 in 2012 to fewer than 2,000 in 2014.   



          Existing state law prescribes two different tax credit rates -  
            30% and 13% - to calculate the amount of the state LIHTC.  The  
            first one is allowed for projects that are not federally  
            subsidized and, thus, qualify for the higher 9% federal LIHTC.  
             In contrast, federally subsidized projects that qualify only  
            for the 4% federal LIHTC receive the state LIHTC in the amount  
            equal to 13% of the project's qualified basis.  Furthermore,  
            no state credit may be allocated to a low-income housing  
            project located in a DDA or QCT if the project has received a  











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            federal LIHTC calculated on the 130% of eligible basis, unless  
            the state LIHTC is computed on 100% of the qualified basis or  
            at least 50% of the building's units are restricted to special  
            need occupants.  Thus, existing state law limits the  
            availability of the state LIHTC to projects located outside a  
            DDA or QCT, since they do not receive a federal "basis boost"  
            of 30% that is available to projects located in those areas.   
            However, the bill's proponents argue that developing housing  
            in these areas is inherently more expensive because of a  
            higher concentration of extremely low-income or homeless  
            individuals and families.
           8)What Does This Bill Do  ?  This bill would increase the state  
            LIHTC allocation by $300 million per year, in addition to the  
            existing $70 million cap, as adjusted for inflation.  While  
            increasing the total amount of state LIHTC, this bill proposes  
            to limit the new funding only to projects that qualify for the  
            4% federal LIHTC.  The projects that receive the 9% federal  
            LIHTC would still qualify for the state LIHTC, albeit the  
            annual amount of those state credits would remain at $70  
            million, as adjusted for inflation.  According to the  
            California Housing Partnership Corporation, the increase in  
            the amount of state LIHTC would allow the state to leverage an  
            additional $200 million in federal 4% LIHTC and at least $400  
            million in federal tax-exempt bond authority annually.  This  
            additional funding is intended to be used exclusively for the  
            construction, rehabilitation and preservation of affordable  
            rental homes for a broad range of lower income households  
            throughout the state.  The expectation is that an increase in  
            the amount of state LIHTC would help fill the gap in funding  
            that was created by the loss of redevelopment and the  
            exhaustion of state voter-approved bonds.  



          Furthermore, this bill would increase the amount of state tax  
            credits awarded to each qualified low-income housing project  
            from 13% to 50% of the qualified basis, provided the project  
            is also receiving a 4% federal tax credit.  This increase  
            would apply to new construction and rehabilitation costs of  











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            the project and would more than triple the amount of equity  
            that an investor in the project would receive, which would  
            bring the return on 4% credits in line with 9% credits and  
            would likely result in greater affordability for the project.   
            The costs of acquiring an existing low-income building would  
            also be eligible for the state LIHTC allocated from the new  
            additional funding of $300 million, but the applicable  
            percentage used to calculate the amount of that credit would  
            be limited to 13% of the project's qualified basis.  
            In addition, this bill would allow state tax credits to be  
            awarded to qualified projects without regard to DDA or QCT  
            status, with the main purpose of providing enough state tax  
            credits to match the value of a 9% federal tax credit.   
            However, to ensure a level playing field between DDA/QCT areas  
            and non-DDA/QCT areas, this bill would explicitly allow TCAC  
            to adjust the new higher state credit percentage downward for  
            projects in DDAs or QCRs to equalize the value of the state  
            credit available in the different areas. 



            Finally, this bill would significantly increase an amount of  
            state LIHTC - 95% of the qualified basis - that may be awarded  
            to a qualified low-income housing building that houses very  
            low-income or extremely low-income tenants and meets all  
            specified requirements, including the building's location,  
            age, and value. 
           9)Tax Incentives:  Do They Work  ?  Generally, advocates for tax  
            incentives, such as Arthur Laffer and N. Gregory Mankiw, argue  
            that reduced taxes allow taxpayers to invest money that would  
            otherwise be paid in taxes to better use, thereby creating  
            additional economic activity.  "Supply-siders" posit that  
            higher taxes do not result in more government revenue;  
            instead, they suppress additional innovation and investment  
            that would have led to more economic activity and, therefore,  
            healthier public treasuries under lower marginal tax rates.   
            Industry-specific credits complement this theory by lowering  
            tax costs for industries that provide positive multiplier  
            effects, such as stimulating economic activity among suppliers  











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            and increasing economy-wide purchasing power resulting from  
            hiring additional employees. 


            Critics, however, assert that tax incentives rarely result in  
            additional economic activity.  Companies locate in California  
            because of its competitive advantages, namely its environment,  
            weather, transportation infrastructure, access to ports,  
            highways, and railroads, as well as its highly skilled  
            workforce and world class higher education system.  These  
            advantages trump perceived disadvantages resulting from  
            California's tax structure and other policies.  Additionally,  
            critics argue that industry-specific tax incentives do not  
            actually affect business decisions; instead, enhanced credits  
            and deductions reward firms for investments they would have  
            made anyway.<2>  


            As noted by the Legislative Analyst Office (LAO) in the  
            presentation at this Committee's hearing "Assessing Tax  
            Expenditure Programs in Light of California's Fiscal  
            Challenges" on February 22, 2012, "Policymakers should regard  
            many TEPs [tax expenditure programs] evaluations with  
            skepticism."  The LAO further explained that, "Analysis of  
            alternative uses of public funds is difficult and often  
            omitted entirely from . . . studies [of TEPs].  These studies  
            also usually rely on extensive and sometimes subjective  
            assumptions which, if changed, can produce very different  
            results . . . .  It is rare that the value of TEPs can be  
            demonstrated conclusively compared to these alternate uses of  
            --------------------------


          <2> See, e.g., D. Neumark, J. Zhang, and J. Kolko, Are  
          Businesses Fleeing the State?   Interstate Business Location and  
          Employment Change in California, (a PPIC report showing that,  
          while California loses jobs due to firms leaving the state,  
          these losses have a minimal effect on the economy);  D. Neumark  
          and J. Kolko, Are California Companies Shifting Their Employment  
          to Other States? (finding that while California companies have  
          shifted jobs to other states, out-of-state firms have offset  
          these losses by hiring more in California).  








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            tax dollars.  If the Legislature wishes to use TEPs, despite  
            these challenges, it is important that TEPs be used  
            cautiously, structured carefully, and reviewed regularly to  
            consider if they operate in an effective and cost-efficient  
            manner."


           10)A Different Kind of Credit  ?  The LIHTC program induces  
            investment into low-income housing by sanctioning a tax  
            shelter structure that helps compensate private investors for  
            allocating capital to an asset class with a relatively poor  
            rate of return.  Low-income housing projects face many  
            barriers in California:  the high cost of land, labor, and  
            capitol, as well as state laws and policies protecting the  
            environment, among others.  In return for providing the LIHTC,  
            the state arguably gets more affordable housing.  

          This program is much different from other tax credits.  In  
            contrast to many tax incentives in California, the LIHTC is  
            targeted; capped at $70 million, as adjusted for inflation,  
            per calendar year; and is allocated to taxpayers by the TCAC  
            mostly on a competitive basis.  The TCAC evaluates the  
            applications and allocates the available funds to those  
            investors/developers who promise to produce the most housing  
            for the state's dollar.   Although the program is in the form  
            of a tax credit, all the participants behave virtually as  
            though they were dealing with an allocation of grant funds.   
            Thus, traditionally, the state LIHTC program, similarly to the  
            federal program, has been administered just as though it were  
            an allocated grant program.

          However, some opponents of the federal LIHTC program believe  
            that government subsidies to the supply of housing are not as  
            efficient as demand-based subsidies, and that the LIHTC  
            program is not efficient as compared with other subsidy  
            mechanisms.<3> They also argue that the equity capital raised  
            from investment generally comes from syndicates of individual  


          ---------------------------
          <3> See, e.g., Low-Income Housing Credit, L. E. Burman, Tax  
          Policy Center.










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            investors or from corporations, at a steep price.   
            Furthermore, because the credit is very complex and risky to  
            investors, investors require high after-tax rates of return.   
            Finally, the costs of the LIHTC include the costs of  
            administration by federal and state housing and tax agencies.   


           11)Suggested Amendments  .   This bill proposes to increase the  
            amount of state LIHTC from 30% to 95% of qualified basis for  
            certain projects serving very low-income or extremely  
            low-income households.  This increased credit amount is  
            intended to incentivize developers to develop or rehabilitate  
            existing buildings that are at least 15 years old.   
            Apparently, certain types of low-income housing buildings that  
            serve special needs or extremely low-income households are  
            difficult to develop or rehabilitate because of their low  
            appraised value.  The author may wish to clarify that the "low  
            appraised value" requirement must be satisfied regardless of  
            whether the project has received an insufficient state credit.  
             The author may also wish to consider technical amendments to  
            clarify the language relating to the calculation of an  
            applicable percentage in the case of a new or existing  
            building located in a DDA or a QCT.  

          REGISTERED SUPPORT / OPPOSITION:




          Support


          Betty T. Yee, California State Controller


          Bridge Housing


          California Apartment Association











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          California Bankers Association


          California Building Industry Association


          California Council of Community Mental Health Agencies


          California Infill Builders Federation


          California Special Districts Association


          California State Association of Counties


          Cities Association of Santa Clara County


          City of Banning, City Council


          City of Concord


          City of Lakewood


          City of Sacramento


          City of San Diego


          City of Thousand Oaks











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          Habitat for Humanity


          Mental Health America of California


          National Association of Social Workers, California Chapter


          San Diego County Apartment Association


          Santa Clara County Board of Supervisors


          California Chamber of Commerce







          Opposition


          None on file




          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098
















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