BILL ANALYSIS                                                                                                                                                                                                    



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 35 (Chiu) - Income taxes:  credits:  low-income housing:   
          allocation increase
          
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          |Version: May 20, 2015           |Policy Vote: GOV. & F. 6 - 0,   |
          |                                |          T. & H. 10 - 0        |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 17, 2015   |Consultant: Robert Ingenito     |
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          This bill meets the criteria for referral to the Suspense File.




          


          Bill  
          Summary: AB 35 would (1) increase the amount of tax credits the  
          California Tax Credit Allocation Committee (CTCAC) can allocate,  
          (2) modify credit percentages, as specified, and (3) create a  
          new category of credit eligibility.


          Fiscal  
          Impact: 

                 The Franchise Tax Board (FTB) estimates that this bill  
               would result in General Fund revenue losses of $44 million  
               in 2015-16, $150 million in 2016-17, and $180 million in FY  







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               2017-18. FTB's administrative costs would not be impacted  
               by the bill.

                 CTCAC would incur first-year administrative costs of  
               $246,000, increasing potentially in the out years (special  
               funds). 


          



          Background: Current federal law allows tax credits for investors who  
          provide project capital to low-income rental housing projects.   
          Taxpayers claim Low-Income Housing Tax Credits (LIHTCs) equal to  
          either (1) 9 percent annually of the basis in a new building  
          (not federally subsidized), or (2) 4 percent annually of the  
          basis of an existing building (federally subsidized) over 10  
          years. Taxpayers can begin applying the credit in the taxable  
          year in which the project is placed in service, and projects  
          must remain affordable to residents for 15 years.  
          California also allows its own LIHTCs for investments made in  
          low-income housing constructed in California to complement the  
          federal credit.  Credits are computed in modified conformity  
          with federal law, but can only be claimed in fixed percentages  
          equal 30% of qualified basis over four years.  Under the state  
          credit, projects must remain affordable for 30 years.    


          CTCAC allocates both federal and state credits.  CTCAC awards  
          federal 9 percent credits for projects up to a cap set by  
          federal law, currently $2.30 per capita for each state; CTCAC  
          can allocate 4 percent credits without limit.  CTCAC also  
          allocates state credits of 30 percent of basis over four years  
          to 9 percent credit projects up to an amount equal to inflation  
          adjusted of the $70 million initially set in statute in 2001,  
          plus any unallocated credits from previous years, which equaled  
          $103 million in 2014.  CTCAC can allocate credits of 13 percent  
          of basis over four years for 4 percent credit projects, but can  
          only do some out of the same authorized amount as the 9 percent  
          credits.  Housing developers design projects, and apply to CTCAC  
          for both credits.  Should CTCAC approve the application and  
          grant the developer credits, he or she forms partnership  
          agreements with taxpayers that provide project capital in  








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          exchange for the credits at a discount.  


          CTCAC can award federal credits to a project, or state and  
          federal credits together, but cannot solely award state credits  
          to a project except for farmworker housing, because a threshold  
          amount of federal credits ensures that the Internal Revenue  
          Service's (IRS's) interest in enforcing the project's  
          affordability over the compliance period.  IRS may recapture  
          credits; however, FTB cannot.  Instead, CTCAC maintains an  
          enforcement staff to monitor affordability, and a party can  
          bring suit in Superior Court to enforce the project's  
          affordability.  


          Combining federal 9 percent credits with state credits generally  
          equals 100% of a project's eligible basis, or its cost less  
          non-depreciable items.  However, the eligible basis is reduced  
          by the applicable percentage, a measure of the amount of  
          affordable units of floor space in the project as a share of the  
          entire project. However, federal law also allows credits equal  
          to 130 percent of eligible basis if the project is located in a  
          Qualified Census Tract (QCT) or a Difficult to Develop Area  
          (DDA), a so-called "basis boost."  QCTs are designated by the  
          Secretary of the United States Department of Housing and Urban  
          Development (HUD) in which either 50 percent or more of the  
          households have an income that is less than 60 percent of the  
          area median gross income or has a poverty rate of 25 percent.   
          The Secretary of HUD also draws DDAs using a ratio of  
          construction, land, and utility costs to area median gross  
          income.  


          State law restricts CTCAC from allocating state credits in QCTs  
          or DDAs unless it swaps out federal credits willing to forgo the  
          "basis boost," so that the combined credit amount doesn't exceed  
          130 percent of basis.  Additionally, CTCAC regulation allows  
          CTCAC to swap state credits for federal credits for any  
          authorized project when the state has unused credits at the end  
          of the year; CTCAC subsequently awards the swapped out federal  
          credits to different projects.  Recently, the Legislature  
          modified this restriction to allow CTCAC to allocate state  
          credits when the project contains at least 50% of its occupants  
          are special needs households, currently defined in CTCAC  








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          regulations as developmentally disabled, are survivors of  
          physical abuse, are homeless, have chronic illness such as HIV  
          and mental illness, are displaced teenage parents (or expectant  
          parents) or another group as designated by CTCAC's executive  
          director (AB 952, Atkins, 2013).  The change allows these  
          projects to receive state credits of 30% of basis in addition to  
          federal ones generated on 130 percent of basis.  That measure  
          also codified CTCTAC regulation to swap an equivalent amount of  
          state credits for federal ones in any project, and makes  
          technical changes.




          Proposed Law:  
          This bill would amend the LIHTC program, increasing the  
          aggregate credit amount that may be allocated to low-income  
          housing projects by $300 million for the 2016 calendar year, and  
          by $300 million, adjusted for inflation, each calendar year  
          thereafter.  As a result, the program will authorize the  
          original $70 million, adjusted for inflation from 2001, plus the  
          additional $300 million, adjusted for inflation after 2015. In  
          addition, the bill would do the following:
                 Specify that a low-income housing project that has  
               received an award of 9 percent 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, as adjusted.


                 Modify the allocation of state LIHTC that may be awarded  
               to a project that has received an award of 4 percent  
               federal LIHTC to provide:


                  o         A cumulative state LIHTC of 50 percent of the  
                    qualified basis of the building over 4 years for new  
                    low-income housing.


                  o         A cumulative state LIHTC of 13 percent of the  
                    qualified basis of the building over 4 years for  
                    existing low-income housing; 









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                  o         In the case of a new or existing building that  
                    is located in a "difficult to develop area" or  
                    qualified census tract, as defined, and receiving a  
                    federal subsidy, the cumulative state LIHTC shall be  
                    reduced by the amount of federal subsidy such that the  
                    total subsidy is the same as it would otherwise have  
                    been under (a) or (b), respectively; and


                  o         A cumulative state LIHTC of 95 percent of the  
                    qualified basis of the building over 4 years for very  
                    low or extremely low income housing, that is at least  
                    15 years old, and could not complete the proposed  
                    rehabilitation absent the credits.




          Related  
          Legislation: AB 377 (Beall) would, among other things, amend the  
          LIHTC to allow the credit to be sold to an unrelated party. AB  
          377 is currently in the Assembly Revenue and Taxation Committee.


          Staff  
          Comments: Using LIHTC allocation data from CTCAC, FTB assumes  
          that the maximum credit allocation would be reached each year.  
          As the bill would authorize an additional $300 million in LIHTC  
          allocations, FTB assumes that five percent, or $15 million, of  
          the allocation would ultimately be returned to CTCAC resulting  
          from unforeseen project issues. Based on current credit awards  
          and usage, FTB estimates that 70 percent of the remaining annual  
          credits would be used to offset income and franchise taxes.  
          Further, FTB assumes that 75 percent of the credit would be used  
          in the year generated and the remaining 25 percent would be  
          carried forward to future years. Current usage indicates that 98  
          percent would be claimed by corporations and the remaining 2  
          percent would be claimed by personal income taxpayers. FTB  
          estimates that once fully phased in, the average annual revenue  
          loss would be approximately $190 million.











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