BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 35 (Chiu) - Income taxes: credits: low-income housing: allocation increase ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 20, 2015 |Policy Vote: GOV. & F. 6 - 0, | | | T. & H. 10 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 17, 2015 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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 AB 35 (Chiu) Page 1 of ? 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 AB 35 (Chiu) Page 2 of ? 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 AB 35 (Chiu) Page 3 of ? 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; AB 35 (Chiu) Page 4 of ? 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. AB 35 (Chiu) Page 5 of ? -- END --