BILL ANALYSIS Ó
AB 771
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Date of Hearing: May 27, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
771 (Atkins) - As Amended May 12, 2015
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|Policy |Revenue and Taxation |Vote:|9 - 0 |
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Urgency: Yes State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill allows a tax credit under the personal income tax and
corporation tax laws, for taxable years beginning on or after
January 1, 2016 and before January 1, 2021, for qualified costs
paid or incurred by a taxpayer in rehabilitation of a certified
historic structure, in modified conformity with the federal
income tax laws, subject to an aggregate annual cap of $50
million. Specifically, this bill:
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1)Allows an income tax credit in an amount equal to 20% of the
qualified rehabilitation expenditures with respect to a
certified historic structure, defined as a structure located
in California that appears on either the National Register of
Historic Places or the California Register of Historic Places.
2)Increases the applicable percentage to 25% in the case of a
certified historic structure that meets specified criteria:
3)Allows an income tax credit, not more than once per taxpayer
every 10 taxable years, between $5,000 and $25,000 for
qualified rehabilitation expenditures for a residence, owned
and occupied as the taxpayer's principal residence, provided
the taxpayer's modified adjusted gross income is $200,000 or
less, but only if the residence is determined by the
California Tax Credit Allocation Committee (CTCAC) and the
Office of Historic Preservation (OHP) to have a public benefit
in the year of completion.
4)Requires that rehabilitation commence within 18 months of the
issuance of the tax credit allocation or else be forfeited,
and allows CTCAC to reallocate any forfeited amounts.
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5)Authorizes CTCAC to establish criteria and procedures for
applications and the allocation and certification of credits,
provide the Franchise Tax Board (FTB) with an annual list of
taxpayers who were allocated credits, and determine and
allocate an aggregate amount of the tax credits, and any
carryover of unallocated credits from prior years, subject to
specified allocation criteria:
6)Requires taxpayers to issue a cost certification for qualified
rehabilitation expenditures with the tax credit application,
including an independent certification from a licensed
certified public accountant for expenditures in excess of
$250,000.
7)Requires CTCAC to set aside $10 million of tax credits each
calendar year for taxpayers with qualified rehabilitation
expenditures of less than $1 million, but allows any unused
portion to be made available for other taxpayers.
8)Authorizes CTCAC to adopt a reasonable fee in an amount
sufficient to cover its expenses and the expenses of OHP to
administer the program.
9)Authorizes the taxpayer to carry forward the tax credit up to
seven years or until the credit is exhausted; allows the tax
credit to reduce the taxpayer's liability below the tentative
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minimum tax; requires the basis of the property to be reduced
by the amount of any historic preservation tax credit allowed;
and includes a five-year tax credit recapture provision when
the property, or interest in the property, is sold.
10)Provides the tax credit shall be allocated to the partners of
a partnership owning the project in accordance with the
partnership agreement, regardless of federal rules or economic
effect.
11)Requires the Legislative Analyst Office, beginning January 1,
2017, to collaborate with the CTCAC to review the
effectiveness of the historic building tax credit program; and
contains legislative findings and declarations relating to the
goals, purposes and objectives of the tax credit, as well as
performance indicators, as required by Section 41 of the
Revenue and Taxation Code (R&TC).
FISCAL EFFECT:
1)Likely significant costs to CTCAC and OHP to develop processes
and regulations to administer the program, some or all of
which may be recovered through application fees; potentially
significant costs to FTB to update systems and procedures.
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2)The bill creates an aggregate annual cap of $50 million of
credits, the effects of which will phase in over the first few
years of implementation. Estimated GF revenue decreases of
$19 million, $41 million, and $48 million in FY 2015-16, FY
2016-17, and FY 2017-18, respectively.
COMMENTS:
1)Purpose. According to the author, California is one of the
few states that do not provide an incentive for the
preservation of historic buildings. The author believes this
tax credit will help stimulate local economies, revitalize
downtown areas and communities, promote and increase the
supply of affordable housing, support smart growth and infill
development, encourage historic property rehabilitation, and
leverage federal tax credits. The author claims this activity
will increase construction jobs, encourage heritage tourism,
and increase tax revenues through higher employment, wages,
and property values.
2)Federal Historic Tax Credit. The Federal Historic
Preservation Tax Incentives Program was created in 1976 to
promote community revitalization and encourage private
investment through historic building rehabilitation. Over
39,600 projects to rehabilitate historic buildings have been
undertaken using the program's incentives. These projects
come in all sizes. The National Park Service reported that in
fiscal year 2013, almost 8% of the certified projects were
under $100,000, 46% were under $500,000, and the majority of
all projects - 59% - involved less than $1 million in costs.
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Housing has been the single most important use for
rehabilitated historic buildings under the federal program.
Over the past five years, between 36% and 69% of the projects
have included housing, and more than 130,000 of low- and
moderate-income housing units have been created under the
program.
To qualify for the federal historic preservation credit, the
structure must be individually listed on the national Register
of Historic Places or be certified as contributing to a
registered historic district, or for a lesser credit, be built
before 1936 and used for income-producing, non-residential
purposes. The developer must submit an application with
details of the rehabilitation plan to the Department of the
Interior for approval, and once completed must submit a
certificate of completion. A historic preservation credit is
then issued and usually must be claimed in the tax year in
which the building was placed in service. The federal rules
contain a "recapture provision" that requires a portion of the
credit to be repaid if the rehabilitated building is sold or
otherwise ceases to qualify within five years of being placed
into service.
3)Typical Rehabilitation Financing Structure. In many cases,
historic preservation and rehabilitation using the federal tax
credit and other tax and financial incentives is accomplished
through a partnership or joint venture structure. Developers
will often partner with third party investors, selling or
syndicating the tax credits to the investors in exchange for a
cash contribution to the venture. Investors may also be
allocated a share of profits over the minimum five year
holding period required to avoid recapture, while developers
charge fees and act as the managing partner, possibly taking a
portion of rents or profits from the building. At the end of
the five year holding period, the financing structure is
usually unwound and investors exit the partnership by selling
to the developer or another third party. This bill also
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ensures that any capital losses that may be claimed by a
selling investor are deferred until the period following the
expiration the federal credit.
4)Experience of Other States. 35 other states offer tax
incentives of various kinds for historic preservation and
rehabilitation projects, many of them similar to the federal
program. These state programs often seek to leverage the
federal tax credits, and studies have concluded those states
with the strongest credits regularly lead the nation in the
use of the federal credit. For example, an annual report of
the Ohio Historic Preservation tax credit program states 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. According to a 2011 economic
impact study conducted by Cleveland State University, the $246
million in approved tax credits is expected to result, during
the construction period alone, in nearly $10 billion in
economic activity in the state between 2007 and 2025.
Similarly, studies in Minnesota and North Carolina found that
every dollar of the state historic tax credit created $8.32
and $12.51, respectively, in economic activity.
5)Prior Legislation. This bill is nearly identical to AB 1999
(Atkins) of last year, which passed this committee but was
vetoed by the Governor. In his veto message, the Governor
noted that while he supported the policy goals of the bill,
its high cost was something that should be considered against
other spending priorities in the budget.
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081
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