BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 377 |Hearing |4/22/15 |
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|Author: |Beall |Tax Levy: |Yes |
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|Version: |4/16/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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INCOME TAXES: CREDITS: LOW-INCOME HOUSING: SALE OF CREDIT
Allows taxpayers to sell low-income tax credits; removes sunset
on provisions allowing partnership agreements to allocate state
tax credits differently than federal ones.
Background and Existing Law
Current federal law allows tax credits against the Persona
Income Tax, Corporation Tax, and Gross Premiums Tax for
investors who provide project capital to low-income housing
projects. Taxpayers claim Low-Income Housing Tax Credits
(LIHTCs) equal to either 9% or 4% of the project's basis over 10
years, and start claiming the credit in the taxable year in
which the project is placed in service. Projects must remain
affordable to residents for 55 years.
The California Tax Credit Allocation Committee (CTCAC),
comprised of the State Treasurer, the State Controller, the
Director of Finance, and three non-voting members, allocates the
federal credits. CTCAC awards federal credits based on a
formula in federal law, currently $2.25 per capita for each
state. Housing developers design projects, and apply to CTCAC
for credits. CTCAC then reviews the application, and either
denies it or grants credits. The housing developer then forms
partnership agreements with taxpayers that provide project
capital for the low-income housing project in exchange for the
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credits at a discount. Tax credits are generally equal to 100%
of a project's eligible basis, or its cost less non-depreciable
items. CTCAC may allocate federal tax credits to any area of
the state, but must conduct a feasibility analysis to ensure
that the amount of credits granted doesn't exceed the amount of
capital needed to build the project. Additionally, state law
uniquely allows the partnership agreement to allocate the state
tax credit to investors in a manner that differs from the
proportional division of the federal credit (SB 585, Lowenthal,
2008). However, this provision is due to sunset on January 1,
2016.
Generally, California doesn't allow taxpayers to sell tax
credits; however, taxpayers with motion picture production
credits from independent films can sell the credit to unrelated
investors, which can be a key financing tool for filmmakers to
raise capital to produce a motion picture. Additionally,
corporation taxpayers can share credits within their unitary
group (AB 1452, Committee on Budget, 2008). Seeking additional
financing options, the State Treasurer wants to allow low-income
housing developers to sell tax credits to unrelated taxpayers,
and remove the sunset on provisions of the LIHTC allowing state
tax credits to be allocated differently than federal ones.
Proposed Law
Senate Bill 377 allows a taxpayer to make an irrevocable
election to sell all or any portion of LIHTC to an unrelated
party. The taxpayer cannot sell the credit in exchange for
consideration that is less than 80% of the credit's value, but
the director of CTCAC may revoke the election if the
consideration amount falls below that level after CTCAC makes
the credit reservation. The taxpayer originally receiving and
selling the credit can choose the method of documentation, and
can change the sale in any subsequent year if the sale is
expressly shown on a return. The taxpayer originally receiving
the credit must also report to the Franchise Tax Board specified
information, and is responsible for all obligations and
liabilities imposed by each tax law. Taxpayers purchasing
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credits can use the credit in the same way the taxpayer
originally receiving it can, but cannot subsequently sell it.
CTCAC must also provide an annual listing to FTB of taxpayers
selling and purchasing credits.
The measure also repeals the sunset on the taxpayer's ability to
make allocations of LIHTCs within the partnership agreement
without economic substance, thereby allowing state tax credits
to be allocated differently than federal ones.
The bill also makes several technical, grammatical, and
conforming changes.
State Revenue Impact
Pending.
Comments
1. Purpose of the bill. According to the author, "SB 377 seeks
to increase the impact of the state's existing low-income
housing tax credit (LIHTC) with no fiscal impact to the state by
structuring the credits in a way that is not subject to federal
taxation. LIHTCs are awarded to developers of qualified
projects and are the primary source of capital to construct and
rehabilitate thousands of affordable housing units each year.
Non-profit affordable housing developers, who do not have the
required tax liability on their own, must seek out private
equity investments for their developments. Under current law,
investors must become owners of the property to claim the
credits against their state tax liabilities. Due to the fact
that state taxes are deductible from federal taxes, a reduction
in the state tax liability increases the federal tax liability
for the investor. With the federal corporate tax rate at 35%,
investors will generally invest no more than 65 cents for each
dollar of state credit. SB 377 addresses this issue by allowing
a developer who is awarded state credits to sell the credits to
an investor without admitting the investor to the ownership
partnership and thereby increasing the value of the credit,
closer to one dollar for each dollar of credit, to the investor.
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SB 377 will significantly increase the value of state LIHTCs and
therefore the public benefit because it will largely eliminate
the federal tax impacts associated with investors claiming state
credits. It will also greatly increase the efficiency of the
program and allow many more affordable housing units to be built
for the same level of state tax expenditure. In other words,
this bill gives the state a bigger bang for its buck."
2. A different kind of credit . The LIHTC induces investment in
low-income housing by providing a tax shelter for investors for
allocating capital to an asset class with a relatively poor rate
of return. In return for providing the tax shelter, the state
gets more low-income housing than it otherwise would have.
Low-income housing projects face many barriers in California:
high costs of land, labor, and capital; resistance from local
residents and state and local laws and policies protecting the
environment, among others. Because the credit is capped and
allocated, CTCAC awards tax credits to projects on a competitive
process based on an evaluation of the most effective use of the
tax credits. This program is much different than other tax
credits, where any individual or businesses can qualify for a
credit by virtue of incurring specific costs such as research
and development or hiring specific individuals. Currently,
housing sponsors form partnership agreements with investors, who
provide capital to fund the housing construction in exchange for
the allocated tax credits. The tax credits exceed the value of
the investment because demand for the tax credits does not meet
supply. For example, a partnership agreement may allocate 100%
of tax credits to an investor that provides 75% of the necessary
project funding; the value of the discounted tax credits is
sufficient for investors to participate. Investors claim the
credit until exhausted, then walk away from the partnership, and
deduct the amount paid to the partnership in exchange for the
tax credits as a capital loss.
3. Gimme shelter . With the exception of the motion picture
production credit, California generally doesn't allow sales of
tax credits because it allows high-income taxpayers to buy down
their tax obligations. A taxpayer can shelter income from other
sources by purchasing credits at a discount that other
taxpayer's can't. However, as discussed above, Congress and the
Legislature designed LIHTCs as a tax shelter because it's hard
for these socially beneficial projects to attract capital. This
especially true after the end of redevelopment and the
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conservatorship of large institutional buyers in federal housing
authorities, so credit sales simply become another mechanism
that builds on existing ones to draw investment into a public
good.
4. Taxing . The IRS Chief Counsel Advised in 2011 that the
proceeds of sales of tax credits results in taxable income for
federal purposes, as nothing in federal law explicitly exempts
these sales from the Internal Revenue Code's definition of
income. California also conforms to this definition, which
would normally trigger a significant combined liability for
taxpayers selling tax credits under SB 377. However, because
most low-income housing developers are non-profit, tax-exempt
entities, they can sell tax credits without a tax implication.
5. Permanence . In addition to allowing sales of LIHTCs, SB 377
makes permanent the ability of partnership agreements to
allocate state credits differently than federal credits, which
is generally precluded by federal and state law guiding
partnerships. CTCAC reports that this ability has been used
several times, and allows much more flexibility for insurance
companies and banks to invest in low-income housing. CTCAC also
reports that this ability has drawn additional investors and
capital into the state. Allowing the ability to expire would
result in a reduction in demand, and thereby a loss of available
capital.
6. The sun also sets . One way to compel an assessment in the
future of SB 377's credit selling authority is to insert a
sunset provision, which repeals the law at a specified future
date. Those seeking to extend the law will have to convince a
future Legislature to extend the provision using information
gathered during the bill's effective period. The Committee may
wish to consider inserting a sunset provision into SB 377's
credit selling authority, much like a previous Legislature did
for the ability for partnership agreements to allocate state
LIHTCs from federal ones.
7. Technicals . Committee staff recommends technical amendments
to:
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Strike paragraph (2) in each section, as it conflicts
with recent amendments enacting an irrevocable election,
and
Require taxpayers to notify CTCAC of sales within ten
days.
Support and
Opposition (4/17/15)
Support : State Treasurer John Chiang, California Coalition for
Rural Housing, Charities Housing, Chinatown Community
Development Center, Community Action North Bay, Community
Economics, East Bay Asian Local Development Corporation, Housing
California, Integrity Housing, LINC Housing, the Nonprofit
Housing Association of Northern California, Northern California
Community Loan Fund, Peoples' Self-Help Housing,
Opposition : Unknown.
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