BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 377 (Beall) - Income taxes: insurance taxes: credits:
low-income housing: sale of credit
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|Version: April 29, 2015 |Policy Vote: GOV. & F. 7 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 11, 2015 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 377 would (1) allow taxpayers to sell low-income
housing tax credits, and (2) remove the program's sunset.
Fiscal
Impact: The Franchise Tax Board (FTB) estimates that the bill
would lead to General Fund revenue gains of $170,000 in 2015-16,
and $450,000 in 2016-17. A General Fund revenue loss of $250,000
would occur in 2017-18.
FTB would incur increased annual administrative costs in the low
hundreds of thousands of dollars (General Fund). To the extent
that the California Tax Credit Allocation Committee (CTCAC)
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requires additional resources as a result of the bill, fee
revenue would likely be used.
Background: Current federal law allows tax credits for investors who
provide project capital to low-income housing projects.
Taxpayers claim Low-Income Housing Tax Credits (LIHTCs) equal to
either 9 percent or 4 percent 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) allocates
the federal credits. CTCAC awards federal credits based on a
formula in federal law. 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 credits at a discount. Tax credits are generally equal
to 100 percent 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.
Generally, current law does not permit 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. In addition,
corporate taxpayers can share credits within their unitary
group.
Proposed Law:
This bill would allow a taxpayer to make an irrevocable election
to sell all or any portion of LIHTC to an unrelated party. The
taxpayer could not sell the credit in exchange for consideration
that is less than 80 percent 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
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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 FTB specified information, and is responsible for
all obligations and liabilities imposed by each tax law.
Taxpayers purchasing 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. Finally the
bill would remove the program's January 1, 2016 sunset.
Related
Legislation:
AB 35 (Chiu and Atkins, 2015) would modify the existing LIHC
to increase the annual amount that may be allocated. AB 35 is
pending before the Assembly Revenue and Taxation Committee.
AB 952 (Atkins, Chapter 771, Statutes of 2013), amended the
existing LIHC to allow the state's Housing Credits to be used
in a Difficult Area or Tract for projects that dedicate at
least 50 percent of the project's units to be reserved for
special needs populations as defined by the Committee
regulations, allow the committee to replace the federal
Housing Credit with a state Housing Credit of up to 30 percent
of a project's eligible basis, if the federal Housing Credit
is reduced in an equivalent amount, and to require the
Committee to determine what an equivalent amount of state
Housing Credit is necessary to replace the federal Housing
Credit a taxpayer would have received.
Staff
Comments: This program is much different than other tax credits
offered by the State, where any individual or businesses can
qualify by virtue of incurring specific costs such as research
and development or hiring specific individuals. The LIHTC
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induces investment in low-income housing by providing a tax
shelter for investors for allocating capital to an asset class
with a relatively lower rate of return. In return for providing
the tax shelter, the State expands it stock of low-income
housing beyond what would have happened on the natural.
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 concerning 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 their most effective use.
FTB's revenue estimate largely reflects timing differences in
how the credits would be used under the provisions of this bill
relative to current law. FTB estimates that 10 percent of the
credits would be sold each year. However, because credits sold
cannot be used until the building is put into service, the
acceleration of credit use relative to current law will not
begin until 2018, two years after the credit allocation. The
revenue impact of the accelerated credit usage would not be
fully phased in until taxable year 2021, since credits must be
taken over a four-year period. For credits that are sold, it is
assumed that the taxpayer would have additional capital gain
income, in the amount of 80 percent of the value of the credits
sold. This capital gain income must be claimed in the year the
credits are purchased, which results in a positive revenue
impact for the 2016 and 2017 taxable years. Combining the
accelerated credit usage (relative to current law) and the
offsetting capital gains tax, it is estimated the average annual
revenue loss for income and franchise tax would be approximately
$1 million in 2018, increasing to $5.8 million in 2021.
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