BILL ANALYSIS                                                                                                                                                                                                    Ó






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          |SENATE RULES COMMITTEE            |                        SB 377|
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                                   THIRD READING 


          Bill No:  SB 377
          Author:   Beall (D)
          Amended:  6/1/15  
          Vote:     21  

           SENATE GOVERNANCE & FIN. COMMITTEE:  7-0, 4/22/15
           AYES:  Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach,  
            Pavley

           SENATE APPROPRIATIONS COMMITTEE:  6-1, 5/28/15
           AYES:  Lara, Bates, Beall, Hill, Leyva, Mendoza
           NOES:  Nielsen

           SUBJECT:   Income taxes:  insurance taxes:  credits:   
                     low-income housing:  sale of credit


          SOURCE:    California Tax Credit Allocation Committee


          DIGEST:  This bill allows taxpayers to sell low-income housing  
          tax credits to unrelated taxpayers.


          ANALYSIS:   


          Existing law:


           1) Allows tax credits against the Personal Income Tax,  
             Corporation Tax, and Gross Premiums Tax for investors who  
             provide project capital to low-income housing projects, equal  








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             to either 9% or 4% of the project's basis over 10 years.   
             Taxpayers can begin claiming the credit in the taxable year  
             in which the housing project is placed in service, which must  
             remain affordable to residents for 55 years.  


           2) Directs the California Tax Credit Allocation Committee  
             (CTCAC), comprised of the State Treasurer, the State  
             Controller, the Director of Finance, and three non-voting  
             members, to allocate credits, including similar credits  
             against federal taxes authorized by federal law.  


           3) Allows the partnership agreements formed to construct  
             low-income housing projects to allocate the state tax credit  
             to investors in a manner that differs from the proportional  
             division of the federal credit by disconnecting federal tax  
             rules that apply to partnerships to which the state conforms  
             (SB 585, Lowenthal, Chapter 382, Statutes of 2008).  However,  
             this provision is due to sunset on January 1, 2016.


           4) Does not allow taxpayers to sell tax credits; however,  
             taxpayers with motion picture production credits from  
             independent films can sell the credit to unrelated investors.


           5) Allows taxpayers under the Corporation Tax Law to share  
             credits within their unitary group (AB 1452, Committee on  
             Budget, Chapter 763, Statutes of 2008).


          This bill:


           1) Allows a taxpayer receiving a preliminary reservation for a  
             credit on and after January 1, 2016, to make an irrevocable  
             election to sell all or a portion of the credit to one or  
             more unrelated party.


           2) Prohibits taxpayers from claiming any credit allowed on a  
             return by another taxpayer.  








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           3) Requires that consideration received in the sale for the  
             credit is not less than 80% of the credit amount, but allows  
             the Director of CTCAC to revoke the election if the  
             consideration amount falls below that level after CTCAC makes  
             the credit reservation.


           4) Requires the taxpayer originally receiving the credit to  
             report specified information to the Franchise Tax Board (FTB)  
             within 10 days of the sale, and ensures that the taxpayer  
             selling the credit is responsible for all obligations and  
             liabilities imposed by each tax law.


           5) Allows taxpayers purchasing credits to use them in the same  
             way the taxpayer originally receiving it can, but prohibits  
             any subsequent sales of the credit.


           6) Requires CTCAC to provide an annual listing to FTB of  
             taxpayers selling and purchasing credits, and to enter into  
             an agreement with FTB to pay any of its costs necessary to  
             administer the bill.


           7) Allows FTB to issue regulations necessary to implement this  
             bill, which are exempt from the Administrative Procedures  
             Act.  


           8) Applies its changes to each of the sections of law that  
             authorize the credit in the Gross Premiums Tax, Personal  
             Income Tax, and Corporation Tax.  


           9) Repeals the sunset on the taxpayer's ability to make  
             allocations of credits within the partnership agreement that  
             lack economic substance, thereby allowing state tax credits  
             to be allocated differently than federal ones.


           10)          Makes several technical, grammatical, and  
             conforming changes.







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          Comments


          The Low-Income Housing Tax Credit (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 projects than it otherwise would  
          have but for the credit.  Low-income housing projects often 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 must award  
          credits to projects in a competitive process based on an  
          evaluation of the most effective use of the tax credits, which  
          is much different than most other tax credits, where an  
          individual or businesses qualified for a credit by virtue of  
          incurring specific costs, such as research and development or  
          hiring specific individuals.  


          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%  
          of a project's eligible basis, or its cost less non-depreciable  
          items.  The value of the tax credits generally exceed the value  
          of the project capital supplied because current 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.


          In addition to allowing sales of LIHTCs, SB 377 makes permanent  
          the ability of partnership agreements to allocate state credits  







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          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.


          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No

          According to the Senate Appropriations Committee:

           FTB estimates that this 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 CTCAC requires additional resources as a result of  
            this bill, fee revenue would likely be used.


          SUPPORT:   (Verified5/29/15)


          California Tax Credit Allocation Committee (source)
          State Treasurer John Chiang
          Burbank Housing Management Corporation
          C&C Development Corporation
          California Association of Housing Authorities
          California Association of Local Housing Finance Agencies
          California Coalition for Rural Housing
          California Commission on Aging
          California Housing Partnership Corporation
          California Institute for Rural Studies
          California Land Title Association
          Charities Housing
          Chinatown Community Development Center
          Christian Church Homes
          City Heights Community Development Corporation







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          City of Morgan Hill
          Community Action North Bay
          Community Economics
          EAH Housing
          East Bay Asian Local Development Corporation
          East Bay Housing Organizations
          Eden Housing
          Housing California
          Integrity Housing
          Leadership Counsel for Justice and Accountability
          Linc Housing
          MidPen Housing Corporation
          Mogavero Notestine Associates
          Monterey County Supervisor Jane Parker
          Mutual Housing California
          Northern California Community Loan Fund
          Paulett Taggart Architects
          Peoples' Self-Help Housing 
          Public Interest Law Project
          Rural Communities Housing Development Corporation
          San Diego Habitat for Humanity
          San Diego Housing Federation
          San Diego-Imperial Counties Labor Council
          San Luis Obispo Housing Trust Fund
          Satellite Affordable Housing Associates
          Self-Help Enterprises
          Sierra Business Council
          Sonoma County Task Force for the Homeless
          Tenderloin Neighborhood Development Corporation
          Terrex Development Corporation
          The Hampstead Companies
          The Nonprofit Housing Association of Northern California
          Wakeland Housing and Development Corporation
          Two individuals


          OPPOSITION:   (Verified5/29/15)


          None received


          ARGUMENTS IN SUPPORT:      According to the author, SB 377 seeks  
          to increase the impact of the state's existing LIHTC with no  







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          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 existing 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.  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.



          Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119
          6/1/15 14:12:41


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