BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 377| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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 SB 377 Page 2 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. SB 377 Page 3 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. SB 377 Page 4 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 SB 377 Page 5 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 SB 377 Page 6 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 SB 377 Page 7 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 **** END ****