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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