BILL ANALYSIS Ó SB 377 Page 1 Date of Hearing: July 1, 2015 ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT Ed Chau, Chair SB 377 (Beall) - As Amended June 1, 2015 SENATE VOTE: 38-1 SUBJECT: Income taxes: insurance taxes: credits: low-income housing: sale of credit SUMMARY: Allows a taxpayer who receives an allocation of state low- income housing tax credits (LIHTC) from the California Tax Credit Allocation Committee (TCAC) to sell all or any portion of the credit to one or more unrelated parties for each taxable year in which the credit is allowed for not less than 80% of the amount of the credit. Specifically, this bill: 1)Allows a taxpayer who receives an allocation of state LIHTC to sell all or any portion of the credit to one or more unrelated parties for each taxable year in which the credit is allowed for not less than 80% of the amount of the credit. 2)Provides that the taxpayer that originally received the credit must report to TCAC within 10 days of the sale of the credit to the social security or other taxpayer identification number of the unrelated party to whom the credit was sold, the face amount of the credit sold, and the amount of consideration SB 377 Page 2 received by the taxpayer for the sale of the credit. 3)Requires TCAC to annually provide the Franchise Tax Board with a list of the taxpayers that have sold or purchased a credit. 4)Allows a credit to be sold to more than one unrelated party but cannot be resold by the unrelated party to another taxpayer or other party. 5)Provides that the taxpayer that originally received the credit that is sold is solely liable for all obligations and liabilities imposed on the taxpayer with respect to the credit and not to the party to whom the credit was sold or subsequently transferred. 6)Allows the party that purchases a credit to utilize the credit in the same manner in which the taxpayer that originally received the credit could use it. 7)Provides that a taxpayer cannot sell a credit if the taxpayer was allowed the credit on any tax return of the taxpayer. 8)Allows a taxpayer with the approval of TCAC to rescind the election to sell all or any portion of the credit if the consideration of the credit falls below 80% of the amount of the credit after the TCAC reservation. 9)Allows the Franchise Tax Board to prescribe rules, guidelines, or procedures necessary or appropriate to implement the sale of credits by taxpayers who receives a credit, to an unrelated party. SB 377 Page 3 10)Removes the sunset on a provision that allows state credits to be allocated to investors in a manner that is different than the proportional division of the federal credit. EXISTING LAW: 1)Allows a state tax credit for costs related to construction, rehabilitation, or acquisition of low-income housing. This credit, which mirrors a federal LIHTC, may be used by taxpayers to offset the tax under the Personal Income Tax (PIT), the Corporation Tax (CT), and the Insurance Tax (IT) laws. (Revenue and Taxation Code Sections 12206, 17058, and 23610.5) 2)Requires the California Tax Credit Allocation Committee (TCAC) to allocate the California LIHTC each year based upon qualification of the applicant and proposed project. The California LIHTC is available only to projects that received an allocation of the federal LIHTC. (Revenue and Taxation Code Sections 12206, 17058, and 23610.5) 3)Limits the annual aggregate amount of the state LIHTC to $70 million, as adjusted for an increase in the California consumer price index from 2002, plus any unused LIHTC for the preceding calendar year and any LIHTC returned in the calendar year. The California LIHTC awarded may be claimed as a credit against tax over a four-year period. (Revenue and Taxation Code Sections 12206, 17058, and 23610.5) SB 377 Page 4 4)Requires TCAC to certify the amount of tax credit amount allocated. In the case of a partnership or an S Corporation, a copy of the certificate is provided to each taxpayer. The taxpayer is required, upon request, to provide a copy of the certificate to the Franchise Tax Board (FTB). (Revenue and Taxation Code Sections 12206, 17058, and 23610.5) 5)Allows any unused credit to be carried forward until the credit is exhausted. (Revenue and Taxation Code Sections 12206, 17058, and 23610.5) FISCAL EFFECT: According to the Senate Appropriations Committee, 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) requires additional resources as a result of the bill, fee revenue would likely be used. SB 377 Page 5 COMMENTS: Background : In 1986, the federal government authorized the LIHTC program to enable affordable housing developers to raise private capital through the sale of tax credits to investors. Two types of federal tax credits are available and are generally referred to as nine percent (9%) and four percent (4%) credits. In 1987, the legislature authorized a state LIHTC program to augment the federal tax credit program. State tax credits can only be awarded to projects that also receive federal LIHTCs, except for farmworker housing projects, which can receive state credits without federal credits. Investors can claim the state credit over four years. TCAC has authority for approximately $103 million in state tax credits each year but has as many as $25 million in credits remaining at the end of the year due to lack of demand. Projects that receive either state or federal tax credits are required to maintain the housing at affordable levels for 55 years. TCAC administers the programs and awards credits to qualified developers who do not have sufficient tax liability to use the credits themselves so they sell those credits to private investors who use the credits to reduce their federal or state tax liability. The developer in turn invests the capital into the affordable housing project. Under current law, the investors must become owners of the property to claim the credits. SB 377 would allow a developer who receives an award of state LIHTCs to sell the credits to an investor without requiring the investor to be part of the ownership entity for the project, typically a limited liability partnership. A developer could sell the tax credit to one or more unrelated parties if they received at least 80% of the value of the credit. The legislature has permitted taxpayers to sell tax credits in some SB 377 Page 6 limited cases. 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. SB 585 (Lowenthal) Statutes of 2008, Chapter 382 allowed the partnership agreement to allocate state tax credits to investors in a manner that differs from the proportional division of the federal credit. This authorization is set to sunset on January 1, 2016. SB 377 would delete the sunset and allow the authorization to continue indefinitely. CTAC 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 drawing additional investors and capital into the state. Affordable Housing Shortage : The Public Policy Institute of California has identified that more than 36% of mortgaged homeowners and 47% of all renters are spending more than 35% of their household incomes on housing. In California we have about 134,000 homeless people living in our streets, parks, alleys, and freeway off-ramps. At the same time vacancy rates are low and rents are increasing. Out of 5.1 million renters in California, 60% are in lower-income households, while one in four renter households are in the extremely low-income. One in two renters in California pay in excess of 30% of their income towards housing and one in four renters pay half of their income towards housing. The funding sources to support construction of affordable housing have drastically diminished over the last five years. The dissolution of redevelopment agencies eliminated up to $1 billion in funding that was available for affordable housing construction. The last statewide housing bond was approved in SB 377 Page 7 2008 and the proceeds of those bonds have been exhausted. State and federal LIHTC represent one of the few remaining sources of funding for affordable housing construction in the state. Currently, investors receive approximately .65 cents on the dollar for state low-income housing tax credits. 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. 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." SB 377 Page 8 Related legislation: AB 35 (Chiu) (2015): Would modify the existing LIHTC program and increases the aggregate credit amount that may be annually allocated to low-income housing projects by $300 million for the 2015 calendar year and each calendar year thereafter. This bill is pending hearing in the Senate Governance and Finance Committee. REGISTERED SUPPORT / OPPOSITION: Support California State Treasurer John Chiang (Co-Sponsor) California Housing Partnership Corporation (Co-Sponsor) Access to Independence Arthur J. Gallagher & Co. Burbank Housing Development Corporation Burbank Housing Management Corporation C&C Development Co. SB 377 Page 9 California Association of Housing Authorities (CAHA) California Association of Local Housing Finance Agencies (CAL-ALHFA) California Catholic Conference, Inc. California Coalition for Rural Housing (CCRH) California Commission on Aging (CCoA) California Housing Consortium (CHC) California Housing Partnership Corporation California Institute for Rural Studies California Land Title Association California Reinvestment Coalition Center for Sustainable Neighborhoods Charities Housing SB 377 Page 10 Chinatown Community Development Center Christian Church Homes (CCH) City Heights Community Development Corporation City of Morgan Hill Community Action North Bay (CAN-B) Community Economics Inc. Community Housing Partnership Creswell Consulting EAH Housing East Bay Asian Local Development Corporation East Bay Housing Organizations (EBHO) Eden Housing ElderFocus SB 377 Page 11 First Community Housing Housing California Housing Leadership Council of San Mateo County Integrity Housing Irvine Community Land Trust Leadership Council for Justice & Accountability LINC Housing MidPen Housing Corporation Mogavero Notestine Associates Monterey County Supervisor Jane Parker Mutual Housing California Non-Profit Housing Association of Northern California (NPH) Northern California Community Loan Fund SB 377 Page 12 Paulette Taggart Architects Peoples' Self-Help Housing Public Interest Law Project Rural Communities Housing Development Corporation (RCHDC) Rural Smart Growth Task Force San Diego Habitat for Humanity San Diego Housing Federation San Diego-Imperial Counties Labor Council San Luis Obispo County Housing Trust Fund Satellite Affordable Housing Associates (SAHA) Self-Help Enterprises Sierra Business Council Sonoma County Task Force for the Homeless SB 377 Page 13 Tenderloin Neighborhood Development Corporation Terrex Development Corp. The Hampstead Companies Wakeland Housing and Development Corporation ZO Dwellings Opposition None on file Analysis Prepared by:Lisa Engel / H. & C.D. / (916) 319-2085