BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                     SB 377


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          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  








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            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. 









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          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)











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          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. 












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          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  








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          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  








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          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."









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           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.








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          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










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          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










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          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










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          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










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          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