BILL ANALYSIS Ó
SB 377
Page 1
Date of Hearing: September 11, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
SB 377
(Beall) - As Amended August 25, 2015
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|Policy |Housing and Community |Vote:|7 - 0 |
|Committee: |Development | | |
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| |Revenue and Taxation | |8 - 0 |
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Urgency: Yes State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill modifies the Low-Income Housing Tax Credit (LIHTC) to:
1)Allow taxpayers to sell credits to investors otherwise
eligible for LIHTCs for projects that receive preliminary
credit reservations on or after January 1, 2016, provided the
consideration received by the taxpayer equals at least 80% of
the credit amount, and requires the Tax Credit Allocation
SB 377
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Committee to administer credit sales, report relevant
information to the Franchise Tax Board (FTB), and reimburse
FTB for any costs incurred in relation to credit sales. The
bill allows initial purchasers of credits to resell them once,
so long as the secondary purchasers are also investors
otherwise eligible for LIHTCs.
2)Repeal the sunset date, making permanent the provisions of the
Low-Income Housing Tax Credit allowing credits to be allocated
within a partnership agreement differently than the federal
low-income housing tax credits.
FISCAL EFFECT:
1)Potentially significant administrative costs and FTB
reimbursement costs to the Tax Credit Allocation Committee
within the Office of the Treasurer, possibly funded with
additional fee revenue. Reimbursable administrative costs to
FTB are likely to be minor.
2)Estimated GF revenue increases of $170,000 and $450,000 in FY
2015-16 and FY 2016-17, respectively, as a result of timing
differences between realized credit sales, which results in
capital gains tax to the seller. Estimated GF revenue
decrease of $250,000 in FY 2017-18 as credit usage
accelerates. Over the long term, annual GF revenue decreases
estimated to reach $5.8 million by 2021 as accelerated credit
usage from sales is fully phased in.
COMMENTS:
1)Purpose. According to the author, this bill is intended to
increase the impact of the state's existing LIHTC program by
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allowing awardees to structure the credits in a manner to
attract lower federal taxation. The bill does not change the
overall credit amounts, and revenue impacts are only a result
of timing differences from the claiming of credits.
The author contends LIHTCs are a primary source of capital to
low-income housing developers. These developers are often
non-profits with no tax liability that seek partnership with
investors for their projects. Presently, LIHTCs may only be
claimed by investors that are owners in the projects, but
because state taxes are deductible from federal taxes, the
realized savings to investors is reduced by additional federal
tax owed. As a result, the author argues investors will
generally not invest more than 65 cents for each dollar of
state credit.
By allowing investors to sell the tax credits, SB 377 enables
investors to achieve a more favorable tax treatment because
the credits are treated as assets, not income, thereby
eliminating the federal income tax and subjecting the
investors only to capital gains tax. Consequently, the
credits sold could convert around 80% of the state's
investment into low-income housing investment instead of the
current 65%.
2)Low Income Housing Tax Credit. The LIHTC program incentivizes
investment into low-income housing by sanctioning a tax
shelter structure to compensate private investors for
allocating capital to an asset class with a traditionally poor
rate of return. Unlike many other tax incentives, the LIHTC
is capped and allocated by the Tax Credit Allocation Committee
on a competitive basis, comparable to a grant program,
focusing on the maximizing the total amount of affordable
housing created. Opponents argue, however, LIHTC programs are
not as efficient as demand-based subsidies, and require
complex financing structures that result in a high cost of
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capital.
3)A Very Small Step. The state LIHTC program augments the
federal program, authorizing state credits to be awarded only
to projects that have also received federal credits. The
state LIHTC program currently limits annual allocations to $70
million, adjusted for inflation. In 2014, total credits
available for allocation amounted to $103 million. AB 35
(Chiu), currently on the Suspense File of the Senate
Appropriations Committee, adds $300 million to that amount.
According to the California Housing Partnership, California
used more of the federal LIHTC before the elimination of
redevelopment agencies and the exhaustion of state housing
bond funding. As a result, the number of newly-constructed
LIHTC units that have been funded with this credit has fallen
from 4,000 in 2012 to under 2,000 in 2014. Yet the housing
shortage will remain problematic as demand continues to grow
relative to supply. Even with the changes to the tax credits
proposed in SB 377, and an additional $900 million in state
and federal funds available to incentivize housing under AB
35, both measures appear unlikely to fund the construction of
even 1% of the claimed 1.5 million unit affordable housing
shortfall.
4)Credit Sales. This bill allows the sale of LIHTCs, which is
not permitted under the federal credit nor permitted under
most all other state tax credits. While the efficiency of
LIHTCs may indeed be improved by allowing credit sales, for
most other tax credits, allowing sales will not improve credit
efficiency despite the ongoing attractiveness to some
recipients and brokers. Furthermore, allowing sales of LIHTCs
will still not make the credits as efficient as direct
subsidies, and it remains unclear whether the market will
actually support the artificial 80% price floor in this bill.
The Committee may wish to consider whether the precedent for
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tax credit sales and complications of federal non-conformity
are sufficiently outweighed by the efficiency gains possible
for LIHTCs.
5)Staff Comment. Given the unproven value of allowing LIHTCs to
be sold and the potentially adverse precedent created by
allowing credit sales generally, staff recommends including a
10-year sunset provision with reporting to the Legislature on
credit use and sales.
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081