BILL ANALYSIS Ó
SB 377
Page A
(Without Reference to File)
SENATE THIRD READING
SB
377 (Beall)
As Amended September 11, 2015
Majority vote. Tax levy
SENATE VOTE: 38-1
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|Committee |Votes|Ayes |Noes |
| | | | |
| | | | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Housing |7-0 |Chau, Steinorth, | |
| | |Burke, Chiu, Beth | |
| | |Gaines, Lopez, Mullin | |
| | | | |
|----------------+-----+----------------------+--------------------|
|Revenue & |8-0 |Ting, Brough, | |
|Taxation | |Dababneh, Gipson, | |
| | |Mullin, Patterson, | |
| | |Quirk, Wagner | |
| | | | |
|----------------+-----+----------------------+--------------------|
SB 377
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|Appropriations |16-0 |Gomez, Bigelow, | |
| | |Bloom, Bonta, | |
| | |Calderon, Chang, | |
| | |Daly, Gallagher, | |
| | |Eduardo Garcia, | |
| | |Holden, Jones, Quirk, | |
| | |Rendon, Wagner, | |
| | |Weber, Wood | |
| | | | |
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SUMMARY: Allows taxpayers to sell Low-Income Housing Tax (LIHT)
credits, subject to certain requirements, and repeals the sunset
date on provisions relating to the allocation of the federal and
state LIHT credits to the partners of a partnership owning a
low-income housing project. Specifically, this bill:
1)Allows a taxpayer to make an irrevocable election to sell all
or any portion of the state LIHT credit to an unrelated party,
as defined, provided that the consideration received by the
taxpayer from the sale of the LIHT credit equals at least 80%
of the credit amount.
2)Defines an "unrelated party" as a taxpayer allowed either the
state or federal LIHT credit in connection with a low-income
housing project in California.
3)Requires the taxpayer to report to the California Tax Credit
Allocation Committee (TCAC), within 10 days of the sale of the
credit, certain specified information regarding the purchase
and sale of the credit, as provided by the TCAC.
4)Requires the TCAC to provide an annual listing to the
Franchise Tax Board (FTB), in a form and manner agreed upon by
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the TCAC and the FTB, of the taxpayers that have sold or
purchased a LIHT credit.
5)Applies to projects that receive a preliminary reservation
beginning on or after January 1, 2016, and before January 1,
2026.
6)Allows a one-time resale of the LIHT credits by an original
purchaser to an unrelated party, provided that all of the
applicable requirements and definitions are satisfied.
7)Specifies that a taxpayer that originally received the LIHT
credit will remain solely liable for all obligations and
liabilities imposed on the taxpayer by law with respect to the
credit, none of which shall apply to any party to whom the
credit has been sold or subsequently transferred.
8)Prohibits a sale of a LIHT credit if the taxpayer was allowed
the credit on any of his/her tax returns.
9)Allows the taxpayer who has made an election to sell a LIHT
credit, with the approval of the Executive Director of the
TCAC, to rescind this election if the consideration for the
credit falls below 80% of the amount of the credit after the
TCAC reservation.
10)Authorizes the TCAC to prescribe rules, guidelines, or
procedures, as specified.
11)Requires the CTCA to report to the Legislature, on or before
January 1, 2021, the total amount of credits allowed to, and
sold by, taxpayers, as specified, including a separate
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accounting of credits sold to original purchasers by the
original investors and credits resold by the original
purchasers to secondary purchasers.
12)Repeals the sunset date that applies to provisions allowing a
partnership to allocate state LIHT credits to investors,
within the partnership, in a manner that differs from the
proportional allocation of the federal LIHT credits, by
disconnecting the federal tax rules that apply to
partnerships, to which California otherwise conforms.
13)Takes effect immediately as a tax levy.
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 LIHT credit, may be used by
taxpayers to offset the tax under the Personal Income Tax, the
Corporation Tax, and the Insurance Tax laws.
2)Requires the California TCAC to allocate each year the
California LIHT credits based upon qualifications of the
applicant and proposed project. The California LIHT credit is
available only to projects that have received an allocation of
the federal LIHT credit.
3)Limits the annual aggregate amount of the state LIHT credit to
$70 million, as adjusted for an increase in the California
consumer price index from 2002, plus any unused LIHT credits
for the preceding calendar year and any LIHT credits returned
in the calendar year. The California LIHT credit awarded may
be claimed as a credit against tax over a four-year period.
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4)Requires TCAC to certify the amount of tax credit 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 FTB.
5)Allows, until January 1, 2016, partnerships formed to
construct low-income housing projects to allocate the state
LIHT credits to investors in a manner that differs from the
proportional allocation of the federal LIHT credits by
disconnecting federal tax rules that apply to partnerships, to
which California otherwise conforms.
FISCAL EFFECT: Unknown
COMMENTS:
1)The Author's Statement. The author has provided the following
statement in support of this bill:
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
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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.
2)Background: Federal LIHT Credit Program. The LIHT credit is
an indirect federal subsidy developed in 1986 to incentivize
the private development of affordable rental housing for
low-income households. The federal LIHT credit program
replaced traditional housing tax incentives, such as
accelerated depreciation, with a tax credit that enables
low-income housing sponsors and developers to raise project
equity through the allocation of tax benefits to investors.
Two types of federal tax credits are available: the 9% and 4%
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credits.<1> Each year, the Federal Government allocates
funding to the states for LIHT credits on the basis of a
per-resident formula. State or local housing authorities
review proposals submitted by developers and select projects
based on a variety of prescribed criteria. Only rental
housing buildings, which are either undergoing rehabilitation
or newly constructed, are eligible for the LIHT credit
programs. In addition, the qualified low-income housing
projects must comply with both rent and income restrictions.
Finally, credit projects must remain affordable for at least
30 years. However, in California, project developers or
housing sponsors must agree to a minimum of 55 years of rent
and income restrictions. Federal law specifies that each
state must designate a "housing credit agency" to administer
the federal LIHT credit program. In California,
responsibility for administering the federal program is
assigned to the California TCAC.
3)State LIHT Credit Program. In 1987, the Legislature
authorized a state LIHT credit program to augment the federal
program. Current state tax law generally conforms to federal
law with respect to the LIHT credit, except that it is limited
to projects located in California. While the state LIHT
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<1>
These terms refer to the approximate percentage of a project's
"qualified basis" a taxpayer may deduct from his/her annual
federal tax liability in each of 10 years. For projects that
are not financed with a federal subsidy, the applicable rate is
9%. For projects that are federally subsidized (including
projects financed more than 50% with tax-exempt bonds), the
applicable rate is 4%. Although the credits are known as the
"9% and 4% credits", the actual rates fluctuate every month,
based on the determination made by the Internal Revenue Service
on a monthly basis. Nonetheless, Congress has established the
minimum applicable percentage of 9% for allocations made for
non-federally subsidized new buildings before January 1, 2015.
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credit program is patterned after the federal program, there
are several differences, including a provision allowing
investors to claim the state LIHT credit over a four-year,
rather than the federal 10-year, allocation period. State tax
credits can only be awarded to projects that have also
received, or are concurrently receiving, an allocation of the
federal LIHT credits. The amount of state LIHT credit that
may be annually allocated by the TCAC is limited to $70
million, adjusted for inflation. In 2014, the total credit
amount available for allocation was $103 million (representing
all four years of allocation) plus any unused or returned
credit allocations from previous years. Because the LIHT
credit is capped and allocated, TCAC awards tax credits to
projects on a competitive basis. The TCAC evaluates the
applications and allocates the available funds to those
investors/developers who promise to produce the most housing
for the state's dollar. Although the program is in the form
of a tax credit, all the participants behave virtually as
though they were dealing with an allocation of grant funds.
4)What is the Problem with the Existing Ownership Structure?
Under existing California law, investors in a low-income
housing project must receive an ownership interest in the
partnership that develops the project in order to obtain a
LIHT credit in exchange for the equity investment. According
to the TCAC, the face amount of the state LIHT credits
allocated to an investor generally exceeds the value of the
investment. For example, a partnership agreement may allocate
100% of the state LIHT credits to an investor that in turn
provides only 65% of the necessary equity funding for the
project. Arguably, the discounted value attributable to the
state LIHT credits is due to the fact that a state tax credit
reduces the investor's state tax liability, which in turn
decreases the amount of deductions available to offset the
investor's federal tax liability. For example, a taxpayer who
has claimed a $10 state tax credit to reduce his/her state
income tax liability of $100 would pay less state income tax,
namely $90 instead of $100. However, his/her federal tax
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liability potentially may be increased because he/she will be
able to deduct only $90 worth of state tax instead of $100.
At the 35% federal tax rate, the value of a $100 deduction is
$35, whereas the value of a $90 deduction is only $31.50.
According to the author, with the federal corporate tax rate
of 35%, corporate investors are willing to pay no more than
$0.65 for each $1 of a state LIHT credit.
5)The Proposed Solution. This bill proposes to allow a project
developer to sell the state LIHT credit to any unrelated
person or entity, provided that the person or entity already
has an ownership interest in any low-income housing project in
California. As explained by the author, this bill would allow
the developer to convert the state LIHT credit into cash,
without tying the buyer to the specific project. From a tax
law perspective, the credit will be treated as an asset that,
if sold by the developer, would trigger only a capital gain
tax payable by the developer. Presumably, in the case of a
developer that is a non-profit entity, no tax will be due.<2>
Furthermore, the TCAC argues, the purchaser of the LIHT credit
will be able to deduct the full amount of the state tax
liability, plus the amount of the credit, in calculating the
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<2> It is unclear to Committee staff whether proceeds from the
sale of credits would or would not be treated as unrelated
business taxable income (UBTI). However, proponents have argued
that gains from the sale of property (like credits) by a
tax-exempt non-profit generally are exempt from UBTI treatment
unless one of the exceptions applies (e.g., if the property is
stock in trade, inventory, or held primarily for sale; or if the
property is debt-financed). If one of the exceptions applies,
the UBTI provisions still might not apply to the sale of the
credits, if, as the tax-exempt non-profit is likely to argue,
the sale of the credits constitutes a trade or business that is
substantially related to the non-profit's tax-exempt purposes.
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federal income tax liability.<3> Consequently, the value of
the state LIHT credit would be significantly enhanced to the
potential purchasers.
Analysis Prepared by:
Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN:
0002438
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<3> In reaching this conclusion, the California Housing
Partnership Corporation relies on the IRS Chief Counsel
Memorandum issued in 2004 with respect to a similar LIHT credit
program implemented in Massachusetts.