BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 377|
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VETO
Bill No: SB 377
Author: Beall (D)
Amended: 9/11/15
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
SENATE FLOOR: 38-1, 6/2/15
AYES: Allen, Anderson, Bates, Beall, Berryhill, Block,
Cannella, De León, Fuller, Gaines, Glazer, Hall, Hancock,
Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson, Lara, Leno,
Leyva, Liu, McGuire, Mendoza, Mitchell, Monning, Moorlach,
Morrell, Nguyen, Pan, Pavley, Roth, Runner, Stone, Vidak,
Wieckowski, Wolk
NOES: Nielsen
NO VOTE RECORDED: Galgiani
SENATE FLOOR: 38-0, 9/11/15
AYES: Allen, Anderson, Bates, Beall, Berryhill, Block,
Cannella, De León, Fuller, Gaines, Galgiani, Glazer, Hall,
Hancock, Hernandez, Hertzberg, Hill, Hueso, Huff, Jackson,
Lara, Leno, Leyva, Liu, McGuire, Mendoza, Monning, Moorlach,
Morrell, Nguyen, Nielsen, Pan, Pavley, Roth, Runner, Stone,
Vidak, Wieckowski
NO VOTE RECORDED: Mitchell, Wolk
ASSEMBLY FLOOR: 79-0, 9/11/15 - See last page for vote
SUBJECT: Income taxes: insurance taxes: credits: low-income
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housing: sale of credit
SOURCE: State Treasurer John Chiang
DIGEST: This bill allows taxpayers to sell low-income housing
tax credits.
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 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.
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4) Does not, generally, 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 between January 1, 2016 and January 1, 2026, to
make an irrevocable election to sell all or a portion of the
credit to a taxpayer who claims either the federal or state
Low-Income Housing Tax Credit (LIHTC).
2) Prohibits taxpayers from claiming any credit allowed on a
return by another taxpayer.
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.
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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 the
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) Directs CTCAC to report to the Legislature regarding the
total amount of credits sold by taxpayers, including a
separate accounting of credits sold by original purchasers
and resales by original purchasers to secondary ones. The
report due January 1, 2021 applies to sales made in calendar
years 2016 to 2019, while the report due January 1, 2025
applies to credits sold between the 2016 and 2023 calendar
years.
11) Makes several technical, grammatical, and conforming
changes.
Comments
LIHTC induces investment in low-income housing by providing a
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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 limited sales of LIHTCs, SB 377 makes
permanent the ability of partnership agreements to allocate
state credits 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
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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 Assembly Appropriations Committee, this bill
results in 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, as well as 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.
SUPPORT: (Verified9/10/15)
State Treasurer John Chiang (source)
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: (Verified9/10/15)
None received
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ARGUMENTS IN SUPPORT: 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
GOVERNOR'S VETO MESSAGE:
I am returning the following nine bills without my
signature:
Assembly Bill 35
Assembly Bill 88
Assembly Bill 99
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Assembly Bill 428
Assembly Bill 437
Assembly Bill 515
Assembly Bill 931
Senate Bill 251
Senate Bill 377
Each of these bills creates a new tax credit or expands an
existing tax credit.
Despite strong revenue performance over the past few years,
the state's budget has remained precariously balanced due
to unexpected costs and the provision of new services. Now,
without the extension of the managed care organization tax
that I called for in special session, next year's budget
faces the prospect of over $1 billion in cuts.
Given these financial uncertainties, I cannot support
providing additional tax credits that will make balancing
the state's budget even more difficult. Tax credits, like
new spending on programs, need to be considered
comprehensively as part of the budget deliberations.
ASSEMBLY FLOOR: 79-0, 9/11/15
AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom,
Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang,
Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle,
Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina
Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez,
Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden,
Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder,
Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina,
Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen,
Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez,
Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting,
Wagner, Waldron, Weber, Wilk, Wood, Atkins
NO VOTE RECORDED: Williams
Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119
11/4/15 13:34:17
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