BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
------------------------------------------------------------------
|Bill No: |SB 873 |Hearing |3/30/16 |
| | |Date: | |
|----------+---------------------------------+-----------+---------|
|Author: |Beall |Tax Levy: |Yes |
|----------+---------------------------------+-----------+---------|
|Version: |1/14/16 |Fiscal: |Yes |
------------------------------------------------------------------
-----------------------------------------------------------------
|Consultant|Grinnell |
|: | |
-----------------------------------------------------------------
Income taxes: insurance taxes: credits: low-income housing:
sale of credit
Allows taxpayers to sell low-income housing tax credits;
reenacts authority for partnership agreements to allocate state
tax credits differently than federal ones.
Background
Current federal law allows tax credits against federal taxes for
investors who provide project capital to low-income housing
projects. Taxpayers claim Low-Income Housing Tax Credits
(LIHTCs) equal to either 9% or 4% of the project's basis over 10
years, and start claiming the credit in the taxable year in
which the project is placed in service. State law also allows
credits against the Personal Income Tax, Corporation Tax, and
Gross Premiums Tax for the same projects. The credits are only
available for rental housing projects which remain affordable to
residents for 55 years, enforced by regulatory agreements
recorded against each project.
The California Tax Credit Allocation Committee (CTCAC),
comprised of the State Treasurer, the State Controller, the
Director of Finance, and three non-voting members, allocates
both federal and state credits. CTCAC awards a federal credit
based on a formula in federal law, currently $2.25 per capita
for each state, and a state credit up to a statutory cap
SB 873 (Beall) 1/14/16 Page 2
of ?
annually adjusted for inflation, plus any unallocated credits
from previous years. Housing developers design projects and
apply to CTCAC for credits, who then review 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 generally total 100% of a
project's eligible basis, or its cost less non-depreciable
items. CTCAC may allocate federal tax credit to any area of the
state, but must conduct a feasibility analysis to ensure that
the amount of credit granted doesn't exceed the amount of
capital needed to build the project.
From 2009 to 2016, state law allowed LIHTC partnership
agreements to allocate the state LIHTC to investors in a manner
that differs from the proportional division of the federal
credit (SB 585, Lowenthal, 2008), a unique departure from
federal partnership rules to which California conforms. These
rules generally require that any allocation from the partnership
to any of its members, such as income, losses, or tax credits,
must have "substantial economic effect," meaning that the
partnership's tax benefits must be proportionally allocated to
each partner according to his or her contribution to or
interests in the partnership relative to its other members.
Generally, California doesn't allow taxpayers to sell state tax
credits; however, 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. Additionally,
corporation taxpayers can share credits within their unitary
group (AB 1452, Committee on Budget, 2008). Seeking additional
financing options, the State Treasurer wants to allow low-income
housing developers to sell tax credits, and reenact the
authority for projects to allocate state tax credits differently
than federal ones.
Proposed Law
Senate Bill 873 amends the LIHTC for each tax to allow a
taxpayer to make an irrevocable election to sell all or any
portion of LIHTC to another taxpayer as part of its application
to CTCAC, subject to several requirements, including:
SB 873 (Beall) 1/14/16 Page 3
of ?
The taxpayer buying the credit is also allowed the
federal or state credit in connection with a project in
California in the same or a previous taxable year as the
credit they purchase, which restricts the pool of potential
buyers only to those who currently or in the past provided
project capital for other LIHTC projects in the state.
The taxpayer selling the credit must receive
consideration that is not less than 80% of the credit's
value; however, the director of CTCAC may revoke the
election if the consideration amount falls below that level
after CTCAC makes the credit reservation.
The taxpayer selling the credit must report specified
information to CTCAC within ten days of the sale.
The taxpayer selling the credit remains solely liable to
comply with statutes authorizing the LIHTC; the bill
explicitly exempts taxpayers purchasing the credits from
these requirements, but allows them to use the credit in
the same manner as the taxpayer who sold it.
The taxpayer cannot sell the credit if he or she claims
it on any return.
CTCAC issues the taxpayer a preliminary reservation on
or after January 1, 2016.
Taxpayers purchasing the credit can use the credit in the same
way the taxpayer originally receiving it can, and can sell to
more than one other party. Taxpayers who originally purchase
credits can resell them once, but after that, credits cannot be
subsequently resold. CTCAC must also provide an annual listing
to the Franchise Tax Board (FTB) of taxpayers selling and
purchasing credits. CTCAC may also prescribe rules, guidelines,
or procedures necessary to carry out the bill, which are exempt
from the Administrative Procedures Act.
The measure also reenacts without a sunset provision the
taxpayer's ability to make allocations of LIHTCs within the
partnership agreement without economic substance thereby
allowing state tax credits to be allocated differently than
federal ones.
SB 873 (Beall) 1/14/16 Page 4
of ?
The bill also makes several technical, grammatical, and
conforming changes.
State Revenue Impact
FTB estimates revenue gains of $300,000 in 2016-17, and revenue
losses of $100,000 in 2017-18, $700,000 in 2018-19, which
gradually increases to $2 million by 2021.
Comments
1. Purpose of the bill . According to the author, "SB 873 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 873 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 873 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.
SB 873 (Beall) 1/14/16 Page 5
of ?
In other words, this bill gives the state a bigger bang for its
buck."
2. A different kind of credit . The LIHTC induces investment in
low-income housing by providing a tax shelter for investors
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 than it otherwise would have.
Low-income housing projects 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 awards tax credits to projects on a competitive
process based on its evaluation of the most effective use of the
tax credits, which contrasts with other state tax credits, where
any individual or businesses can qualify for a credit by virtue
of incurring specific costs such as research and development.
Currently, housing sponsors form partnership agreements with
investors, who provide capital to construct the housing project
in exchange for the tax credits and an ownership stake in the
project. The tax credits can exceed the value of the investment
because tax credit demand exceeds 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, and
then walk away from the partnership, deducting the amount paid
to the partnership in exchange for the tax credits as a capital
loss.
3. Gimme shelter . With the exception of the motion picture
production credit, California generally doesn't allow sales of
tax credits, as sales allow high-income taxpayers to buy down
their tax obligations, often at a discount. A taxpayer with
available capital can buy an LIHTC to shelter income from other
sources from tax, whereas less sophisticated taxpayers cannot.
However, Congress and the Legislature designed LIHTCs in this
specific way because of the difficulty these socially beneficial
projects experience attracting available capital.
4. Taxing . The IRS Chief Counsel Advised in 2011 that the
proceeds of sales of tax credits results in taxable income for
federal purposes, as nothing in federal law explicitly exempts
these sales from the Internal Revenue Code's definition of
SB 873 (Beall) 1/14/16 Page 6
of ?
income. California also conforms to this definition, which
would normally trigger a significant combined liability for
taxpayers selling tax credits under SB 873. However, because
many low-income housing developers are non-profit, tax-exempt
entities, they can sell tax credits without a tax implication.
5. Permanence . In addition to allowing sales of LIHTCs, SB 873
resurrects the currently expired 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 several projects have
allocated capital using this authority, which adds much more
flexibility for insurance companies and banks to invest in
low-income housing. CTCAC also reports that this ability has
drawn additional investors and capital into the state, and
allowing this provision to remain expired would result in a
reduction in demand, and thereby a loss of available capital.
6. Do it again . SB 873 is almost identical to the last version
of SB 377 (Beall, 2015), which the Committee approved
unanimously last year. That measure was amended in the Assembly
Revenue and Taxation Committee to restrict the pool of potential
buyers to those taxpayers who currently or in the past claimed
state or federal EITCs, among other changes. However, Governor
Brown vetoed the bill, using the same veto message that he
issued for several other bills, stating:
"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."
7. Technical s. FTB and Committee Staff recommend the
following grammatical amendments:
On page 3, line 2, after "subject" insert "to"
SB 873 (Beall) 1/14/16 Page 7
of ?
On page 13, line 32, after "party" insert "or parties"
On page 27, line 3, after "party" insert "or parties"
Support and
Opposition (3/24/16)
Support : State Treasurer John Chiang, Association of Regional
Center Agencies, California Housing Partnership Corporation, The
Arc and United Cerebral Palsy California Collaboration, Santa
Clara County Board of Supervisors.
Opposition : Unknown.
-- END --