BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 873 (Beall) - Income taxes: insurance taxes: credits:
low-income housing: sale of credit
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|Version: April 5, 2016 |Policy Vote: GOV. & F. 7 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: April 18, 2016 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 873 would modify the existing Low-Income Housing
Credit, and allow the credit to be sold.
Fiscal
Impact: The Franchise Tax Board (FTB) estimates that the bill
would lead to a General Fund revenue gain of $300,000 in
2016-17. The bill would result in General Fund revenue losses of
$100,000 in 2017-18 and $700,000 in 2018-19. Losses would
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increase to $2 million by 2021.
FTB would likely 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.
Background: Current federal law allows tax credits for investors who
provide project capital to low-income housing projects.
Taxpayers claim Low-Income Housing Tax Credits (LIHTCs) equal to
either 9 percent or 4 percent 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. Projects must remain
affordable to residents for 55 years.
The California Tax Credit Allocation Committee (CTCAC) allocates
the federal credits. CTCAC awards federal credits based on a
formula in federal law. 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 percent of a project's eligible basis, or its cost less
non-depreciable items. CTCAC may allocate federal tax credits
to any area of the State, but must conduct a feasibility
analysis to ensure that the amount of credits granted doesn't
exceed the amount of capital needed to build the project.
Generally, current law does not permit taxpayers to sell 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. In addition,
corporate taxpayers can share credits within their unitary
group.
Proposed Law:
This bill would re-enact and make permanent prior law's
requirement that the LIHTC allocation to partners be based upon
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the partnership agreement, regardless of how the federal LIHTC
is allocated to the partners, or whether the allocation has
substantial economic effect, as specified. Additionally, the
bill would amend the LIHTC 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
specified requirements, including:
The taxpayer purchasing 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. This restricts the pool of potential
buyers only to those who currently or previously provided
project capital for other LIHTC projects in the State.
The taxpayer selling the credit must receive
consideration that is not less than 80 percent of its
value; however, CTCAC may revoke the election if the
consideration amount falls below that level after it 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.
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
credits cannot be subsequently resold. CTCAC must also
provide an annual listing to the FTB of taxpayers selling
and purchasing credits. CTCAC may also prescribe rules,
guidelines, or procedures necessary to carry out the bill,
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which are exempt from the Administrative Procedures Act.
Related
Legislation:
SB 377 (Beall, 2015) was substantially similar to this bill.
SB 377 was vetoed by Governor Brown.
AB 35 (Chiu and Atkins, 2015) would have modified the existing
Low-Income Housing Tax Credit program and increased the
aggregate credit amount that may be annually allocated to
low-income housing projects by $100 million for calendar years
2016 through 2021. AB 35 was vetoed by the Governor.
AB 952 (Atkins, Chapter 771, Statutes of 2013), amended the
existing LIHC to allow the state's Housing Credits to be used
in a Difficult Area or Tract for projects that dedicate at
least 50 percent of the project's units to be reserved for
special needs populations as defined by the Committee
regulations, allow the committee to replace the federal
Housing Credit with a state Housing Credit of up to 30 percent
of a project's eligible basis, if the federal Housing Credit
is reduced in an equivalent amount, and to require the
Committee to determine what an equivalent amount of state
Housing Credit is necessary to replace the federal Housing
Credit a taxpayer would have received.
Staff
Comments: This program is much different than other tax credits
offered by the State, where any individual or businesses can
qualify by virtue of incurring specific costs such as research
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and development or hiring specific individuals. The LIHTC
induces investment in low-income housing by providing a tax
shelter for investors for allocating capital to an asset class
with a relatively lower rate of return. In return for providing
the tax shelter, the State expands it stock of low-income
housing beyond what would have happened on the natural.
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 concerning the
environment, among others. Because the credit is capped and
allocated, CTCAC awards tax credits to projects on a competitive
process based on an evaluation of their most effective use.
FTB's revenue estimate largely reflects timing differences in
how the credits would be used under the provisions of this bill
relative to current law. FTB estimates that four percent of the
credits would be sold each year. However, because credits sold
cannot be used until the building is put into service, the
acceleration of credit use relative to current law will not
begin until 2018, two years after the credit allocation. The
revenue impact of the accelerated credit usage would not be
fully phased in until taxable year 2021, since credits must be
taken over a four-year period. For credits that are sold, it is
assumed that the taxpayer would have additional capital gain
income, in the amount of 80 percent of the value of the credits
sold. This capital gain income must be claimed in the year the
credits are purchased, which results in a positive revenue
impact for the 2016 and 2017 taxable years. Combining the
accelerated credit usage (relative to current law) and the
offsetting capital gains tax, it is estimated the average annual
revenue loss for income and franchise tax would be approximately
$400,000 in 2018, increasing to $2 million in 2021.
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