BILL ANALYSIS                                                                                                                                                                                                    





          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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