BILL ANALYSIS                                                                                                                                                                                                    




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          |SENATE RULES COMMITTEE            |                        SB 873|
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                                   THIRD READING 


          Bill No:  SB 873
          Author:   Beall (D) 
          Amended:  4/5/16  
          Vote:     21 

           SENATE GOVERNANCE & FIN. COMMITTEE:  7-0, 3/30/16
           AYES:  Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach,  
            Pavley

           SENATE APPROPRIATIONS COMMITTEE:  6-0, 5/27/16
           AYES:  Lara, Bates, Beall, Hill, McGuire, Mendoza
           NO VOTE RECORDED:  Nielsen

           SUBJECT:   Income taxes:  insurance taxes:  credits:   
                     low-income housing:  sale of credit


          SOURCE:    State Treasurer John Chiang
                     California Housing Partnership Corporation

          DIGEST:   This bill allows low-income housing developers who  
          receive Low-Income Housing Tax Credit (LIHTC) to sell the  
          credits to other taxpayers under specified conditions.  


          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, in  








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             partial conformity with federal law.  Taxpayers can begin  
             claiming LIHTCs 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 state and federal LIHTCs 


           3) 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.


           4) 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  
             LIHTCs after January 1, 2016, to make an irrevocable election  
             in its application to CTCAC to sell all or a portion of the  
             credit.


           2) Requires, for the sale to be valid, that the purchaser of  
             the credit to also claim a state or federal LIHTC in  
             connection with a project in this state in the same taxable  
             year as the credit purchased, or any previous taxable year.    



           3) Requires, for the sale to be valid, that consideration  
             received in the sale is not less than 80% of the credit  
             amount, but allows the director of CTCAC to revoke the  








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             election if the consideration falls below that amount after  
             CTCAC makes the reservation.


           4) Allows an LIHTC purchaser to resell the credit once, subject  
             to all of the measure's requirements. 


           5) Prohibits taxpayers from claiming any credit allowed on a  
             return by another taxpayer.  


           6) Requires the taxpayer originally receiving the credit to  
             report specified information to CTCAC within 10 days of the  
             sale, and directs CTCAC to provide an annual listing of the  
             names of taxpayers selling and purchasing LIHTCs to the  
             Franchise Tax Board.


           7) Permits taxpayers purchasing credits to use them in the same  
             way the taxpayer originally receiving it can, but clarifies  
             that the taxpayer selling the credit is responsible for all  
             obligations and liabilities imposed by each tax law.


           8) Allows CTCAC to issue regulations necessary to implement the  
             bill, which are exempt from the Administrative Procedures  
             Act.


           9) Reenacts without a sunset provision authority for taxpayers  
             to allocate LIHTCs within the partnership agreement without  
             economic substance, thereby allowing state tax credits to be  
             allocated differently than federal ones.


           10)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. 


           11)Makes several technical, grammatical, and conforming  








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             changes.


          Background


          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 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 differs from most other tax credits, where an  
          individual or businesses qualify for a credit by virtue of  
          incurring specific costs, such as research and development.  


          Housing developers design projects, and apply to CTCAC for  
          credits.  CTCAC then reviews the application, and either denies  
          it or grants credits.  If approved, 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.


          With the exception of the motion picture production credit,  








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          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.  


          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, Chapter 382, Statutes of 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.


          Prior Legislation


          SB 873 is almost identical to the last version of SB 377 (Beall,  
          2015).  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  








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            deliberations.




          FISCAL EFFECT:   Appropriation:    No          Fiscal  
          Com.:YesLocal:   No


          According to the Senate Appropriations Committee, the Franchise  
          Tax Board (FTB) estimates that this bill would lead to a General  
          Fund revenue gain of $300,000 in 2016-17.  This bill would  
          result in General Fund revenue losses of $100,000 in 2017-18 and  
          $700,000 in 2018-19.  Losses would 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 CTCAC requires additional resources as a result  
          of this bill, fee revenue would likely be used.


          SUPPORT:   (Verified5/27/16)


          State Treasurer John Chiang (co-source) 
          California Housing Partnership Corporation (co-source) 
          Association of Regional Center Agencies
          Burbank Housing Development Corporation
          California Apartment Association 
          California Coalition for Rural Housing
          California Council for Affordable Housing
          California Economic Summit
          California Housing Consortium
          Cities Association of Santa Clara County
          City of Dublin
          City of Glendale
          City of Livermore
          City of San Jose
          City of Santa Monica
          League of California Cities








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          Mayor of Los Angeles, Eric Garcetti
          North Los Angeles County Regional Center
          Palm Communities
          People's Self Help Housing
          San Diego Housing Federation
          Santa Clara County Board of Supervisors
          SV@Home
          The Arc and United Cerebral Palsy California Collaboration  


          OPPOSITION:   (Verified5/27/16)


          None received


          ARGUMENTS IN SUPPORT:  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  








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          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."   


           

          Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119
          5/28/16 16:50:05


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