BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 873| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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 SB 873 Page 2 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 SB 873 Page 3 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 SB 873 Page 4 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, SB 873 Page 5 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 SB 873 Page 6 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 SB 873 Page 7 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 SB 873 Page 8 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 **** END ****