BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | SB 873|
|Office of Senate Floor Analyses | |
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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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