BILL ANALYSIS                                                                                                                                                                                                    



                                                                     SB 873


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          Date of Hearing:  June 15, 2016


               ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT


                                  David Chiu, Chair


          SB  
          873 (Beall) - As Amended April 5, 2016


          SENATE VOTE:  39-0


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


          SUMMARY:   Allows a taxpayer who receives an allocation of state  
          low- income housing tax credits (LIHTC) from the California Tax  
          Credit Allocation Committee (TCAC)  to sell all or any portion  
          of the credit to one or more unrelated parties for each taxable  
          year in which the credit is allowed for not less than 80% of the  
          amount of the credit.  Specifically, this bill:  


          1)Allows a taxpayer to make an irrevocable election to sell all  
            or any portion of the state LIHTC to an unrelated party, as  
            defined, provided that the consideration received by the  
            taxpayer from the sale of the LIHTC equals at least 80% of the  
            credit amount.


          2)Defines an "unrelated party" as a taxpayer allowed either the  
            state or federal LIHTC in connection with a low-income housing  
            project in California. 









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          3)Requires the taxpayer to report to TCAC, within 10 days of the  
            sale of the credit, certain specified information regarding  
            the purchase and sale of the credit, as provided by TCAC.  


          4)Requires TCAC to provide an annual listing to the Franchise  
            Tax Board (FTB), in a form and manner agreed upon by TCAC and  
            FTB, of the taxpayers that have sold or purchased a LIHTC. 


          5)Applies to projects that receive a preliminary reservation  
            beginning on or after January 1, 2017, and before January 1,  
            2027.


          6)Allows a one-time resale of the LIHTC by an original purchaser  
            to an unrelated party, provided that all of the applicable  
            requirements and definitions are satisfied. 


          7)Specifies that a taxpayer that originally received the LIHTC  
            will remain solely liable for all obligations and liabilities  
            imposed on the taxpayer by law with respect to the credit,  
            none of which shall apply to any party to whom the credit has  
            been sold or subsequently transferred. 


          8)Prohibits a sale of a LIHTC if the taxpayer was allowed the  
            credit on any of his/her tax returns. 


          9)Allows the taxpayer who has made an election to sell a LIHTC,  
            with the approval of the Executive Director of TCAC, to  
            rescind this election if the consideration for the credit  
            falls below 80% of the amount of the credit after TCAC  
            reservation. 










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          10)Authorizes TCAC to prescribe rules, guidelines, or  
            procedures, as specified. 


          11)Requires TCAC to report to the Legislature, on or before  
            January 1, 2022, the total amount of credits allowed to, and  
            sold by, taxpayers, as specified, including a separate  
            accounting of credits sold to original purchasers by the  
            original investors and credits resold by the original  
            purchasers to secondary purchasers. 


          12)Reinstates provisions that sunset last year that allow a  
            partnership to allocate state LIHTC to investors, within the  
            partnership, in a manner that differs from the proportional  
            allocation of the federal LIHTC, by disconnecting the federal  
            tax rules that apply to partnerships, to which California  
            otherwise conforms. 


          13)Takes effect immediately as a tax levy. 


          EXISTING LAW:    





          1)Allows a state tax credit for costs related to construction,  
            rehabilitation, or acquisition of low-income housing.  This  
            credit, which mirrors a federal LIHTC, may be used by  
            taxpayers to offset the tax under the Personal Income Tax  
            (PIT), the Corporation Tax (CT), and the Insurance Tax (IT)  
            laws. (Revenue and Taxation Code Sections 12206, 17058, and  
            23610.5)

          2)Requires the TCAC to allocate the California LIHTC each year  
            based upon qualification of the applicant and proposed  








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            project.  The California LIHTC is available only to projects  
            that received an allocation of the federal LIHTC.  (Revenue  
            and Taxation Code Sections 12206, 17058, and 23610.5)



          3)Limits the annual aggregate amount of the state LIHTC to $70  
            million, as adjusted for an increase in the California  
            consumer price index from 2002, plus any unused LIHTC for the  
            preceding calendar year and any LIHTC returned in the calendar  
            year.  The California LIHTC awarded may be claimed as a credit  
            against tax over a four-year period. (Revenue and Taxation  
            Code Sections 12206, 17058, and 23610.5)





          4)Requires TCAC to certify the amount of tax credit amount  
            allocated.  In the case of a partnership or an S Corporation,  
            a copy of the certificate is provided to each taxpayer.  The  
            taxpayer is required, upon request, to provide a copy of the  
            certificate to the Franchise Tax Board (FTB). (Revenue and  
            Taxation Code Sections 12206, 17058, and 23610.5)



          5)Allows any unused credit to be carried forward until the  
            credit is exhausted. (Revenue and Taxation Code Sections  
            12206, 17058, and 23610.5)
          


          FISCAL EFFECT:  According to the Senate Appropriations  
          Committee, 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 increase to $2 million by  
          2021.








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          FTB would likely incur increased annual administrative costs in  
          the low hundreds of thousands of dollars (General Fund). To the  
          extent that the TCAC requires additional resources as a result  
          of the bill, fee revenue would likely be used. 





          COMMENTS:  


           Background  :  In 1986, the federal government authorized the  
          LIHTC program to enable affordable housing developers to raise  
          private capital through the sale of tax credits to investors.  
          Two types of federal tax credits are available and are generally  
          referred to as nine percent (9%) and four percent (4%) credits.  
          In 1987, the legislature authorized a state LIHTC program to  
          augment the federal tax credit program. State tax credits can  
          only be awarded to projects that also receive federal LIHTCs,  
          except for farmworker housing projects, which can receive state  
          credits without federal credits.   Investors can claim the state  
          credit over four years. TCAC has authority for approximately $70  
          million in state tax credits each year.  Projects that receive  
          either state or federal tax credits are required to maintain the  
          housing at affordable levels for 55 years.


          TCAC administers the programs and awards credits to qualified  
          developers who do not have sufficient tax liability to use the  
          credits themselves so they sell those credits to private  
          investors who use the credits to reduce their federal or state  
          tax liability. The developer in turn invests the capital into  
          the affordable housing project.  Under current law, the  








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          investors must become owners of the property to claim the  
          credits.  


          SB 873 would allow a developer who receives an award of state  
          LIHTCs to sell the credits to an investor without requiring the  
          investor to be part of the ownership entity for the project,  
          typically a limited liability partnership.  A developer could  
          sell the tax credit to one or more unrelated parties if they  
          received at least 80% of the value of the credit.  The  
          legislature has permitted taxpayers to sell tax credits in some  
          limited cases. 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.


          SB 585 (Lowenthal) Statutes of 2008, Chapter 382 allowed LIHTC  
          partnership agreements to allocate state tax credits to  
          investors in a manner that differs from the proportional  
          division of the federal credit.  This authorization sunset on  
          January 1, 2016.  SB 873 would reinstate that authorization and  
          allow it to continue indefinitely. TCAC reports that this  
          ability has been used several times and allows much more  
          flexibility for insurance companies and banks to invest in  
          low-income housing drawing additional investors and capital into  
          the state. 


           Affordable Housing Shortage  : The Public Policy Institute of  
          California has identified that more than 36% of mortgaged  
          homeowners and 47% of all renters are spending more than 35% of  
          their household incomes on housing. In California we have about  
          134,000 homeless people living in our streets, parks, alleys,  
          and freeway off-ramps. At the same time vacancy rates are low  
          and rents are increasing.  Out of 5.1 million renters in  
          California, 60% are in lower-income households, while one in  








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          four renter households are in the extremely low-income. One in  
          two renters in California pay in excess of 30% of their income  
          towards housing and one in four renters pay half of their income  
          towards housing.


          The funding sources to support construction of affordable  
          housing have drastically diminished over the last five years.  
          The dissolution of redevelopment agencies eliminated up to $1  
          billion in funding that was available for affordable housing  
          construction.  The last statewide housing bond was approved in  
          2008 and the proceeds of those bonds have been exhausted.

          State and federal LIHTC represent one of the few remaining  
          sources of funding for affordable housing construction in the  
          state. Currently, investors receive approximately .65 cents on  
          the dollar for state low-income housing tax credits.   
           
            Purpose of the bill  :  According to the author, "SB 873 seeks to  
          increase the impact of the state's existing 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.  








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          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 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."


           Previous legislation: 


           SB 377 (Beall) which was identical to this bill was vetoed by  
          the Governor last year. The veto message follows: 


            I am returning the following nine bills without my signature: 



            Assembly Bill 35
            Assembly Bill 88
            Assembly Bill 99
            Assembly Bill 428
            Assembly Bill 437
            Assembly Bill 515
            Assembly Bill 931
            Senate Bill 251
            Senate Bill 377

            Each of these bills creates a new tax credit or expands an  
            existing tax credit. 

            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  








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            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 deliberations.  
          Related legislation:


           AB 35 (Chiu) (2015):  Would modify the existing LIHTC program  
          and increases the aggregate credit amount that may be annually  
          allocated to low-income housing projects by $300 million for the  
          2016 calendar year and each calendar year thereafter. This bill  
          was vetoed by the Governor. 


          AB 2817 (Chiu (2016) Would modify the existing LIHTC program and  
          increases the aggregate credit amount that may be annually  
          allocated to low-income housing projects by $300 million for the  
          2017 calendar year and each calendar year thereafter. This bill  
          has been referred to the Senate Committee on Governance and  
          Finance and the Senate Committee on Transportation and Housing. 


           Double-referred:  SB 873 was also referred to the Committee on  
          Revenue and Taxation, where it will be heard should it pass out  
          of this committee.


          REGISTERED SUPPORT / OPPOSITION:




          Support










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          California State Treasurer John Chiang (Co-Sponsor)


          California Housing Partnership Association (Co-Sponsor)


          Association of Regional Center Agencies


          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 Los Angeles










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          City of San Jose


          City of Santa Monica


          League of California Cities


          North Los Angeles County Regional Center


          People's Self-Help Housing


          Santa Clara County Board of Supervisors


          SV@Home


          The Arc


          United Cerebral Palsy California Collaboration




          Opposition


          None on file




          Analysis Prepared by:Lisa Engel / H. & C.D. / (961)  
          319-2085








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