BILL ANALYSIS Ó
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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