BILL ANALYSIS Ó SB 873 Page 1 Date of Hearing: August 3, 2016 ASSEMBLY COMMITTEE ON APPROPRIATIONS Lorena Gonzalez, Chair SB 873 (Beall) - As Amended June 27, 2016 ----------------------------------------------------------------- |Policy |Housing and Community |Vote:|6 - 0 | |Committee: |Development | | | | | | | | | | | | | |-------------+-------------------------------+-----+-------------| | |Revenue and Taxation | |9 - 0 | | | | | | | | | | | ----------------------------------------------------------------- Urgency: No State Mandated Local Program: NoReimbursable: No SUMMARY: This bill allows taxpayers to sell Low-Income Housing Tax Credits (LIHTCs) and extends the sunset date on provisions relating to the allocation of federal and state LIHTCs. 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 for SB 873 Page 2 projects that receive a preliminary reservation on or after January 1, 2017, and before January 1, 2020, subject to both of the following conditions: a) The consideration received by the taxpayer from the sale of the LIHTC equals at least 80% of the credit amount; and, b) The purchaser of the credit is a taxpayer allowed 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. 2)Allows an LIHTC purchaser to resell the credit once, subject to all of the applicable requirements. 3)Specifies that the 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. 4)Extends the sunset date the provisions allowing the state LIHTC to be allocated within the partnership agreement differently than federal LIHTCs to January 1, 2020. FISCAL EFFECT: GF revenue gain of $300,000 in 2016-17, and GF revenue losses of $100,000 and $700,000 in 2017-18 and 2018-19, respectively. COMMENTS: SB 873 Page 3 1)Federal LIHTC Program. The LIHTC is an indirect federal subsidy developed in 1986 to incentivize the private development of affordable rental housing for low-income households. The federal LIHTC program replaced traditional housing tax incentives, such as accelerated depreciation, with a tax credit that enables low-income housing sponsors and developers to raise project equity through the allocation of tax benefits to investors. Two types of federal tax credits are available, the 9% and 4% credits. These terms refer to the approximate percentage of a project's "qualified basis" a taxpayer may deduct from his/her annual federal tax liability in each of 10 years. For projects that are not financed with a federal subsidy, the applicable rate is 9%. For projects that are federally subsidized (including projects financed with more than 50% with tax-exempt bonds), the applicable rate is 4%. 2)State LIHTC Program. In 1987, the Legislature authorized a state LIHTC program to augment the federal program. While the state LIHTC program is patterned after the federal program, there are several differences, including a provision allowing investors to claim the state LIHTC over a four-year allocation period, rather than the federal 10-year. Furthermore, unlike the federal LIHTC program, the California LIHTC law requires project developers or housing sponsors to agree to a minimum of 55 years of rent and income restrictions. State tax credits can only be awarded to projects that have SB 873 Page 4 also received, or are concurrently receiving, an allocation of the federal LIHTCs. Federal law specifies that each state must designate a "housing credit agency" to administer the federal LIHTC program. In California, responsibility for administering the federal program is assigned to the California TCAC, which is comprised of the State Treasurer, the State Controller, the Director of Finance, and three non-voting members. TCAC allocates both federal and state LIHTCs through a competitive application process. The amount of state LIHTC that may be annually allocated by the TCAC is limited to $70 million, adjusted for inflation, plus any unallocated or unused credits from previous years. In 2015, the total state credit amount available for allocation was approximately $90 million (representing all four years of allocation), plus $5.5 million in farmworker state credit available for agricultural worker housing. The TCAC awarded approximately $123.1 million in state tax credits to 47 projects in 2015, including one farmworker state credit award of almost $1 million. 3)Housing partnership agreements and tax liability. Investment partnerships are a primary source of equity financing for LIHTC projects. A typical arrangement is to match a corporate tax credit investor with a project developer or sponsor, creating a partnership (such as a general partnership or a LLC) where the investor is allocated the LIHTC in exchange for cash and the developer acts as a general partner (or managing member). The money that investors pay for the partnership interest is paid into the low-income housing project as equity financing. Although investors are buying an interest in a SB 873 Page 5 rental housing partnership, this process is commonly referred to as "buying" tax credits because they receive tax credits in return for their investment. According to TCAC, this arrangement usually finances 30% to 60% of the capital costs of project construction. This structure of investors being able to claim state LIHTCs in exchange for part ownership of the project can also lead to adverse federal tax consequences for those investors. Specifically, because taxpayers can deduct their state taxes paid from their federal taxes, a state LIHTC can actually increase federal taxpayer liabilities. Because of these federal tax liabilities, the amount of tax credits an investor will receive often exceed the amount of investments actually made. 4)Purpose. According to the author, SB 873 will increase the value of state LIHTCs by eliminating the federal tax impacts associated with investors claiming the state LIHTCs. The author argues that allowing developers to sell their state LIHTCs to investors will make the state LIHTC more lucrative for these investors and allow them to invest more dollars into affordable housing projects. By selling their credits to other eligible taxpayers, investors can devote more resources to affordable housing projects without concern for federal tax liability. 5)Enacted Budget. This bill duplicates provisions in the enacted 2016-17 budget. The enacted budget modifies the state LIHTC to allow developers to sell the credit, with similar restrictions established by SB 873. SB 873 Page 6 Analysis Prepared by:Luke Reidenbach / APPR. / (916) 319-2081