BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 622 - Lowenthal
Amended: May 21, 2009
Urgency
Hearing: June 10, 2009 Fiscal: Yes
SUMMARY: Retroactively Disconnects Federal Partnership
Rules for Low-Income Housing Tax Credits (LIHTCs)
awarded in 2008
EXISTING LAW allows state tax credits against the
gross premiums tax, personal income tax, and corporation
tax for low-income housing constructed in California, known
as Low-Income Housing Tax Credit (LIHTCs or "lee-teks").
Credits are computed in modified conformity with similar
credits authorized by federal law, and allocated to
low-income housing developers by the California Tax Credit
Allocation Committee (CTCAC) according to specified
criteria up to a cap set in statute ($85 million in 2009).
CTCAC is comprised of the State Treasurer, the State
Controller, and the Director of Finance. Three non-voting
members also sit on CTCAC.
EXISTING LAW provides that individual credit amounts
are based on when the housing was built, and whether it was
federally subsidized or at risk of conversion. The
taxpayer can also receive cash distributions from the
project operations. Projects constructed using these
credits are rent-restricted and must be occupied by a
certain percentage of low-income occupants
EXISTING FEDERAL LAW requires partnership agreements
to allocate income, gains, losses, deductions, or credits
in accordance with the partner's interest in the
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partnership if the agreement does not provide as to the
partner's distributive share or the allocation does not
have substantial economic effect. Tax experts generally
interpret this provision to mean that a partner may only
receive a tax credit based on his or her ability of a
partner to depreciate the building.
EXISTING LAW disconnects these federal partnership
rules to allow partnership agreements to allocate state
LIHTCs to partners regardless of the manner in which the
partnership agreement awards federal LIHTCs (SB 585,
Lowenthal, 2008). Effective for credits approved by CTCAC
on or after January 1, 2009, SB 585 allowed investors to
offset state tax incurred as a result of other economic
activity in exchange for the low income housing project
capital, thereby increasing the attractiveness of
low-income housing project investments to investors with
state tax liability but little to no federal liability.
This provision allows for partnership allocations of
credits normally precluded by federal law, which generally
provides that a tax credit in a partnership agreement would
be allowed only for the partner who has depreciation rights
to the building. Additionally, an LIHTC investor receives
a double benefit when he or she leaves the partnership with
negative basis in the investment, providing another offset
to other capital gains, although SB 585 required that the
capital loss be deferred until the tax year after the
federal credit expires when partnership agreement allocate
tax credits in violation of federal partnership rules,
delaying the double-benefit for ten years.
THIS BILL provides that partnership agreements may
allocate state LIHTCs to partners regardless of whether the
allocation has substantial economic effect for LIHTCs
allocated during the 2008 calendar year. The measure also
defers a partner's capital loss until the tax year after
the federal credit expires when partnership agreement
allocate tax credits in such a manner. The bill does not
allow similar treatment for any project for which final
closing has occurred before the bill's effective date
(which due to the bill's urgency clause, could be before
January 1, 2010). The measure amends sections of the Gross
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Premiums Tax, Personal Income Tax, and Corporation Tax
which authorize the LIHTC.
FISCAL EFFECT:
According to FTB, SB 622 results in no net revenue
effect as revenue losses created by disconnecting federal
partnership rules to the 2008 credits from 2011-15 of
approximately $250,000 per year are offset by revenue gains
associated with fewer residual credits for taxpayers to
claim.
COMMENTS:
A. Purpose of the Bill
According to the Author, "SB 585 (Lowenthal) of 2008
allowed for the bifurcations of state and federal
low-income housing tax credits awarded from 2009 to 2016,
meaning that an affordable housing developer who receives
the award may market the state and federal credits to
separate investors. Prior to SB 585, developers had to
seek an investor that had both significant state and
federal tax liabilities, which limited the pool of
potential investors and therefore reduced demand and
pricing for the credits. Bifurcation increases demand for
state low-income housing credits, resulting in more money
for affordable housing for the same level of state tax
credits.
SB 585 was not applied to state low-income housing tax
credits awarded in 2008 because it was assumed that these
deals would close before the bill took effect on January 1,
2009. As a result of the collapse of financial markets in
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October 2008 and the subsequent contraction of the
low-income housing tax credit market, however, the
developers of these projects are still seeking investors.
Given the extreme difficulty in finding investors at this
time, bifurcation may allow some 2008 projects to go
forward that otherwise would not."
B. A Different Kind of Tax Credit
Low-Income housing projects face many barriers in
California: high costs of land, labor, and capitol; other
investments that provide better returns; NIMBYism (Not In
My Back Yard); and state and local laws and policies
protecting the environment, to name a few. To address this
problem, lawmakers at the federal and state level crafted
the LIHTC, which functions differently from any other tax
credit due to the unique nature of the problem: a shortfall
of housing for individuals and families of moderate and low
incomes.
The LIHTC stands in stark contrast to other tax
credits, where a certain class of individuals or businesses
may claim a credit based on membership in a certain
industry or business location, functioning more like a
grant program than a typical tax credit. Because the
credit is capped and allocated, CTCAC awards tax credits to
projects on a competitive process based on an evaluation of
the most effective use of the tax credits. Investors
design projects in response to CTCAC's specified criteria
when seeking a tax credit, then CTCAC decides whether the
project proposals meet those standards, and allocates the
credit accordingly.
Currently, housing sponsors, often non-profit
organizations, form partnership agreements with investors,
who provide capital to fund the housing construction in
exchange for the allocated tax credits. First, the
developer designs a project based on CTCAC's criteria, then
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applies to CTCAC for the credit. If the application is
successful, CTCAC awards the taxpayer a reservation for the
credit. The taxpayer then forms partnership agreements
with private investors, who provide project capital so the
taxpayer can construct the housing project in exchange for
discounted tax credits.
SB 585 (Lowenthal, 2008) enhanced the value of state
tax credits by allowing investors to enter partnership
agreements where they can purchase state tax credits
without the corresponding federal credits. Under SB 585,
investors with no federal tax liability, but sufficient
state tax liability have an incentive to invest in a
low-income housing project, setting up a sanctioned tax
shelter that allows taxpayers to offset unrelated state
income tax liability with LIHTCs. For example, a
partnership agreement may give tax credits to an investor
to provide 99% of the necessary project funding, in
exchange for possibly a much smaller ownership share in the
project; the value of the tax credits to offset income from
another source is sufficient to draw interest from the
investor. With SB 585, the Legislature determined that the
benefits of increased project capital exceeded the tax
policy concerns of sanctioning a state tax shelter. SB 622
extends this treatment for credits CTCAC allocated last
year, but not yet used in a housing project, thereby
enhancing the value of the credits to possible future
investors.
C. Meet Me Half The Way?
In February, the Committee approved SB 16 (Lowenthal),
which contained provisions identical to SB 622. That
measure also changed LIHTCs from non-refundable to
refundable in certain years. The Senate Appropriations
Committee held the measure on its suspense file, and the
Author subsequently amended SB 622 to hopefully enact the
other half of SB 16.
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Support and Opposition
Support:Housing California
The Pacific Companies
Oppose:None Received
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Consultant: Colin Grinnell