BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 1216 - Cedillo
Amended: April 5, 2010
Hearing: April 28, 2010 Tax Levy Fiscal: Yes
SUMMARY: Allows the California Tax Credit Allocation
Committee to Swap State Credits for Federal
Low-Income Housing Tax Credits, Up to 80% of
Eligible Basis.
EXISTING FEDERAL LAW allows tax credits for
investments in lo-income housing as defined. Tax credits
are computed based on 100% of a project's eligible basis,
or its cost less non-depreciable items, or 130% of eligible
basis if the project is located in a Qualified Census Tract
(QCT) or a Difficult to Develop Area (DDA). The eligible
basis may be reduced by the applicable percentage, a
measure of the amount of affordable units of floor space in
the project as a share of the entire project. Taxpayers
claim credits equal to 9% of the basis over 10 years, or a
floating percentage of currently approximately 4% for
projects funded by tax-exempt bond financing, and start
claiming the credit in the taxable year in which the
project is placed in service. Projects must remain
affordable to residents for 15 years.
EXISTING STATE LAW allows state tax credits against
the gross premiums tax, personal income tax, and
corporation tax for investments made in low-income housing
constructed in California, known as the Low-Income Housing
Tax Credit (LIHTC). Credits are computed in modified
conformity with similar credits authorized by federal law,
SB 1216 - Cedillo
Page 4
and allocated by the California Tax Credit Allocation
Committee (CTCAC) according to specified criteria, up to a
cap set in statute, which is currently around $71 million
per year. Generally, taxpayers receive a credit of 30% of
basis taken in the four years after the project is placed
service, with 9% granted in years one through three, and 3%
in the fourth year.
EXISTING LAW allows CTCAC to award federal credits to
projects, or state and federal credits to projects, but not
state-only projects, as a requisite amount of federal
credits ensures that the Internal Revenue Service's (IRS)
interest in maintaining the project's affordability over
the 15 year compliance period. IRS may recapture credits,
however, the Franchise Tax Board (FTB) does not; instead, a
party may bring suit in Superior Court to enforce the
project's affordability. CTCAC awards federal credits
based on a formula in federal law ($2.10 per capita for
each state). Additionally, CTCAC regulation allows CTCAC
to "force swap" state credits for federal credits when the
state has unused credits at the end of the year; CTCAC
subsequently awards the federal credits to a different
project. Projects willing to swap federal credits for
state credits receive bonus points on its application.
CTCAC is comprised of the State Treasurer, the State
Controller, and the Director of Finance. Three non-voting
members also sit on CTCAC.
THIS BILL amends the three sections of state law that
provide for LIHTCs to allows CTCAC to swap state credits
for federal credits in any year in which it has a surplus,
up to 80% of a project's basis. CTCAC may not exceed the
total credit allowable for a project under federal law.
FISCAL EFFECT:
FTB estimates that SB 1216 will have no fiscal impact
until the 2013-14 fiscal year, at which time the measure
results in revenue losses of $500,000 in that year and the
subsequent two fiscal years.
SB 1216 - Cedillo
Page 4
COMMENTS:
A. Purpose of the Bill
According to the Author, "SB 1216 would authorize the
California Tax Credit Allocation Committee, in any year in
which it has a surplus of state tax credits to be
allocated, with the approval of the applicant, to allocate
those credits in excess of the 30% to a new development and
reduce the amount of federal credits accordingly to ensure
that the combined amount of state and federal credit shall
not exceed the total credit allowable. SB 1216 would not
increase the total amount of federal or state tax credits
that the CTCAC is authorized to allocate to each project
under current law. It simply gives the CTCAC the ability to
tailor each credit package in response to economic factors.
By doing so, it would allow for more affordable housing
projects that have been delayed in 2 recent months, to
begin development, which will stimulate the local economy,
create jobs and increase tax revenues. Additionally, this
bill will save CTCAC (the State) valuable ARRA funds that
can be reallocated to other projects. SB 1216 would also
keep investors in the process and allow developers to be
less reliant on ARRA funds."
B. A Different Kind of Credit
The LIHTC induces investment into low-income housing
by providing a tax shelter for investors that helps
compensate private investors for 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 that it otherwise would have.
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. Accompanied by
$71 million each year in federal low-income-housing tax
SB 1216 - Cedillo
Page 4
credits, CTCAC allocates up to $80 million each year to
projects that must also be eligible for federal tax
credits. 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. This program 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,
and not on whether the credit actually affects a change in
behavior or results in a quantifiable public benefit.
Currently, housing sponsors form partnership
agreements with investors, who provide capital to fund the
housing construction in exchange for the allocated tax
credits. The tax credits exceed the value of the
investment because demand for the tax credits does not
currently meet supply. For example, a partnership
agreement may allocate 100% of tax credits to an investor
that provides 65% 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. State law now allows the
partnership agreement to allocate the state tax credit to
investors in a manner that differs from the proportional
division of the federal credit (SB 585, Lowenthal, 2008).
C. Holding it Down
SB 1216 expands a creative application of LIHTCs
currently practiced by CTCAC by regulation, which provides
a bonus during application evaluation for those applicants
that are willing to swap out state credits for federal
credits. In a swap, CTCAC takes federal credits from a
project whilst swapping in unused state credits, then
SB 1216 - Cedillo
Page 4
allocates the swapped out federal credits to additional
projects that did not receive allocations in that year.
However, current law caps the amount of state credit in any
project at 30% of basis, so only those projects allocated
less than the full amount of state credits are eligible for
the forced swap, and even then, CTCAC can only fill-in
state credits in up to the cap. SB 1216 allows CTCAC to
push-in to a project state credits left unallocated at the
end of they year, and pull-out federal credits to allocate
to other projects if the applicant approves, up to 80% of
basis. In an example provided to the Committee by CTCAC, a
project eligible for the 9% tax credits with an eligible
basis of $10 million would currently receive $1.17 million
in federal tax credits. Swapping up to the full 80% basis
would result in the project receiving $955,715 in federal
credits, and $3 million in state credits. Even with a swap
of up to 80%, the notional federal credit amount is only
25% less than before the swap, and likely significant
enough to keep the IRS sufficiently interested to enforce
the affordability of the project.
D. Soft Effects
Like many investments, demand for LIHTCs has suffered
in recent years. While corporate profits and tax liability
have lagged, diminishing the investor appetite for tax
credits to offset that liability, three key LIHTC customers
no longer invest in the credits. According to the New York
Times in January, 2009, the Federal National Mortgage
Association (FNMA or "Fannie-Mae) and the Federal Home Loan
Mortgage Corporation, also known as "Freddie-Mac," ceased
purchasing credits when the entities came under federal
conservatorship. Another large purchaser, Citigroup, has
also stopped buying credits, which when combined with the
government mortgage companies, previously comprised 35% of
investor demand for LIHTCs. With less demand for credits,
project applicants receive less project capital for each
tax credit, if they can find demand for the tax credits at
all.
SB 1216 - Cedillo
Page 4
SB 1216 is the most recent effort to change previous
rules to draw-in additional capital for low-income housing
projects by allowing CTCAC to swap-in state credits for
federal credits; the Legislature enacted SB 585, which
disconnected federal partnership rules to allow project
applicants to allocate state credits to investors separate
from federal credits, inducing potential investors with
state, but not federal, tax liability. While SB 1216 will
likely result in more investment more quickly in low-income
housing than without, diminishing interest in LIHTCs and
tax credits generally offers some consolation for the
state's beleaguered finances. LIHTCs are capped, but the
balance carries over to the next year, surely to be used
someday, but SB 1216 will likely accelerate the use,
possibly leaving the state with a little less "found money"
today.
E. Sunrise, Sunset
Given the current uncertainty in investor appetite for
LIHTCs, and that the Legislature limited SB 585's allowance
to disconnect federal partnership rules for LIHTCs until
January 1, 2016, the Committee may wish to consider
enacting an identical sunset date for SB 1216. The
Legislature could simultaneously evaluate SB 585 and SB
1216, then choose to reauthorize, expand, limit, or allow
the changes from the bills to sunset given the LIHTC market
conditions at that time.
Support and Opposition
Support:State Treasurer Bill Lockyer, Pacific West
Communities
Oppose:None received.
SB 1216 - Cedillo
Page 4
---------------------------------
Consultant: Colin Grinnell