BILL ANALYSIS Ó
AB 624
Page 1
Date of Hearing: May 2, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 624 (John A. Perez) - As Amended: March 31, 2011
VOTE ONLY
Majority vote. Fiscal committee.
SUBJECT : California Organized Investment Network: tax credit
program.
SUMMARY : Extends the operation of the Community Development
Financial Institution (CDFI) tax credit program for qualified
investments made by insurance companies, corporations, or other
taxpayers into a CDFI, as provided. Specifically, this bill :
1)Extends the existing CDFI tax credit provisions, from January
1, 2012 until January 1, 2017, that allow a credit to a
taxpayer against the insurance gross premiums tax, personal
income or corporation tax, in an amount equal to 20% of each
qualified investment made by the taxpayer during the taxable
year in a CDFI that is certified by the California Organized
Investment Network (COIN) of the Department of Insurance.
2)Requires the Insurance Commissioner to create and appoint a
COIN Advisory Board with the duty to advise on the best
methods to increase the level of insurance industry capital in
safe and sound investments while providing fair returns to
investors and social benefits to underserved communities.
EXISTING LAW:
1)Authorizes a credit against the insurance gross premiums tax,
personal income or corporation tax, in an amount equal to 20%
of a qualified investment made into a CDFI, not to exceed in
the aggregate amount $10 million per calendar year.
2)Defines "qualified investment" as an investment that is a
deposit or loan that does not earn interest, or an equity
investment, or an equity-like debt instrument meeting federal
or state agency standards. The duration of the investment
must be for 60 months or more and the amount must equal
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$50,000 or more.
3)Defines a "community development financial institution" as a
private financial institution located in California that is
certified by the COIN Office of the Department of Insurance,
that has community development as its primary mission, and
that lends in urban, rural, or reservation communities in this
state. The term "CDFI" includes a community development bank,
a community development loan fund, a community development
credit union, a microenterprise fund, a community development
corporation-based lender, and a community development venture
fund.
4)Limits the annual certification of total qualified investments
made by all taxpayers to all CDFIs to $10 million for each
calendar year, but if the qualified investments are less than
that amount in one year, the difference may be carried over to
future years.
5)Provides that the amount of total qualified investments
certified in any calendar year from any one CDFI cannot exceed
the lesser of $10 million or 40% of the aggregate qualified
investments authorized.
6)Requires that, until July 1 of each year, 25% of the aggregate
qualified investment amount be reserved for investments by
admitted insurers, but permits the Insurance Commissioner to
announce a different amount via regulations.
7)Requires that, until July 1 of each year, $3 million of the
aggregate qualified investment be reserved for investments by
individuals in amounts not to exceed $300,000, but permits the
Insurance Commissioner to announce a different amount via
regulations.
8)Allows a carryforward of the unused credit up to four taxable
years.
9)Requires the Legislative Analyst, on or before December 31,
2010, to prepare an analysis of the tax credits investments
made, including the credits' fiscal impact, the explanation of
programs, projects, and other uses funded or carried out by
CDFIs and supported, in whole or in part, by the tax credit
investments, and the resulting benefits to economically
disadvantaged communities.
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10) Repeals the CDFI tax credit effective January 1, 2012.
FISCAL EFFECT : The staff at the Franchise Tax Board (FTB)
estimates that the income tax provisions of this bill will
result in an annual revenue loss of $200,000 in fiscal year (FY)
2011-12, $420,000 in FY 2012-13, $450,000 in FY 2013-14, and
$450,000 in FY 2014-15. These estimates do not include the
revenue impact of the tax credit allowed against the insurance
gross premiums tax.
COMMENTS :
1)Author's Statement . The author states that, "Community
development investments make sound business sense and provide
solid returns while bringing much needed capital to low-income
communities. These investments are leveraged to provide loans
such as small business loans, mortgage loans, and construction
loans. More than $100 million has been invested into some of
California's most under-served communities from 1997 through
2009."
2)Arguments in Support . The sponsor of this bill states that,
"COIN's goal is to help address unmet capital needs supporting
economic development and affordable housing in or benefitting
low-income urban and rural people or communities in
California, either directly, or through fiscal
intermediaries," and that, through the CDFI tax credit
program, more than $100 million has been invested into some of
California's most under-served communities. The proponents of
this bill give an example of a Los Angeles-based financial
development corporation that "received a $500,000 COIN
investment from a bank and was able to leverage that
investment into $3.9 million in small business loans to 40
borrowers, 60% of whom are located in low-moderate income
communities." The proponents also assert that, "Ýt]he state's
small investment in this program helps leverage far more for
our state," promotes development projects of special benefit
to seniors and assists "persons in low income communities to
secure financing for economic development and affordable
housing."
3)Background: The COIN Program . The COIN Program was created
in 1996 as a public-private partnership by the Department of
Insurance, the insurance industry, state government leaders,
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and community development organizations with the goal of
helping to address the unmet capital needs for economic
development and affordable housing in low-income urban and
rural communities throughout California. This voluntary
program was established at the request of the insurance
industry, "as an alternative to state legislation that would
have required insurance companies to invest in low-income
urban and rural communities, similar to the federal Community
Reinvestment Act (CRA) that applies to the banking industry."
(Insurance Commissioner Urges California Insurers to Invest in
Low-Income Communities, Press Release, August 6, 2001). The
COIN program serves as a liaison between insurers that are
seeking investment opportunities and the community
organizations that are seeking investment capital for
projects. CDFIs work with COIN - an office within the
California Department of Insurance - as financial
intermediaries providing access to credit, loans, and
investments to small businesses and non-profits that serve
economically disadvantaged communities. CDFIs also offer
administrative and technical assistance in these low-income
communities. Generally, CDFIs lend to borrowers that do not
satisfy the criteria for conventional lenders and focus on a
particular community or certain groups of people.
4)The CDFI Tax Credit Program . The existing state law provides,
until January 1, 2012, for the CDFI tax credit, which allows
taxpayers to claim a credit equal to 20% of each qualified
investment made in a specified private financial institution
located in California - a CDFI - that has been certified by
the COIN as eligible. The COIN must certify each CDFI and
each qualified investment. A CDFI, among other requirements,
must apply to COIN for certification of its status and, on
behalf of a taxpayer, for certification of the credit amount
allocated to the taxpayer. The COIN office generally approves
applications on a first-come, first-served basis, although it
has some discretion in certifying CDFIs. Currently, 81 CDFIs
are certified by COIN as eligible to participate in the tax
credit program. The COIN is required to provide the FTB,
which is charged with administering the state income tax laws,
with an annual list of taxpayers, their identification
numbers, the amount of their investments and the total amount
of all qualified investments.
The goal of the CDFI tax credit program is to provide incentives
to attract private capital investments that otherwise would
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not be available to CDFIs. This tax credit may be claimed by
taxpayers against the insurance gross premium tax, the state
corporation tax, or the state personal income tax. The
statewide amount of the credit for all recipients is capped at
$2 million per year for the three taxes combined. Thus, each
year qualified investments up to $10 million are eligible to
receive the tax credits. However, if less than $10 million is
invested in qualified CDFIs in any calendar year, the
remaining amount may be carried over to the next year and any
succeeding year during which the credit remains in effect.
The credit is subject to a 60-month recapture period if the
investment is reduced or withdrawn. According to the FTB's
tax expenditure report, the total amount of credit claimed
under the Corporation Tax (CT) and the Personal Income Tax
(PIT) Laws in 2007 was $52,000, and was allowed on 48 PIT and
3 CT tax returns. As stated in the COIN report dated January
10, 2011, approximately $1.65 million in qualified investments
have been approved by the COIN and $330,000 of the tax credits
have been certified for the 2010 calendar year. The total
remaining amount of investment still available for 2010
calendar year is $13.7 million, which translates into over
$2.75 million of tax credits available for certification.
Most investments that qualify for the CDFI tax credit also
qualify for the federal New Markets tax credit. Furthermore,
those investments may also qualify for the low-income housing
tax credit and/or the enterprise zones (EZs) and targeted tax
areas deductions. The low-income housing tax credit and EZ
zone programs are state tax programs that are also intended to
generate new investment and economic activity in targeted
communities.
5)Federal "New Markets" Tax Credit Program . Existing federal
law provides for a "new markets" tax credit that permits
individuals and corporate taxpayers to receive a credit
against their federal income taxes for making equity
investments in investment vehicles known as Community
Development Entities (CDEs). The primary mission of a CDE is
to serve, or provide investment capital for, low-income
communities or low-income persons, as specified. The federal
credit amount is equal to 39% of the qualified equity
investment, and is spread over seven years. Thus, in each of
the first three years, the federal credit amount is equal to
5% of qualified contributions and, in each of the remaining
four years, the amount of credit is increased to 6% of
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qualified contributions. The Department of the Treasury
administers the program and provides allocations of the
federal credits to eligible community development entities
through a competitive grant process when Congress makes the
credits available. The federal limit of the total qualified
investments from all taxpayers for 2010 was $3.5 billion, of
which $901 million were allocated to California companies.
6)Gross Premiums Tax . Unlike the federal "New Markets" tax
credit, the CDFI tax credit is also available to insurers that
are subject to the gross premiums tax pursuant to the
California Constitution (Section 28, Article. XIII, California
Constitution). The gross premiums tax is an excise tax on
insurers for the privilege of transacting insurance in this
state. The statutory provisions relating to the assessment
and collection of the tax are contained in Part 7 (commencing
with Section 12001) of Division 2 of the Revenue and Taxation
Code. This tax is imposed in lieu of other state and local
taxes and fees, making an insurer exempt from paying those
charges, other than real property and motor vehicle taxes and
fees.
The economics of the insurance industry provide a key reason for
the special treatment of insurance companies. Most corporate
taxpayers calculate their income by subtracting costs incurred
in the production of goods or services from the revenues
received from their sale. Insurance companies, by contrast,
collect their revenues up front, then make payments to
policyholders based on contingent events that occur many
months or years later. Thus, it can be difficult to "match
up" revenues to related expenses. In an income tax framework,
insurers ideally would be allowed to deduct the current value
of all future obligations (claims) covered by the insurance
policies they have written when calculating their taxable
income for a given year. Because the actual amount of these
obligations is uncertain, as are the amount of investment
earnings on accumulated premiums received during the
intervening period, an accurate determination of the
theoretically appropriate amount of taxable income proves very
difficult to achieve in practice. Insurers subject to the
gross premiums tax do not pay tax on other forms of income,
such as investment income, or income earned from other trades
or businesses.
7)The CDFI Tax Credit Program Utilization. As stated in the
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letter sent by the Insurance Commissioner to insurance company
executives on February 17, 2011, the CDFI tax credit has been
underutilized in recent years and, currently, $4.75 million in
tax credits are available for investments in underserved
communities. In 2009, the COIN certified 23 CDFI qualified
investments, but 22 of those investments were made by banks
and one or more individuals and the single largest investment
- a $5 million investment resulting in a $1 million tax credit
- was made by Metropolitan Life Insurance, the only insurance
company that applied and received the credit. AB 41
(Solorio), Chapter 340, Statutes of 2010, requires insurance
companies to develop and file with the Insurance Commissioner
a policy statement on community development investment and
community development infrastructure investments by July 1,
2011. The goal of this new law is to increase the number and
amount of community development investments by requiring the
adoption of Community investment policy statements.
8)The Report by the Legislative Analyst's Office (LAO). As
required by existing law, on April 14, 2011, the LAO issued an
analysis of the CDFI tax credit, discussing the credits'
fiscal impact and the resulting benefits to economically
disadvantaged communities and low-income people in California.
The LAO report noted all the following:
a) Economic Impact. While the LAO was unable to estimate
the economic impact of the tax credits, it states that "in
many cases investments in the CDFIs would not have been
made in the credit's absence." The report admits that
"some of the credits have benefited larger CDFIs that are
capable of raising funds in other ways and for which the
credit-funded investments represent a smaller portion of
their total assets." However, the LAO found that, even in
those cases, the tax credits "helped generate investment
activity that otherwise might not have been funded."
b) Credit Percentage Seems Reasonable . The credit refunds
a percentage of the invested amount, which translates into
approximately "2.5 to 3 percentage points on a ten-year
loan at prevailing interest rates," which is "about
one-half of the interest spread between a fairly safe
investment and a very risky one." While the LAO did not
find a 20% subsidy to be too high or too low, it noted that
"changing conditions in financial markets in the future
could warrant a different subsidy percentage for this
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credit."
c) Owned Versus Rental Housing . In light of the higher
credit standards for home purchase loans since the collapse
of the housing market, the LAO suggests that, in order to
benefit low-income individuals, the CDFI tax credit program
should focus on investments in rental housing, at least in
the near future.
d) First-Come, First-Served Tax Credits Can Be Problematic .
Even though the tax credit is currently underutilized, at
some point in prior years, it was fully used. The LAO
advises to authorize COIN or some other entity to award the
credits competitively, instead of a first-come,
first-served basis, to allow the state to prioritize CDFI
investment, if there is more demand for the credit in the
future.
9)Tax Credit Versus Grant . A disadvantage of using tax credits
as a means of encouraging or rewarding particular behavior is
that they could only be utilized by taxpayers with a tax
liability. For example, charities or other tax-exempt
organizations have very little use for a tax credit; nor does
a tax credit have any immediate value to a business that has
losses. The CDFI tax credit has been largely underutilized in
recent years. While it leverages billions of dollars of
investment into businesses and real estate projects in
communities with high rates of poverty and unemployment, it
appears that a stand-alone tax credit may not be sufficient to
attract enough of those investments. An alternative way of
encouraging investment in CDFIs and increasing the CDFI tax
credit program's utilization rate would be to temporarily
convert the program into a partial grant program, similarly to
a temporary federal tax credit for qualified investments in
solar, wind or other qualified projects. Under the federal
grant program, a qualified taxpayer may elect to receive a
grant - in lieu of the tax credit - for a qualified project
placed in service either in 2009 or 2010. The ability to
choose whether to receive the credit or grant helps owners in
financing the solar, wind, or other qualified project. The
Committee may wish to consider whether a temporary grant
program would be a better vehicle in achieving the goal of
encouraging investments in underserved communities and of
allocating a fixed, budgeted amount among the most worthy
depositors or the most necessary projects. The Committee may
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also wish to consider amending the bill to authorize COIN to
award grants, in addition to allocating tax credits, subject
to the total aggregate amount of $2 million, and to allow a
qualified taxpayer to make an irrevocable election to choose
either the tax credit or a grant in lieu of the credit.
10)Double-referral . This bill was doubled-referred with the
Assembly Committee on Insurance, and passed out of that
Committee with a 10-0 vote on March 30, 2011. For additional
discussion of this bill, please refer to that committee's
analysis.
REGISTERED SUPPORT / OPPOSITION :
Support
California Department of Insurance (sponsor)
Association of Financial Development Corporations
Local Initiatives Support Corporation
Rural Community Assistance Corporation
Opposition
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098