BILL ANALYSIS �
AB 2037
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Date of Hearing: April 17, 2012
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel P�rez, Chair
AB 2037 (Davis/V. M. P�rez) - As Introduced: February 23, 2012
SUBJECT : State New Market Tax Credit Program
SUMMARY : Creates a $300 million state New Markets Tax Credit
program (NMTC) for the purpose of stimulating economic
development and hastening California's economic recovery.
Specifically, this bill :
1)Authorizes the creation of the California New Markets Tax
Credit Program, administered through the California Tax Credit
Allocation Committee (TCAC), for the purpose of allocating tax
credits to qualifying community development entities (CDEs).
2)Authorizes a CDE to award tax credits to private investors who
make qualifying equity investments in the CDE. Moneys
received from the investments are to be used to make qualified
low-income community investments, which may include, among
other things, loans and capital investments in businesses,
real estate and other CDEs that undertake development projects
in eligible low-income areas.
3)Authorizes a tax credit valued at 39% of a tax payer's
qualified equity investment in a CDE, beginning in 2013 and
ending in 2019. The credit may be applied against the tax
payer's personal and corporate tax liability. The bill
provides for the recapture of the value of the credit if the
investment is withdrawn from the CDE prior to the close of the
seventh year, as specified.
4)Defines a qualifying equity investment to mean an equity
investment made to a CDE that makes qualifying investments in
California low-income communities, as defined.
5)Defines a low income community to mean a census tract where
any of the following applies:
a) The tract has a poverty rate of at least 20%.
b) The tract is not located within a metropolitan area, and
the median family income does not exceed 80% of the greater
statewide median income.
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c) The tract is located in a metropolitan median area, and
the median family income does not exceed the greater of the
statewide or metropolitan median family income.
d) The tract is located within a high migration rural
county, and the median family income does not exceed 85% of
the statewide median income. A "high migration" area is
defined as a county that has experienced (for the last two
decade census reporting periods) net outmigration of
inhabitants of at least 10%.
e) When a community is in a location that has not been
tracked by the U.S. Census Bureau, the equivalent county
divisions shall be used for determining poverty rates and
median family income.
f) Where a community has a census tract of under 2,000
people, the community is to be treated as a low-income
community if the tract is within a federal empowerment zone
and is contiguous to one or more low-income communities, as
defined.
6)Defines qualified low-income community investments to mean:
a) Any capital or equity investment in, or loan to a
qualified low-income business, as defined;
b) Any capital or equity investment in, or a loan to, a
real estate project in a low-income community;
c) The purchase of a loan from another CDE that meets the
other requirements for a low-income community investment;
d) Financial counseling and other services in support of
business activities to businesses and residents of a
low-income community; or
e) Any equity investment in, or a loan to, a CDE.
7)Defines a CDE as a domestic corporation or partnership that
has a primary mission of serving or providing investment
capital for low-income communities or low-income persons; has
low-income residents on its governing or advisory board; and
is certified by the TCAC. A CDE also includes any entity that
has an allocation agreement with the federal Community
Development Financial Institution Fund (CDFI Fund).
8)Defines an equity investment as any stock, other than
nonqualified preferred stock, in a corporation or any capital
interest in any partnership.
9)Requires TCAC to establish guidelines for implementing the
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NMTC program and set fees to cover the costs for administering
the program. The guidelines include a process for CDEs to
return unused credits so they can be reallocated. Up to $50
million in tax credits may be allocated in any one tax year
for a total allocation of $300 million over the six years of
the NMTC program. Unused credits may be rolled over to the
following year. Priority is to be given to CDEs that:
a) Have a record of successfully providing capital and
technical assistance to disadvantaged business or
communities; or
b) Intend to make qualified low-income community
investments in one or more business in which a person
unrelated to the CDE holds a majority interest.
10)Requires TCAC to annually report on the use of moneys
received in exchange for the credits, including, but not
limited to, the impact those moneys had on the low-income
community, number of jobs created, and the geographic
distribution of the credits.
11)Appropriates $150,000 from the Tax Credit Allocation Fee
Account to TCAC for the purpose of administering the new tax
credit program. These moneys are only available for
expenditure until January 1, 2020 and it is the Legislature's
intent that these moneys would be reimbursed through fees on
the New Market Tax Credit application.
12)Reduces the cumulative total of the Small Business Hire
Credit (SBHC) from $400 million to $100 million. Once the
Franchise Tax Board (FTB) estimates that it has received
original tax returns claiming credits that total $100 million,
no additional credits may be claimed.
13)Takes immediate effect as a tax levy.
EXISTING STATE LAW :
1)Authorizes a qualified taxpayer, on their personal or
corporate tax return, to claim a $3,000 credit against state
tax liability for each net increase in full-time employees
hired during the taxable year. Credits must be claimed on an
original return and be filed prior to FTB estimating it has
received returns claiming $400 million in credits, as defined.
Qualified taxpayers are limited to businesses with fewer than
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20 employees as of the last day of the preceding taxable year.
2)Authorizes a taxpayer to claim a state credit equal to 20% of
qualified investments in community development financial
institutions. The credit may be used against the taxpayer's
personal income tax, corporation tax, and insurance premiums
tax for non-interest bearing investments of at least $50,000,
which are held for a minimum of 60 months. The total qualified
investment for all taxpayers are capped at $10 million per
year ($2 million in credits).
EXISTING LAW FEDERAL LAW :
Authorizes a taxpayer to claim a credit on their federal tax
return for qualified investments made to CDEs. The value of the
federal NMTC is 39% of the value of the qualified investment
taken over a seven year period.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's purpose : According to the author, "California can no
longer afford to leave millions in federal money on the table,
year after year, by failing to implement a state New Markets
Tax Credit Program to jump-start economic productivity in our
low-income areas. Such a program will enable us to leverage
many times more in federal funds than it would cost the state
to implement, and lead directly to capital investment in small
businesses, a proven model for helping to end an economic
recession. At least nine other states have successfully
implemented such a program already, on average leveraging 13
times more in federal monies than they allocated in planned
revenue to fund the tax credit. This bill means community
empowerment because the program in question has a proven track
record of job creation."
2)Economic justice : Research shows that the inequality between
the residents in low-income communities and those that reside
in California's most affluent communities has dramatically
increased in the past two decades. For example, the average
inflation-adjusted income of the top 1% of California's
taxpayers increased by 50.2% between 1987 and 2009, from
$778,000 to $1.2 million. In contrast, the average income of
taxpayers in each of the bottom four-fifths of the
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distribution lost purchasing power. This economic disparity
has significant social and economic ramifications for everyone
in the state and directly challenges the state's global
competitiveness and long-term economic success.
Programs like the NMTC program proposed in this measure are
based on the economic principle that targeting significant
incentives to lower income communities allows these
communities to more effectively compete for new businesses and
retain existing businesses, which results in increased tax
revenues, less reliance on social services, and lower public
safety costs. Residents and businesses also directly benefit
from these more sustainable economic conditions through
improved neighborhoods, business expansion, and job creation.
3)Challenges to accessing capital : Access to debt and equity
financing is critical for promoting the efficient operation
and expansion of small businesses. Small businesses rely on
adequate short-term (working capital) and long-term debt as
well as equity financing to purchase new equipment, replenish
inventories, fund ongoing operations, and market their
services long before those activities generate revenue. While
financial institutions routinely extend working capital
revolvers and long-term debt products to established, larger
businesses, smaller businesses are often bypassed because they
lack the collateral and threshold operating and revenue
generating history of larger businesses.
The same dynamic occurs when small businesses attempt to
access equity financing, with investment funds often bypassing
smaller businesses because they lack the operating history and
revenue generating track record of larger businesses. The
situation often results in a "chicken and egg" scenario
whereby businesses are told they need to grow in order to
access financing, while at the same time being denied access
to the financing they need to grow.
It should be noted that in the aftermath of the Great
Recession, many banks moved to tighten lending standards. In
fact, according to the U.S. Chamber of Commerce, a record
74.5% of banks reported raising lending standards in the
fourth quarter of 2008. While it is unclear if banks have
since moved to further tighten lending standards, what is
clear is that banks are not yet comfortable lowering their
standards to increase liquidity to small businesses, making it
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difficult for small businesses to flourish and grow. AB 2037
would support the development of new capital resources for
businesses in low-income neighborhoods.
4)Federal New Markets Tax Credit Program : Congress enacted the
NMTC program with the Community Renewal Tax Relief Act of 2000
(Public Law 106-554) for the purpose of stimulating equity
investments in low-income communities. Under the program,
CDEs apply to the U.S. Treasury's CDFI Fund, for an allocation
of federal tax credits, which the CDE can then offer to
individual and corporate investors in exchange for making an
equity investment in the CDE or its subsidiary.
In this way, the CDE serves as a community and financial
intermediary between sources of private capital and low-income
communities. The value of the federal credit to the investor
is 39% of the original investment amount, claimed over a
period of seven years (5% for each of the first three years,
and 6% for each of the remaining four years). The investment
in the CDE cannot be redeemed before the end of the seven-year
period.
The CDFI Fund has made 594 awards allocating a total of $29.5
billion in tax credit authority to CDEs through its
competitive application process. This $29.5 billion includes
$3 billion in Recovery Act Awards and $1 billion of special
allocation authority to be used for the recovery and
redevelopment of the Gulf Opportunity Zone.
Between 2004 and 2010, CDEs made over 373 New Markets Tax
Credit Investments totaling $2.16 billion, with an average
investment size of $5.7 million.
5)State New Markets Tax Credits : Since the inception of the
federal NMTC, at least nine other states have enacted matching
programs to help leverage more federal dollars in NMTC
investments including: Ohio, Florida, Missouri, Louisiana,
Mississippi, Kentucky, Illinois, Oklahoma, and Connecticut.
According to information provided by the author's office,
several of these states have experienced a return on
investment of 13 to 1. In addition, the author states:
In Missouri, in the first two years the state New
Markets Tax Credit paid for itself, bringing in more in
additional investment dollars that was allocated in state
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funds for the entire seven-year period.
In Illinois, federal allocations of NMTC funds more than
doubled after the Legislature implemented a matching state
program in 2008. In the first year of implementation,
allocations jumped to $875 million. Prior to the 2008 law,
federal allocations never exceeded $400 million.
1)Other states use a variety of access to capital strategies :
In addition to NMTC programs, several states have recently
created or will soon create venture funds to support local
entrepreneurs, including targeting resources to historically
underserved areas. Among other sources of funding, more than
one dozen states have used their share of the federal Small
Business Credit Initiative to capitalize venture funds
including Arkansas, Florida, Hawaii, Indiana, Iowa, Kansas,
Louisiana, Maine, Maryland, Missouri, Nebraska, New Hampshire,
New Jersey, New York, Ohio, Oklahoma, Puerto Rico, Rhode
Island, Tennessee, Texas, Washington, West Virginia and
Wisconsin.
Washington State used its $19.6 million in federal Small
Business Credit Initiative moneys to fund direct and guarantee
programs, as well as capitalizing a venture fund. The $5
million in federal money allocated for the venture fund has
already attracted another $20 million in private investor
capital. The Washington Department of Commerce anticipates
that for every $1 the state invests, approximately $15 to $18
will be generated in private lending or investment,
potentially injecting $300 million into the state economy and
generating 3,000 to 6,000 direct and indirect jobs.
While historically California has been a national leader in
start-ups and venture capital, the state's slow recovery from
the recession and the increasing competition from other
states, as illustrated by the creation of these state NMTC
programs and venture funds, could threaten California's
position. States like Washington and Texas have been actively
pursuing California businesses with marketing strategies that
emphasize a better business climate and government support for
the business community.
These new business incentives also represent potentially new
competition for venture capital from states that do not
traditionally receive much of this type of capital. Nebraska,
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as an example, is not just adding a venture fund, but it is
also considering a new tax credit for angel investors. These
types of new capital incentives would, no doubt, make second
tier investment states such as Nebraska a much more attractive
investment location.
2)Extension of federal credit : The federal NMTC program is
currently not authorized for 2012. In the past, Congress has
reauthorized the program through the tax-extenders bill,
usually the last legislative action of the year. While
Congress did not pass an extenders package at the end of 2011,
the NMTC Program administrators expect Congress to pass an
extenders package after the fall elections reauthorizing the
program.
3)NMTC research findings : In 2010, the General Accounting
Office released a report on the New Markets Tax Credit program
that found:
a) Since 2003, NMTC investments totaling $26 billion have
been made in all 50 states, the District of Columbia and
Puerto Rico.
b) NMTC investments in low-income community businesses
generally use leveraged structures, where equity is left in
the businesses, or subsidized loan structures, where below
market interest rate loans are offered.
c) At the time of the report, the CDFI Fund did not collect
data that could identify the portion of the subsidy
channeled to businesses, such as data on credit pricing,
transaction fees, and the amount of equity left in the
businesses.
According to a January 2011 case study prepared by Pacific
Community Ventures on the NMTC program, Impact Investing: A
Framework for Policy Design and Analysis:
Through 2009, CDEs made more than $16 billion in NMTC
investments in low income communities.
Approximately 95% of NMTC funds are invested in
designated areas of distress, and 90% in metropolitan
areas.
For every dollar of foregone tax revenue, the NMTC
program leverages $12-$14 of private investment.
1)Impact on the existing Small Business Hiring Credit (SBHC)
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Program : Implementation of this bill will reduce the
authorized credits under the SBHC and use the amount of the
reduction to fund the credits authorized in the NMTC program.
According to the FTB and information provided by the Assembly
Committee on Revenue and Taxation, 12,903 personal income tax
and business entity returns had been filed as of December
2011using the SBHC with a cumulative credits value of only $76
million.
Concerns have previously been raised, including within the
Governor's 2011-12 May Revision Report, that the SBHC was
being significantly underutilized. While there have been
several attempts to improve and expand the SBHC (as described
below), Members may want to consider whether a tax credit to a
very small size business is the best way to provide support.
Many small size businesses have so few taxable revenues that
tax credits are of limited assistance. AB 2037 takes an
alternative approach for assisting these same size businesses
by providing a credit to the tax payer who provides the cash
to the CDE, which then uses those funds to make direct loans
and equity investments to small businesses in low-income
communities.
2)Related legislation : Below is a list of related legislation:
a) AB 643 (Davis and V. Manuel P�rez) State New Markets Tax
Credit : This bill creates a $300 million state New Markets
Tax Credit program (NMTC) for the purpose of stimulating
economic development and hasten California's economic
recovery. Status: The bill was held in Assembly
Appropriations Committee, January 2012.
b) AB 624 (John A. P�rez) California Organized Investment
Network : This bill extends the operation of the Community
Development Financial Institution Investments tax credit
until January 1, 2017, and requires the Insurance
Commissioner to establish a California Organized Investment
Network Advisory Board, as specified, to advise the
California Organized Investment Network on the best methods
of increasing insurance investments while providing fair
returns to investors and social benefits to underserved
communities. Status: The bill was signed by the Governor,
Chapter 436, Statutes of 2011.
c) SB 1316 (Romero) State New Market Tax Credit : This bill
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would have enacted a New Markets Tax Credit for qualified
investments made in low-income communities in the 2011
calendar year. The State Treasurer's Office would
administer the new credit program and allocate credits in
an amount equal to the estimated revenue gains resulting
from the temporary elimination of specified like-kind
property exchanges. Status: The bill died on the Senate
inactive file, 2010.
d) AB 246 (Wieckowski) Tax Credits : This bill will allow a
tax credit for qualified employees, as defined, in the
amount of $4,500 for each net increase in full-time
employees who are paid wages less than $16 per hour.
Further, the bill will allow a tax credit in the amount of
$9,100 for each net increase in full-time employees who are
paid wages of $16 or more per hour. Status: This bill is
pending before the Senate committee on Government and
Finance.
3)Double referral : The Assembly Rules voted to refer this
measure to JEDE and the Assembly Committee on Revenue and
Taxation. Should this measure be approved at the April 17,
2012 hearing, the bill will be referred to the second policy
committee for additional policy consideration.
REGISTERED SUPPORT / OPPOSITION :
Support
The East Los Angeles Community Union (TELACU) (Sponsor)
City of Roseville, California.
California Black Chamber of Commerce
Advantage Capital Partners
Greater Sacramento Urban League
Opposition
None Received
Analysis Prepared by : Toni Symonds and Oracio Gonzalez / J.,
E.D. & E. / (916) 319-2090
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