BILL ANALYSIS �
AB 2037
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Date of Hearing: May 14, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2037 (Davis) - As Amended: May 3, 2012
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : California New Markets Tax Credit Program
SUMMARY : Establishes the California New Markets Tax Credit
Program (Program), with the stated purpose of stimulating
economic development and hastening California's economic
recovery by granting tax credits for investment in California.
Specifically, this bill :
1)Contains legislative findings noting the following:
a) California is entering the sixth year of the worst
economic recession since the Great Depression.
b) Due to a systemic budget problem, the state is suffering
from chronic revenue shortfalls based in part on increasing
reliance on revenues from personal income tax rolls.
c) Investment in small business ventures is a proven method
of stimulating economic activity, creating new jobs, and
generating revenue by expanding the tax base.
d) The federal New Markets Credit Tax Program �sic],
created in 2000 with bipartisan support, has been an
effective means of stimulating state and regional economies
due to its ability to leverage federal funds to drive
private investment in communities that would otherwise not
have had access to capital. These investments accrue to
small businesses, schools, and other business-related real
estate projects.
e) As of 2010, nine states (Ohio, Florida, Missouri,
Louisiana, Mississippi, Kentucky, Illinois, Oklahoma, and
Connecticut) had enacted matching state programs. On
average, these states successfully leveraged $13 in federal
new Markets Tax Credit �sic] for every dollar of state
credits initially allocated for the state program.
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f) In the 2010-11 fiscal year (FY), $350 million of
California's State Hiring Tax Credit credits �sic] went
unused.
g) Given the current economic climate and the lack of use
of the state hiring tax credit, it is reasonable for the
Legislature to search for and consider other alternatives
to stimulate hiring and generate economic activity with a
view to shortening the current recession and promoting
permanent economic recovery.
h) There are low-income communities in the state that face
multiple challenges in attracting private investment,
including developing and maintaining a workforce that meets
the skill needs of local employers, an infrastructure that
connects local businesses to external markets, and
neighborhoods that are not disproportionately burdened with
environmental pollutants, including air, soil, and water
contamination.
i) Given the ability of the Program to stimulate private
investment activity in areas that would otherwise not have
access to investment capital, it is appropriate that the
state consider prioritizing a portion of the Program to
encourage private investment in areas that face multiple
challenges in attracting investment capital.
2)Requires the California Tax Credit Allocation Committee to
administer the Program.
3)Allows, for taxable years beginning on or after January 1,
2013, and before January 1, 2020, a specified credit to
taxpayers holding a "qualified equity investment" on a "credit
allowance date" of the investment which occurs during the
taxable year. Provides that the credit amount shall equal 39%
of the "qualified equity investment."
4)Defines a "qualified equity investment" as any "equity
investment" in a "qualified community development entity" if
all the following conditions are met:
a) The investment is acquired by the taxpayer at its
original issue, directly or through an underwriter, solely
in exchange for cash;
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b) Substantially all of the cash is used by the "qualified
community development entity" to make low-income community
investments. This requirement shall be deemed met if at
least 85% of the aggregate gross assets of the "qualified
community development entity" are invested in "qualified
low-income community investments" in California; and,
c) The investment is designated by the "qualified community
development entity."
5)Provides that "credit allowance date" means, with respect to
any qualified equity investment, the date on which the
investment is initially made.
6)Defines "equity investment" as any:
a) Stock, other than nonqualified preferred stock as
defined in Internal Revenue Code Section 351(g)(2), in a
corporation; or,
b) Capital interest in a partnership.
7)Defines a "qualified community development entity" as a
domestic corporation or partnership that meets all of the
following conditions:
a) Has a primary mission of serving, or providing
investment capital for, low-income communities or
low-income persons;
b) Maintains accountability to residents of low-income
communities through their representation on any governing
board of the entity or on any advisory board to the entity;
and,
c) Is certified by the California Tax Credit Allocation
Committee.
8)Defines a "qualified low-income community investment" as any
of the following:
a) Any capital or equity investment in, or loan to, a
qualified low-income community business;
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b) Any capital or equity investment in, or loan to, a real
estate project in a low-income community;
c) The purchase from another qualified community
development entity of any loan made by that entity, which
is a qualified low-income community investment;
d) Financial counseling and other services in support of
business activities to businesses located in, and residents
of, low-income communities; or,
e) Any equity investment in, or loan to, a qualified
community development entity.
9)Requires the California Tax Credit Allocation Committee to
adopt guidelines to carry out the Program's purposes.
Provides that the adoption of these guidelines shall not be
subject to the rulemaking provisions of the Administrative
Procedure Act (Government Code Section 11340 et seq.).
10)Requires the California Tax Credit Allocation Committee to
establish and impose reasonable fees upon entities that apply
for a credit allocation, with revenues used to defray
administrative costs.
11)Caps the aggregate amount of credit that may be allowed in
any calendar year at an amount equal to the sum of the
following:
a) $50 million in credits for the 2012 calendar year and
each calendar year thereafter, through and including the
2019 calendar year; and,
b) The unused credit amount, if any, for the preceding
calendar year.
12)Requires the California Tax Credit Allocation Committee to
allocate credits among entities, with priority given to
applications submitted by an entity that:
a) Has a record of successfully providing capital or
technical assistance to disadvantaged businesses or
communities; or,
b) Intends to make qualified low-income community
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investments in one or more businesses in which persons
unrelated to the entity hold the majority equity interest.
13)Requires the California Tax Credit Allocation Committee to
annually reserve at least:
a) 15% of the tax credits for community development
entities that target businesses located in low-income
communities facing disproportionate environmental
pollution;
b) 15% of the tax credits for community development
entities that target rural areas, including businesses
providing equipment or supplies to agricultural producers,
packers, handlers, and processors; and,
c) 20% of the tax credits for community development
entities that target businesses in inner-city areas.
14)Provides that any credits used for a qualified equity
investment where a "recapture event" occurs at any time before
the close of the seventh taxable year after the qualified
equity investment shall be included in income in the taxable
year in which the "recapture event" occurred.
15)Defines a "recapture event" to include any of the following
that occur before the close of the seventh taxable year after
the qualified equity investment in a qualified community
development entity:
a) The qualified community development entity ceases to be
a qualified community development entity;
b) The proceeds of the investment cease to be used as
specified to make low-income community investments; or,
c) The investment is redeemed by a qualified community
development entity.
16)Provides additional definitions for the following terms:
a) "Low-income community";
b) "Qualified active low-income community business"; and,
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c) "Qualified business."
17)Reduces the credit allocation for the existing New Jobs Tax
Credit from roughly $400 million to roughly $100 million.
Provides that the "cut-off date" for the New Jobs Tax Credit
shall be the last day of the calendar quarter within which the
Franchise Tax Board (FTB) estimates that it will have received
returns claiming credits that cumulatively total $100 million
(instead of $400 million) for all taxable years.
18)Deletes duplicative sections of the Revenue and Taxation Code
as a housekeeping matter.
19)Sunsets the Program provisions on December 1, 2020.
20)Appropriates $150,000 from the Tax Credit Allocation Fee
Account to the California Tax Credit Allocation Committee for
purposes of implementing the Program.
21)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices.
2)Provides for the following geographically-targeted economic
development areas (G-TEDAs): Enterprise Zones, Manufacturing
Enhancement Areas, Targeted Tax Areas, and Local Agency
Military Base Recovery Areas. Special tax incentives are
provided to taxpayers conducting business activities within a
G-TEDA. These incentives include a hiring credit equal to a
percentage of wages paid to qualified employees.
3)Allows a credit for taxable years beginning on or after
January 1, 2009, to qualified employers equal to $3,000 for
each net increase in qualified full-time employees hired
during the taxable year. The credit is limited to small
businesses (i.e., taxpayers with 20 or fewer employees as of
the last day of the preceding taxable year). The credit is
capped at roughly $400 million for all taxable years.
4)Allows a credit equal to 20% of each qualified investment into
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a Community Development Financial Institution (CDFI) that is
certified by the California Organized Investment Network
(COIN). The aggregate amount of qualified investments is
generally capped at $10 million for each calendar year. Thus,
the statewide total for all credits allowed under the program
is capped at $2 million per year (i.e., 20% of $10 million).
FISCAL EFFECT : The FTB estimates that this bill would result in
General Fund revenue losses of $2.7 million in FY 2012-13, $33
million in FY 2013-14, and $6 million in FY 2014-15.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
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 moneys than they allocated in
planned revenue to fund the tax credit.
2)Proponents of this bill state:
At least nine other states have already enacted similar
programs to help leverage Federal Dollars for local
investments.
We believe AB 2037 will have a positive impact on the state
of California and specifically on the ongoing
revitalization of South Los Angeles.
3)The FTB notes certain implementation concerns in its staff
analysis of this bill, including the following:
a) "This �bill's] language for the California New Markets
Credit is modeled after the federal New Markets Credit (IRC
section 45D). The federal credit is equal to a cumulative
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credit of 39 percent spread out over a seven-year period.
The credit amount proposed by this bill is 39 percent of
the qualified equity investment; however, the bill is
silent concerning spreading the credit over seven years.
The bill would make the California credit a one-year
credit, not a credit taken over seven years. Additionally,
the bill sets the maximum aggregate credit "allowed" in a
calendar year at $50 million, plus unused credits from the
preceding calendar year. Since allowed credits are those
used to offset the �taxpayer's] California income or
franchise tax, it appears that the taxpayer can carryover
unused credit to the next calendar year. However, there is
no other carryover language in the bill, e.g. setting the
number of years the carryover is allowed. It is therefore
unclear if a taxpayer is able to carryover unused credits
from one year to the next or �whether] unused credits �are]
"given back" and re-allocated by the CTCAC. If it is the
author's intention that the credit is taken over seven
years, like the federal credit, this bill should be
amended."
b) "The bill seems to use "allowed" and "allocated" almost
interchangeably. This results in some confusion as to what
is being "allocated" (by the CTCAC) and what is "allowed"
to be reported on a taxpayer's California income or
franchise tax return and used to reduce the taxpayer's tax
before credits. The author may wish to amend this bill to
clarify the allocation process from the allowed use of the
credits."
c) "Additionally, this bill uses terms that are undefined,
e.g., "start-up business" and "real estate project." The
absence of definitions to clarify these terms could lead to
disputes with taxpayers and would complicate the
administration of this credit. The author may wish to
amend this bill to clarify these terms."
d) "The bill is silent regarding whether a low-income
housing project (a real estate project) that qualifies for
this credit would also qualify for the low-income housing
credit. If it is the author's intention that only one
credit should apply, this bill should be amended."
e) "This bill requires only the credit used to be
recaptured if a recapture event occurs. The federal new
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markets credit requires the credit plus interest to be
recaptured when a recapture event occurs. If it is the
author's intention that, like the federal recapture rules,
interest should also be recaptured, the bill should be
amended. In addition, the federal credit has a precise
definition of the recapture amount whereas this bill would
recapture the amount of the credit "used." Clarity
regarding the amount 'used' would reduce disputes."
f) "According to the bill language, the CTCAC is
responsible for the administration of the NMTC program.
However, the credits allowed would be those credits claimed
on a California income or franchise tax return to reduce
the income or franchise tax of a taxpayer. The FTB would
be the agency that would most easily monitor the amount of
credits "allowed" and the amount �of] credits recaptured.
It is unclear if the FTB would have to report the amount of
credits claimed on income and franchise tax returns to the
CTCAC, in order to cut off the allowed credits at the
maximum, or if the FTB would be responsible for cutting off
the credits when the reported credits reaches the $50
million maximum for the calendar year."
4)Committee Staff Comments:
a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960s, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures," since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues).
b) How is a tax expenditure different from a direct
expenditure? : As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. This can offer taxpayers greater certainty, but it
can also result in tax expenditures remaining a part of the
tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue
losses associated with any given tax expenditure. Finally,
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it should also be noted that, once enacted, it generally
takes a two-thirds vote to rescind an existing tax
expenditure absent a sunset date. This effectively results
in a "one-way ratchet" whereby tax expenditures can be
conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority
vote.
c) This proposal : This bill would enact a new tax
expenditure program modeled after the federal New Markets
Tax Credit (NMTC), with the stated purpose of stimulating
economic development and hastening California's economic
recovery by granting tax credits for investment in
California. The Program would be partially "funded" by
reducing the credit allocation for the existing New Jobs
Tax Credit by roughly $300 million.
d) The federal NMTC : Enacted in 2000, the federal NMTC is
a non-fundable tax credit designed to encourage capital
investment in qualified low-income communities.
Specifically, federal law allows a NMTC for a taxpayer's
qualified equity investments (QEIs) in a community
development entity (CDE), which must be a corporation or
partnership. The CDE's primary mission must be serving, or
providing investment capital for, low-income communities or
low-income persons, as certified by the Secretary of the
Treasury. The taxpayer's federal NMTC totals 39% of the
QEI made in the CDE, but is spread over a seven-year period
as follows:
i) A 5% credit for the year the QEI is purchased and
for the first two years thereafter (i.e., 15% for the
first three years); and,
ii) A 6% credit for years four through seven (i.e., 24%
for the subsequent four years).
Before a CDE can sell QEIs eligible for the federal NMTC,
it must apply for and be granted an allocation from the
CDFI Fund through a competitive application and review
process. Geographic diversity is not a consideration in
the evaluation process.
e) Does California have any similar tax credit programs? :
While California does not conform to the federal NMTC,
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state law does allow a 20% credit for each "qualified
investment" in a CDFI certified by COIN. The aggregate
amount of qualified investments is generally capped at $10
million for each calendar year.<1> Thus, the statewide
total for all credits allowed under the program is capped
at $2 million per year (i.e., 20% of $10 million). Unlike
the federal NMTC, the "qualified investment" in the CDFI
must be at least $50,000, be for a minimum duration of 60
months, and may consist of either an equity investment or a
deposit or loan that does not earn interest.
According to the California Department of Insurance, CDFIs
are "mission-driven private financial institutions in
California specifically dedicated to, and whose core
purpose is, providing financial products and services to
people and communities underserved by traditional financial
markets." A CDFI may include a community development loan
fund, credit union, bank, microenterprise fund,
corporation-based lender or venture fund.
f) CDFI projects : Committee staff understands that CDFIs
are not required to specify the projects that
credit-eligible funds will be used for, but in many cases
they do. The Legislative Analyst's Office (LAO) notes, "In
such cases, it appears that these funds are used primarily
for small business loans to lower-income and
moderate-income people in less affluent areas who otherwise
would struggle to qualify for loans and for loans for
construction or purchase of owner-occupied or rental
housing for similar clients in similar areas."
g) Utilization of the CDFI credit : COIN staff reports that
the tax credit program has not fully utilized the total $2
million tax credit capacity in several recent years. In
fact, on February 17, 2011, the Insurance Commissioner sent
a notice to insurance company executives noting that $4.75
million in CDFI state tax credits were available due to
underutilization in recent years.
h) The LAO report : On April 14, 2011, the LAO issued an
--------------------------
<1> State law provides that if the aggregate amount of qualified
investments made in a calendar year is less than $10 million,
the difference may be carried over to the next year, and any
succeeding year during which the credit remains in effect, and
added to the aggregate amount authorized for those years.
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analysis of the CDFI tax credit, discussing the credits'
fiscal impact and the resulting benefits to economically
disadvantaged communities and low-income individuals in
California. The LAO report noted the following:
It is very difficult to estimate the impact of the tax
credits, although we suspect that in many cases
investments in the CDFIs would not have been made in the
credit's absence. It is true 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. Even in these cases it seems likely that the tax
credits helped generate investment activity that
otherwise might not have been funded.
i) Open questions : The author's background sheet notes
that, "The state NMTC will be capped at $50 million per
year for a period of six years." Thus, the analysis
prepared by the Assembly Committee on Jobs, Economic
Development and the Economy understandably notes that this
bill "�c]reates a $300 million" Program. This bill,
however, allows the credit for "taxable years beginning on
or after January 1, 2013, and before January 1, 2020" - in
other words, a total of 7 years - suggesting an aggregate
credit allocation of $350 million. Creating even more
confusion, however, the bill later provides that the
aggregate credit amount per year shall be capped at $50
million "for the 2012 calendar year and each calendar year
thereafter, through and including the 2019 calendar year" -
a period of eight years. Finally, while this bill seeks to
fund the Program by reducing the credit allocation for the
existing New Jobs Tax Credit by roughly $300 million, it is
not clear if these "savings" will be fully realized. As of
May 5, 2012, the FTB reports that nearly $114 million in
New Jobs Tax Credits have already been claimed.
j) Related legislation : Committee staff notes the
following related bills introduced in the 2011-12
Legislative Session:
i) AB 11 (Portantino) would have reduced the New Jobs
Tax Credit allocation from roughly $400 million to
roughly $200 million, and allowed a new credit equal to
20% of annual workers' compensation premiums paid by
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qualified taxpayers. The total amount of the new credit,
in turn, would have been capped at roughly $200 million.
AB 11 was held in this Committee.
ii) AB 234 (Wieckowski) would have modified and expanded
the existing New Jobs Tax Credit by, among other things,
providing a credit of $9,100 for each net increase in
qualified full-time employees paid more than $16 per
hour. AB 234 was held in this Committee.
iii) AB 236 (Swanson) would have reallocated $50 million
from the New Jobs Tax Credit to establish a new credit
designed to encourage the hiring of the chronically
unemployed. AB 236 was held in the Assembly
Appropriations Committee.
iv) AB 246 (Wieckowski) would modify and expand the
existing New Jobs Tax Credit by, among other things,
providing a credit of $9,100 for each net increase in
qualified full-time employees paid more than $16 per
hour. AB 246 is pending in the Senate Committee on
Governance and Finance.
v) AB 248 (Perea) would have reallocated $150 million
from the New Jobs Tax Credit to establish a credit equal
to 25% of the value of qualified medical services
personally provided by a physician during the taxable
year. AB 248 was held in the Assembly Appropriations
Committee.
vi) AB 304 (Knight) would have allowed a tax credit,
under both the Personal Income Tax Law and the
Corporation Tax Law, for each "qualified employee"
employed by a "qualified employer," as specified. AB 304
was held in this Committee.
vii) AB 643 (Davis) would have reallocated $300 million
from the New Jobs Tax Credit to establish a state New
Markets Tax Credit program designed to stimulate economic
development. AB 643 was held in the Assembly
Appropriations Committee.
viii) AB 1009 (Wieckowski) would have recast the existing
New Jobs Tax Credit by, among other things, modifying the
definition of a "qualified full-time employee" to apply,
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for taxable years beginning on or after January 1, 2012,
only to individuals who were unemployed for the 30 days
immediately prior to being hired. AB 1009 was held in
this Committee.
ix) AB 1195 (Allen, Perea, and Wieckowski) would have
expanded the New Jobs Tax Credit's definition of a
"qualified employer" to include taxpayers that, as of the
last day of the preceding taxable year, employed 50 or
fewer employees (instead of 20 or fewer employees per
current law). AB 1195 was held in the Senate
Appropriations Committee.
x) AB 1596 (Cook) would modify the New Jobs Tax Credit
by allowing the credit to employers with up to 50
employees. AB 1596 is currently pending on this
Committee's suspense file.
xi) SB 156 (Emmerson) would have modified the New Jobs
Tax Credit by allowing the credit to employers with up to
50 employees. SB 156 failed passage out of the Senate by
the constitutional deadline.
aa) Double-referral : This bill was double-referred to the
Assembly Committee on Jobs, Economic Development and the
Economy, and passed out of that committee on a 4-0 vote on
April 17, 2012. For additional discussion of this bill's
provisions, please refer to that committee's analysis.
REGISTERED SUPPORT / OPPOSITION :
Support
Los Angeles Urban League (sponsor)
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
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