BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
AB 1399 (Medina) - Income Taxation: Credits: New Markets Tax
Credit
Amended: August 4, 2014 Policy Vote: G&F 7-0
Urgency: No Mandate: No
Hearing Date: August 11, 2014
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 1399 would create New Markets Tax Credit
program to encourage investment in low-income and impoverished
communities in the State. It would provide tax credits of up to
$40 million annually, with an aggregate total of $200 million.
Fiscal Impact:
The Franchise Tax Board (FTB) indicates that the bill
would result in a General Fund revenue loss of $1.6 million
in 2016-17, $5.7 million in 2017-18, and $10 million in
2018-19.
FTB would incur costs of $131,000 in 2015-16 for IT
programming changes, and $13,000 on-going annually
thereafter (General Fund).
The Governor's Office of Business and Economic
Development (GO-Biz) estimates that it would require 11
positions and $1.3 million annually to administer the
program, for compliance monitoring, program administration
and enforcement (General Fund).
Background: Created in 2000, federal law allows a new markets
tax credit for a taxpayer's investments in qualified community
development entities (CDEs), the primary mission of which must
be serving or providing investment capital for low-income
communities or low-income persons, as certified by the Secretary
of the Treasury. The federal credit is equal to 39 percent of
the qualified equity investment and is spread over seven years
(three percent per year for the first three years, and four
percent per year for the final four years). The Community
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Development Financial Institutions Fund allocated $777 million
in Federal New Markets Tax Credits to financial institutions in
California in 2013.
State law does not conform to the federal new markets tax
credit; instead, it permits the Community Development Financial
Institution credit (CDFI), administered by the Department of
Insurance (DOI). Taxpayers may claim a credit against the Gross
Premiums Tax, Personal Income Tax, or Corporation Tax equal to
20 percent of qualified investments in the form of non-interest
bearing deposits, loans, or equity investments of at least
$50,000 held for at least 60 months. Taxpayers can carry over
the credit for four years. The Legislature expanded the credit
in 2013 from $10 million to $50 million.
For deposits to generate credits, CDFI must be certified by the
California Organized Investment Network (COIN), within DOI, by
demonstrating that (1) it is a private financial institution
located in California, (2) its primary mission is community
development, and (3) it lends in urban, rural or
reservation-based communities in California. CDFIs may be
banks, credit unions, or non-regulated non-profit institutions
organized to provide private capital for community development
or investing. There are currently 27 CDFIs in California, down
from 50 in 2011. CDFIs must use the proceeds of the investment
for a purpose that is consistent with its community development
mission and for the benefit of economically disadvantaged
communities and low-income people in California. COIN generally
allocates the credits on a first-come, first-served basis;
however, if COIN determines that the total amount of investment
will exceed the cap, it can prioritize applications with
investments that directly benefit low-income persons, or
prioritize affordable housing, housing for veterans, and
self-help housing ahead of single-family housing. DOI or FTB
may recapture the credit within the 60 month period if the
taxpayer reduces or withdraws the investment.
The California Alternative Energy and Advanced Transportation
Financing Authority (CAEATFA), within the State Treasurer's
Office, provides financing through conduit or revenue bonds,
loan guarantees, loan loss reserves and a sales and use tax
(SUT) exemption for facilities that use alternative energy
sources and technologies. In 2008, the Governor and State
Treasurer announced that CAEATFA would use its existing
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authority to grant SUT exemptions for normally taxable
manufacturing equipment purchased by Tesla Motors under a
sale-leaseback agreement. Subsequently, the Legislature directed
CAEATFA to administer SUT exemptions for manufacturers of
renewable technology and advanced manufacturing. CAEATFA is
authorized to allocate exemptions up to $100 million annually to
successful applicants.
In 2013, legislation was enacted that reformed California's
economic development policies by eliminating enterprise zones
and other geographically-targeted economic development areas,
and instead allowing three new tax benefits:
Tax credits for wages paid by taxpayers to qualified
employees within former enterprise zones, and other areas
that suffer from high levels of poverty and unemployment.
The credit lasts from 2014 until 2019.
A SUT exemption on purchases of manufacturing equipment
made by taxpayers within specific North American Industrial
Classification System codes, capped at $200 million
annually per taxpayer, effective July 1, 2014, and ending
July 1, 2022. The exemption largely superseded the CAEATFA
programs, as they applied to almost all the same taxpayers.
The California Competes Tax Credit, where the California
Competes Tax Credit Committee, also created by the bill,
can award various tax credits up to an annually capped
amount to taxpayers who apply. The Committee is comprised
of the Treasurer, the Director of Finance, the Director of
the Governor's Office of Business and Economic Development
(GO-BIZ), one appointee of the Speaker of the Assembly, and
one appointee from the Senate Committee on Rules.
Proposed Law: This bill would enact a California New Markets Tax
Credit, that generally parallels its federal counterpart.
Specifically, the tax credit would be against the Gross Premiums
Tax, Personal Income Tax and Corporation Tax, and would be
administered by the California Competes Tax Credit Committee
(Committee), within GO-Biz. CAEATFA must certify the amount of
unallocated sales and use tax exclusions under its $100 million
cap in the calendar year; the Committee can allocate up to that
amount of New Markets Tax Credits each calendar year, but not
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more than $40 million in credits annually. Any unused credits
must be returned to the Committee by March 1st and be available
for the Committee to reallocate in the following calendar year.
Taxpayers may claim a credit equal to 39 percent of a qualified
equity investment in a community development entity, as
specified. The taxpayer can't claim a credit in the first two
years; instead, the taxpayer may claim a credit equal to 7
percent in the second year of the investment, and 8 percent in
the fourth, fifth, and sixth, and seventh years. Taxpayers may
carry over the credit for six years. The credit is especially
valuable if the taxpayer also has a federal allocation of the
New Markets Tax Credit.
Entities may invest funds in either equity investments of stock
in a corporation or capital interests in partnerships to qualify
investors for credits. If the business meets the below tests at
the time of the investment, the taxpayer can still claim the
credit. To qualify, a business must (1) derive at least 50
percent of total gross income from the active conduct of a
business in a low-income community, as defined, and (2) have at
last one-half of its use of tangible property and services
performed by its employees occurring in a low-income community
in California, as specified.
The bill only allows operating businesses with fewer than 250
employees, which are located within a low-income community at
the time the investment is made to qualify, but excludes
businesses that derive, or attempt to derive, 15 percent or more
of annual revenue from rental or sale of real estate; however,
the eligible business can be part of the controlled group, or
controlled by another business that does derive more than 15
percent of its income from the rental or sale of real estate if
the second business is a primary tenant.
Low-income community means census tracts where any of the
following conditions apply:
The census tract has a poverty rate in excess of 30
percent.
In non-metropolitan areas, median family income does not
exceed 60 percent of the statewide figure.
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In metropolitan areas, median family income does not
exceed 60 percent of the greater of statewide median
income, or metropolitan area median family income.
However, for purposes of the AB 1399 credit, when the United
States Census Bureau discontinues reporting median family income
on a census tract basis, GO-BIZ must use census block group data
from the American Community Survey instead.
The California Competes Tax Credit Committee must adopt an
allocation process that (1) creates an equitable distribution
process that ensures low-income communities have an opportunity
to benefit from the program, (2) sets minimum organizational
capacity standards that applicants must meet to receive an
allocation of credits, and (3) provides for the annual return of
unused credits.
Staff Comments: The purpose of the credit is to stimulate
private sector investment in lower income communities by
providing a tax incentive to qualified community and economic
development entities that can be leveraged by the entity to
attract private sector investment that in turn will be deployed
by providing financing and technical assistance to small and
medium size businesses and the development of commercial,
industrial, and community development projects, including, but
not limited to, facilities for nonprofit service organizations,
light manufacturing, and mixed-use and transit-oriented
development.
As noted previously, the financing mechanism in the bill relies
upon the unallocated portion of CAEATFA 's annual allocation of
$100 million. CAEATFA's short history shows some years when it
allocated credits such that $40 million for the purpose of this
bill would not be available. However, also as noted previously,
the enactment of the broader SUT exemption for manufacturing
equipment in 2013 will likely lessen the demand for CAEATFA's
credits, leaving more room under the annual $100 million cap for
the California New Market Tax Credit. However, the FTB revenue
estimate indicates that, in the initial years, the $40 million
cap is not expected to be reached.
Fourteen other states have adopted new market tax credits, some
very similar to this proposal. The federal tax credit expired in
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2013, but is expected by many to be reenacted retroactively.