BILL ANALYSIS �
AB 1399
Page A
CONCURRENCE IN SENATE AMENDMENTS
AB 1399 (Medina and V. Manuel P�rez)
As Amended August 22, 2014
Majority vote
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|ASSEMBLY: | |(May 16, 2013) |SENATE: |35-0 |(August 27, |
| | | | | |2014) |
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(vote not relevant)
Original Committee Reference: J., E.D. & E.
SUMMARY : Establishes the California New Markets Tax Credit
(NMTC) Program (Program), with the stated purpose of stimulating
private sector investment in lower income communities, as
specified.
The Senate amendments delete the Assembly version of this bill,
and instead:
1)Contain the following legislative findings:
a) While many areas of California have recovered from the
economic and community development impacts of the 2006
Financial Crisis and the 2010 global recession,
Californians in a number of communities and neighborhoods
are still experiencing their lingering effects. In some
cases, this has resulted in small and medium businesses in
low-income areas lacking sufficient access to capital and
technical assistance. Given that California has many needs
and limited resources, moneys from the private sector are
necessary to fill this capital and investment gap.
b) Initially enacted in 2000, the Federal Government
established the NMTC Program, which uses a market-based
approach for expanding capital and technical assistance to
businesses in lower income communities. The federal
program is jointly administered by the Community
Development Financial Institutions Fund (CDFI Fund) and the
Internal Revenue Service. The Program allocates federal
tax incentives to community development entities (CDEs),
which they then use to attract private investors who
contribute funds that can be used to finance and invest in
businesses and develop real estate in low-income
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communities.
c) Through the 2013-14 funding round, the CDFI Fund had
awarded approximately $40 billion in NMTC in 836 awards
including $3 billion in American Recovery and Investment
Act of 2009 awards and $1 billion of special allocation
authority to be used for the recovery and redevelopment of
the Gulf Opportunity Zone.
d) The federal NMTC totals 39% of the original investment
amount in the CDE and is claimed over a period of seven
years (5% for each of the first three years, and 6% for
each of the remaining four years). Any investment by any
taxpayer in the CDE redeemed before the end of the
seven-year period will be recaptured.
e) Fourteen states in the United States (U.S.) have adopted
state programs using the NMTC model including Alabama,
Florida, Illinois, Nevada, and Oregon. While some of the
programs substantially mirror the federal program, others
vary in both the percentage of the credit and some of the
policies that form the foundation of the credit. One of
the reasons cited for establishing state-level programs is
to make a state more attractive to CDEs, which results in
increasing the amount of federal NMTCs being utilized in
the state. Further, several studies, including a January
1, 2011, case study by Pacific Community Ventures, showed
that for every dollar of foregone tax revenue, the federal
NMTC leverages $12 to $14 of private investment.
2)Require the California Alternative Energy and Advanced
Transportation Financing Authority (CAEATFA) to determine the
amount of the $100 million in exclusions not granted in the
assigned calendar year under Public Resources Code (PRC)
Section 26011.8. An amount equal to that amount shall be
granted in the subsequent calendar year through the Program.
3)Require the California Competes Tax Credit Committee
(Committee) and the Governor's Office of Business and Economic
Development (GO-Biz) to administer the Program.
4)Allow, for taxable years beginning on or after January 1,
2015, and before January 1, 2027, a credit in an amount
determined in accordance with Internal Revenue Code (IRC)
Section 45D, as modified. For a taxpayer holding a "qualified
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equity investment" on that investment's "credit allowance
date," the credit shall equal a percentage of the amount paid
to a "qualified CDE" for such investment at its original
issue. The applicable percentage shall be:
a) Zero percent with respect to the first two "credit
allowance dates";
b) Seven percent with respect to the third "credit
allowance date"; and,
c) Eight percent with respect to the remainder of the
"credit allowance dates".
5)Modify the federal definition of a "qualified CDE" to include
only those qualified CDEs (and their subsidiaries) that have
entered into an allocation agreement with the CDFI Fund of the
U.S. Treasury Department, with respect to credits authorized
by IRC Section 45D, that includes California within the
service area and is dated on or after January 1, 2012.
6)Modify the federal definition of a "qualified active
low-income community business" as follows:
a) Allows the services of employees of a service-based
qualified active low-income community business to be
performed outside the low-income community. "A
service-based qualified active low-income community
business" is defined as a business that primarily earns
revenue through providing intangible products and services
and leases or owns real property in the low-income
community that is used for the operation of the business;
b) A qualified active low-income community business shall
not include any business that derives, or projects to
derive, 15% or more of its annual revenue from the rental
or sale of real estate, subject to certain exceptions;
c) A qualified active low-income community business shall
only include a business that, at the time the initial
investment is made, has 250 or fewer employees and is
located in one or more California low-income communities;
d) A qualified active low-income community business shall
only include a business located in specified census tracts
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based on poverty and unemployment rates;
e) A qualified active low-income community business shall
not include any business that operates or derives revenues
from the operation of a country club, gaming establishment,
massage parlor, liquor store, or golf course;
f) A qualified active low-income community business shall
not include a sexually oriented business, as defined; and,
g) A qualified active low-income community business shall
not include a charter school.
7)Provide that the aggregate amount of qualified equity
investments that may be allocated in any calendar year under
the Program shall be an amount based upon any unused portion
of the $100 million in exclusions, authorized under Revenue
and Taxation Code Section 6010.8, as determined by CAEATFA and
reported to the Committee, not to exceed an amount based upon
a credit of $40 million.
8)Require the Committee to limit the allocation of investments
that may be designated to a cumulative total amount based on
credits of no more than $200 million.
9)Require GO-Biz to establish a process for the recapture of
credits. Specifically modifies federal law to add the
following events triggering a credit recapture:
a) The qualified CDE fails to invest at least 15% of the
qualified equity investment in a qualified low-income
community business in consultation or partnership with
either of the following:
i) A qualified CDE that has not received a federal NMTC
allocation on or after January 1, 2012, as specified; or,
ii) A nonprofit organization certified by GO-Biz, as
specified.
b) The qualified CDE made an investment without performing
a revenue impact assessment that satisfies this bill's
requirements.
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10)Provide that enforcement of each of the recapture provisions
shall be subject to a six-month cure period. Specifically,
recapture shall not occur until the qualified CDE gives notice
of potential noncompliance to GO-Biz and is afforded six
months to cure the noncompliance.
11)Provide that in cases where a qualified CDE fails to send the
required notice of potential noncompliance or GO-Biz has
information from the annual report or other sources indicating
that the entity is in potential noncompliance, GO-Biz shall
send the notice, and the date GO-Biz sends the notice shall
begin the six-month cure period.
12)Provide that if a qualified CDE makes a capital or equity
investment or a loan with respect to a qualified low-income
building under the state Low-Income Housing Tax Credit
Program, the investment or loan is not a qualified low-income
community investment under the Program.
13)Require GO-Biz to adopt guidelines necessary or appropriate
to carry out its responsibilities with respect to the
allocation of the qualified equity investments and recapture
of credit. The adoption of these guidelines shall not be
subject to the rulemaking provisions of the Administrative
Procedure Act (Government Code Section 11340 et seq.).
14)Require GO-Biz to establish and impose reasonable fees upon
entities that apply for an allocation that, in the aggregate,
defray the cost of reviewing applications.
15)Require GO-Biz to adopt an allocation process that does all
of the following:
a) Creates an equitable distribution process that ensures
that low-income community populations across the state are
engaged and have an opportunity to benefit from the
Program;
b) Sets minimum organizational capacity standards that
applicants must meet to receive an allocation, as
specified;
c) Considers the qualified CDE's prior qualified low-income
community investments under IRC Section 45D;
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d) Considers the qualified CDE's prior qualified low-income
community investments under the Program;
e) Does not require the qualified CDE to identify the
qualified active low-income community businesses in which
the qualified CDE will invest in an application for
qualified equity investment allocation; and,
f) Does not disqualify a low-income community investment
for the single reason that public or private incentives,
loans, equity investments, technical assistance, or other
forms of support have been or continue to be provided.
16)Provide that GO-Biz shall begin accepting applications on or
before May 15, 2015, and shall award authority to designate
qualified equity investments annually through 2019, to the
extent that allocations are available under PRC Section
26011.9.
17)Provide that, in the 2015 awards cycle, the Committee shall
award authority to designate qualified equity investments to
qualified CDEs in the order applications are received by the
Committee.
18)Provide that, in the 2016 to 2019 award cycles, at least 60%
of the authority shall be awarded in the order applications
are received by the Committee.
19)Require the Committee to award up to 40% of the authority in
the 2016 to 2019 award cycles to qualified CDEs on a
competitive basis using blind scoring and a review committee
comprised of community development finance practitioners.
20)Authorize an approved applicant to transfer all or a portion
of its certified qualified equity investment authority to its
controlling entity or any subsidiary qualified CDE of the
controlling entity, provided the applicant and the transferee
notify the Committee within 30 calendar days of such transfer.
The transferee shall be subject to the same rules,
requirements, and limitations applicable to the transferor.
21)Provide that a qualified CDE shall only make a qualified
low-income community investment that demonstrates a positive
revenue impact on the state over a 10-year period against the
aggregate tax credit utilization over the same 10-year period,
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as specified.
22)Require a qualified CDE that issues qualified equity
investments to submit a report to GO-Biz within the first five
business days after the first anniversary of the initial
credit allowance date that provides documentation as to the
investment of at least 85% of the purchase price in qualified
low-income community investments in qualified active
low-income community businesses in California.
23)Include additional reporting requirements.
24)Provide that a taxpayer allowed a credit under the Program
for a qualified equity investment shall not be eligible for
any other state credit with respect to that investment.
25)Provide that GO-Biz and the Committee shall only make
authority awards in a calendar year in which the Legislature
appropriates funds in the California New Markets Tax Credit
Fund, which this bill creates.
26)Provide that this bill shall take immediate effect as a tax
levy.
27)Sunset the credit provisions on December 1, 2028.
28)Declare that the provisions of this bill are severable.
EXISTING LAW :
1)Allows various tax credits under both the Personal Income Tax
Law and the Corporation Tax Law. These credits are generally
designed to encourage socially beneficial behavior or to
provide relief to taxpayers who incur specified expenses.
2)Establishes the Committee, which has specified duties in
regard to tax credits for economic development.
3)Imposes an annual tax on the gross premiums of an insurer, as
defined, doing business in this state at specified rates.
4)Allows a credit equal to 20% of each qualified investment into
a community development financial institution that is
certified by the California Organized Investment Network
(COIN). The aggregate amount of qualified investments is
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generally capped at $50 million for each calendar year. Thus,
the statewide total for all credits allowed under the program
is capped at $10 million per year (i.e., 20% of $50 million).
AS PASSED BY THE ASSEMBLY , this bill authorized GO-Biz, and its
director, to expend specified economic development funds
previously administered by the Business, Transportation and
Housing Agency.
FISCAL EFFECT : According to the Senate Appropriations
Committee, the Franchise Tax Board indicates that this bill will
result in a General Fund (GF) revenue loss of $1.6 million in
fiscal year (FY) 2016-17, $5.7 million in FY 2017-18, and $10
million in FY 2018-19.
COMMENTS :
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).
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, it should
also be noted that, once enacted, it 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.
This bill: This bill would enact a new tax expenditure program
modeled after the federal NMTC, with the stated purpose of
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stimulating private sector investment in lower income
communities.
The federal NMTC: Congress established the federal NMTC program
as part of the Community Renewal Tax Relief Act of 2000 to
encourage investment in low-income communities that have
traditionally lacked access to capital. The federal NMTC
program provides taxpayers (e.g., individual investors,
financial institutions, corporations, etc.) a credit for
investing in economically distressed communities. Specifically,
the credit is allowed for a taxpayer's qualified equity
investment in a 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 qualified equity
investment made in the CDE, but is spread over a seven-year
period as follows:
1)A 5% credit for the year the qualified equity investment is
purchased and for the first two years thereafter (i.e., 15%
for the first three years); and,
2)A 6% credit for years four through seven (i.e., 24% for the
subsequent four years).
In recent years, private investors have claimed more than $1
billion in NMTCs annually.
The federal NMTC program is administered by the CDFI Fund within
the U.S. Treasury. The CDFI Fund allocates tax credit authority
to CDEs that apply for and obtain allocations.<1> These CDEs,
in turn, enable private investors to obtain credits in exchange
for equity investments with the CDEs. The CDEs then invest the
raised capital in qualified low-income community investments,
which include investments in operating businesses and
residential, commercial, and industrial projects. While the
range of projects financed by CDEs varies, roughly 50% of NMTC
investments have been used for commercial real estate projects.
The federal NMTC program expired in 2013, but legislation has
been introduced to extend it, and the President requested a
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<1> In the 11 allocation rounds since 2003, the CDFI Fund has
made allocations to CDEs totaling $40 billion.
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permanent extension in his FY 2015 budget proposal.
How would the Program differ from the federal NMTC? The Program
would differ from the federal NMTC in numerous respects,
including the following:
1)Different credit percentages over the seven-year period:
While the proposed state credit, like the federal credit,
totals 39% of the taxpayer's investment in a qualified CDE,
the state credit would be spread out over the seven-year
period as follows:
a) Zero percent for the year the investment is purchased
and the following year (i.e., 0% for the first two years);
b) A 7% credit for the third year; and,
c) An 8% credit for years four through seven (i.e., 32% for
the subsequent four years).
It is Committee understanding that this "back-loading" of the
credit percentages is designed to reduce the Program's upfront
cost to the GF.
2)Modified definition of a qualified active low-income community
business: This bill modifies the definition of a "qualified
active low-income community business" in several respects.
For example, under federal law, a substantial portion of the
services performed for such a business by its employees must
be performed in a low-income community. This bill arguably
dilutes that requirement for "service-based" qualified active
low-income community businesses. Specifically, this bill
allows the services of employees of a service-based business
to be performed outside the low-income community. The
business would, however, be required to lease or own real
property in the low-income community for the operation of its
business.
In some respects, however, this bill's definition of a
"qualified active low-income community business" is more
restrictive than the federal definition. For example, under
this bill, any business that derives 15% or more of its annual
revenue from the rental or sale of real estate would generally
be excluded from the definition. In addition, the state
definition is limited to businesses that, at the time the
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initial investment is made, have 250 or fewer employees.
Does California have any similar tax credit programs? While
California does not conform to the federal NMTC, 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 $50 million for each calendar
year.<2> Thus, the statewide total for all credits allowed
under the program is capped at $10 million per year (i.e., 20%
of $50 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.
Existing law defines a "CDFI," in turn, as a private financial
institution located in California that has community development
as its primary mission, and that lends in urban, rural, or
reservation-based communities in this state. Specifically, a
"CDFI" may be a community development bank, a community
development loan fund, a community development credit union, a
microenterprise fund, a community development corporation-based
lender, or a community development venture fund.
The existence of California's stand-alone CDFI tax credit raises
some interesting issues. Namely, California already has a tax
credit program specifically designed to encourage private
investment in underserved markets. Given this fact, does it
makes sense to establish a second tax credit program with the
same goal? If this bill were enacted in its present form,
California would have two similar tax credit programs,
administered by two separate entities, with an unclear level of
coordination between the two.
Government Accountability Office report: A recent report issued
by the U.S. Government Accountability Office (GAO) found that
better controls and data are needed to ensure the effectiveness
of the federal NMTC program. Specifically, the report noted
that the financial structures of NMTC investments have become
increasingly complex and less transparent over time. This
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<2> State law provides that if the aggregate amount of qualified
investments made in a calendar year is less than $50 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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increased complexity, in turn, was attributed to the combining
of the NMTC with other federal, state, and local government
funds. The GAO's survey of CDEs determined that approximately
62% of NMTC projects received other federal, state, or local
government support from 2010 to 2012. The report acknowledged
that combining public financing from multiple sources can fund
projects that would otherwise not be economically viable. At
the same time, however, this combination raises questions about
whether the subsidies are unnecessarily duplicative. In
addition, the report found that, "in some cases the complexity
of the structures may be masking rates of return for NMTC
investors that are above market rates." The GAO specifically
pointed to a U.S. Treasury report that found an investor
apparently earning a 24% rate of return, which is significantly
above market rates. In that case, the investor leveraged the
NMTC by using other public funds to increase the base for
claiming the credit. The report found that the U.S. Treasury
does not currently have controls to limit the risk of
unnecessary duplication in government subsidies or above market
rates of return. The report found that, "[w]ithout such
guidance and controls the impact of the NMTC program on
low-income communities could be diluted." The GAO also found
that the data on equity remaining in low-income community
businesses after the seven-year credit period were unreliable
because, in part, reporting instructions are unclear.
Similarly, data on NMTC project failure rates were unavailable.
Thus, the GAO recommended that the U.S. Treasury issue further
guidance on how other government programs can be combined with
NMTCs. The GAO also recommended the implementation of adequate
controls to limit the risks of unnecessary duplication and
above-market rates of return. Finally, the GAO also recommended
the collection of more complete and accurate data on, among
other things, the equity remaining in businesses after seven
years, along with loan performance.
This bill was substantially amended in the Senate and the
Assembly-approved provisions of this bill were deleted. This
bill, as amended in the Senate is inconsistent with Assembly
actions.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
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FN: 0005448