BILL ANALYSIS �
SB 355
Page A
Date of Hearing: June 9, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 355 (Beall) - As Amended: May 27, 2014
Majority vote. Tax levy.
SENATE VOTE : 32-0
SUBJECT : Conservation: tax credits
SUMMARY : Extends the Natural Heritage Preservation (NHP) tax
credit program until June 30, 2020, and allows a sale of the NHP
credit to an unrelated taxpayer, upon approval and certification
by the Wildlife Conservation Board (WCB). Specifically, this
bill :
1)Allows, for each taxable year beginning on or after January 1,
2014, a sale of the NHP tax credit to an unrelated party,
under both the Personal Income Tax (PIT) and the Corporation
Tax (CT) laws, upon approval and certification by the WCB.
2)Specifies that only unexpired NHP tax credits may be sold.
3)Requires the taxpayer to report to the WCB, prior to the sale
of the credit, in the form and manner specified by the WCB,
all required information regarding the sale of the credit,
including the social security or other taxpayer identification
number of the unrelated party to whom the credit has been
transferred and the face amount of the credit transferred, for
the approval by the WCB.
4)Requires the WCB, upon approval of the sale, to provide a
certificate to the taxpayer evidencing the approval, in the
form and manner specified by the Franchise Tax Board (FTB).
The certificate shall include all required information
regarding the credit.
5)Prohibits the WCB from approving a sale of the NHP tax credit
if the consideration received by the taxpayer in exchange for
the credit is less than 90% of the value of the credit to be
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transferred.
6)Extends the NHP tax credit program until June 30, 2020.
7)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Requires the WCB to authorize and allocate specified funds for
the purchase of property suitable for recreation and the
preservation, protection and restoration of wildlife habitat.
2)Requires the WCB to implement the NHP Tax Credit Program
(Program). Under the Program, upon the WCB's approval, a
"donor" may contribute qualified property to a "donee" and
receive a nonrefundable tax credit equal to 55% of the fair
market value of any qualified contribution of property made
between January 1, 2010 and June 30, 2015. Any unused credit
may be carried over for eight years. Moreover, this credit is
in lieu of any other state credit or deduction that the
taxpayer may otherwise claim with respect to the contributed
property.
3)Defines a "donor" as a property owner that donates, or submits
an application to donate, property under the Program. The
term "property" is defined to include "any real property, and
any perpetual interest therein, including land, conservation
easements, and land containing water rights, as well as water
rights."
4)Defines a "donee" as any of the following:
a) A department to which a donor has applied to donate
property (a department, in turn, means the State Resources
Agency or any entity created by statute within the
Resources Agency and authorized to hold title to land);
b) A local government that has filed a joint application
with a donor requesting approval of a donation of property
to that local government; or,
c) A designated nonprofit organization.
5)Allows a taxpayer that is a member of a combined reporting
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group, for taxable years beginning on or after June 30, 2008,
to transfer certain unused tax credits to a related
corporation, as defined. The election to transfer any credit
is irrevocable once made and is required to be made on the
taxpayer's return for the taxable year in which the assignment
is made.
6)Authorizes the WCB to use bond funds issued under the
California Clean Water, Clean Air, Safe Neighborhood Parks,
and Coastal Protection Act of 2002 (Proposition 40); the Water
Security, Clean Drinking Water, Coastal and Beach Protection
Act of 2002 (Proposition 50); or the Safe Drinking Water,
Water Quality and Supply, Flood Control, River and Coastal
Protection Bond Act of 2006 (Proposition 84), among other
sources, to reimburse the General Fund (GF) for the amount of
a NHP tax credit, as specified.
7)Authorizes the NHP Tax Credit Reimbursement Account
established within the GF to receive bond funds used to
reimburse the GF for NHP tax credit allocations. Requires the
WCB to encumber bond funds in the amount needed to pay for the
entire NHP tax credit and to transfer bond funds to the NHP
Tax Credit Reimbursement Account in the amounts and the tax
years in which a donor claims the NHP tax credit.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual GF revenue loss of $700,000 in fiscal year
(FY) 2013-14, $3.4 million in FY 2014-15, and $4.5 million in FY
2015-16. However, according to the FTB staff, these GF losses
are largely due to a timing lag that will result from a sale of
tax credits.
COMMENTS :
1)The Author's Statement . The author provided the following
statement in support of this bill:
"Since 2000, the Natural Heritage Preservation Tax Credit
(NHPTC) has protected 8,006 acres of high value resources
property that has been obtained at 55% of the land's fair
market value - resulting in a savings to the State of just
under $40 million.'
"Unfortunately, for the last seven years, not a single willing
property owner has been able to take advantage of this
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incentive program due to the fact that most landowners lack
the state tax liability that would make this tax credit
attractive to them.
"SB 355 would jump start the NHPTC by creating a transferable
tax credit option that landowners could transfer to a willing
3rd party who could utilize the tax credit. SB 355 gives state
and local agencies a powerful tool to obtain valuable
resources land from willing sellers at a fraction of their
fair market value and with no direct impact to the state's
General Fund."
2)Arguments in Support . The proponents of this bill state that
"not a single eligible entity had taken advantage of the NHPTC
since 2006." They believe that the primary reason for this
lack of interest is the fact that landowners do not have
sufficient state tax liability to take advantage of the NHP
tax credit. The proponents propose to modify the existing NHP
tax credit Program to allow landowners who are unable to
utilize the credit to transfer it to interested corporate
entities that can use it to offset their state tax liability.
The proponents argue that by allowing taxpayers to transfer
the NHP tax credit to unrelated parties, the "state would once
again have a valuable tool for high priority resources land
protection" and would advance important conservation goals
"by providing a financial incentive to private landowners and
potential partners at no cost to the state government."
3)Legislative History of the Natural Heritage Preservation Tax
Credit. The Legislature enacted the Program to compensate
landowners who donate land to the state for preservation
purposes [SB 1647 (O'Connell), Chapter 113, Statutes of 2000].
The Program had a number of stated objectives, including
accommodating economic development and resolving land use and
water disputes in a manner beneficial to both the people of
California and to California's environment. Initially, the
aggregate amount of all credits was limited to $100 million.
In response to fiscal pressures on the GF, the Legislature
suspended the awarding of tax credits in FY 2002-03 [AB 3009
(Committee on Budget), Chapter 1033, Statutes of 2002].
Following this suspension, the Legislature extended the tax
credit through FY 2007-08, but provided that credits could be
awarded between July 1, 2002, and June 30, 2005, only if the
amount of all lost revenue resulting from the credits was
reimbursed by transfer to the GF of moneys not from the GF [SB
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1100 (Committee on Budget and Fiscal Review), Chapter 226,
Statutes of 2004]. The Legislature then allowed bond funds
(approved by voters in separate propositions) to reimburse the
GF for the tax credit's costs [AB 2722 (Laird), Chapter 715,
Statutes of 2004). The WCB awarded $48.6 million in credits
through 2006-07, but taxpayers only claimed $23.4 million, for
an average of $4 million per year. In 2010, the Legislature
again reauthorized the credit until 2015 and eliminated the
$100 million cap [AB 94 (Evans), Chapter 220, Statutes of
2009].
4)A Different Kind of Credit. The Program provides state and
local governments, as well as nonprofit organizations, with
the ability to protect and preserve California's open space by
compensating donors for 55% of the donated property's fair
market value. To qualify for the credit, landowners must
apply to the WCB for approval to donate a parcel of property
and for certification that the property meets certain
requirements. If the WCB approves the contribution, the
landowner may claim a tax credit equal to 55% of the
property's fair-market value, and may carry the credit forward
to the succeeding seven years. Taxpayers may alternatively
choose to take a charitable contribution deduction instead of
the NHP tax credit. However, the alternative minimum tax
limits the value of deductions. Furthermore, the "value" of a
deduction varies with the marginal tax rate (or tax bracket)
of the taxpayer, whereas the value of a tax credit, on other
hand, is the same regardless of the taxpayer's tax rate. Tax
credits directly reduce a person's tax liability and, hence,
have the same value for all taxpayers with tax liability at
least equal to the credit. Thus, a tax credit is generally
more appealing to taxpayers; especially to corporate taxpayers
whose charitable contribution deductions are generally limited
to 10% of the net income.
The NHP tax credit operates differently from other tax credits.
Specifically, this credit is funded by bond funds, private
donations, and other specified moneys instead of foregone tax
revenues that would normally flow to the GF. Unlike other tax
credits, the WCB must approve the credit and reimburse the
Natural Heritage Preservation Tax Credit Account within the GF
within 60 days of FTB's notification that a taxpayer claimed a
NHP tax credit. Because these credits have no impact on the
GF, in 2009 the Legislature removed the $100 million cap
contained in the original act that established the NHP tax
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program.
Tax credits can either be nonrefundable or refundable.
Nonrefundable credits, like the NHP tax credit, work only to
reduce a taxpayer's tax liability. Usually, any remaining
credit amount left after reducing the taxpayer's liability to
zero can be carried forward to offset the taxpayer's tax
liability in future years. With a refundable credit, however,
the state must refund the remaining value of the credit after
tax due is reduced to zero.
5)A Sale of the NHP Tax Credit . The inability to fully use a
credit, in the case of a taxpayer without sufficient tax
liability, undoubtedly reduces the value of the credit for
that taxpayer. One approach to increase the value of a credit
would be to make it refundable. Another potential solution
would be to make the credit transferable, i.e. allow taxpayers
to sell the credit to unrelated parties.
Under existing law, a transfer of the NHP tax credit is already
allowed for corporate taxpayers, but only to related parties.
Specifically, taxpayers that are members of a combined
reporting group may make a one-time, irrevocable election to
assign eligible credits to another member. This bill would
instead allow the sale of this credit to unrelated parties in
exchange for a monetary contribution (equal to at least 90% of
its value). As such, this bill would permit individuals and
corporations with enough cash to buy these tax credits to
reduce their own tax liability. The proposed program would be
a new and unprecedented development in California tax law.
Admittedly, there is one case in which a taxpayer may sell a
credit to an unrelated party under existing law, but only if
it is a film tax credit attributable to the production of an
independent film. However, unlike the NHP tax credit, the
film tax credit is targeted, capped, and allocated by the
California Film Commission. In many respects, it is similar
to a grant program; is effective only for a limited number of
years; and is allocated and certified on a first-come,
first-serve basis, up to $100 million every fiscal year. The
ability to sell the film credit is limited to a small number
of targeted taxpayers, i.e. independent movie production
companies. Furthermore, the FTB has the ability to collect
from either the buyer or the seller of a film tax credit if it
is determined that the credit has been claimed by more than
one individual or that the taxpayer that generated the credit
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was not entitled to claim the credit.
In contrast, while the NHP credit must be approved by the WCB,
it is not allocated, i.e. not awarded as a result of a
competitive process among several applicants. Any person who
makes a qualified contribution of property will be awarded an
NHP tax credit. Furthermore, the total aggregate amount of
the NHP credit that may be approved in any given taxable year
is unlimited. In addition, unlike the film tax credit, which
is designed to create new jobs and increase economic activity,
the NHP tax credit serves only as a reward for donations of
property in California to governmental and non-profit
entities.
In 2007, the Conservation Resource Center reported that
transferability, including full refundability, of an NHP tax
credit is by far the most important element of a successful
Conservation Credit program.<1> With respect to the sale of
the credits, the report, while acknowledging that market rates
could fluctuate, found that landowners received on average
between 70% and 82% of the value of their credits. The report
also noted that facilitators negotiated for the highest price
for the landowners and were often reimbursed for their
services from the proceeds of the credit transfer. (Ibid.)
Generally, tax incentives are created to encourage taxpayers to
engage in an activity that they would not have otherwise
engaged in the absence of the incentive. While the NHP tax
credit is intended to encourage taxpayers to engage in a
specific activity, i.e. donations of land to state and local
governments, as well as non-profit organizations, the economic
benefits of a sale of that credit are less apparent. First,
in a typical transaction, the seller of an NHP credit will
receive less than 100% of the face value of the credit. Based
on other states' experience, an average price ranges between
70% and 82%. Second, the seller will have to compensate a tax
credit broker for his or her services of finding a buyer.
Third, the seller would be faced with an additional federal
and state income tax liability resulting from the sale, which
---------------------------
<1> State Conservation Tax Credits, Impact and Analysis, a
Report by the Conservation Resource Center, 2007, p.23.
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would further reduce the financial benefits of the sale.<2>
This bill's intent is to provide the beneficiary of the tax
credit program with the largest amount of funding available to
encourage more donations of property. Committee staff
appreciates the author's objective to incentivize the
preservation of critical, in-state wildlife and plant habitat,
agricultural lands, open spaces, and water. However, creating
a market for the sale of tax credits appears to be an
inefficient way of delivering those funds to a taxpayer.
Specifically, the State (the Wild Life Preservation Fund) will
pay out 100% of the tax credit when claimed by the third party
even though the intended beneficiary will only receive 90% of
the face value. Thus, 10% of the value of the credit is the
cost incurred by the beneficiary for expediting the transfer
of funds. It seems inefficient for the beneficiary to spend
10% of the funds on transaction costs, especially in light of
the fact that a transfer of funds could be completed, free of
charge, through a grant program or a refundable tax credit.
The Committee may wish to consider whether converting the
existing NHP credit into a refundable one would achieve the
same goal of adequately compensating landowners willing to
donate property to governmental or non-profit organizations
without creating a questionable precedent for tax policy
purposes. With a refundable credit, donors would get a check
from the State when they file their taxes. Although with
transferable credits taxpayers could monetize tax credits
without filing a tax return, refundable credits provide a
bigger benefit to the taxpayers at the same cost to the state
- since taxpayers do not have to sell them at a discounted
price. The State could also limit the refund amount to either
90% of the value of the credit or any other percentage that
would reflect a fair market value of the credit, if sold in
the open market.
6)The 90% Limitation . This bill requires that the taxpayer
receive at least 90% of the face value of the tax credit when
sold to a third party. Establishing an arbitrary market price
threshold creates several problems. First, it is unclear if
third parties would be willing to receive only a 10% benefit
from the purchase of the tax credit. Next, when considering
the purchase of the tax credit, purchasers take into account
---------------------------
<2> See, e.g., Office of Chief Counsel Internal Revenue Service
Memorandum, Number 201147024, November 25, 2011, which states
that a sale of a tax credit is a taxable event, under the
federal income tax laws, and both the seller and the purchaser,
if the tax credit is purchased for less than its face value,
must recognize gain and pay federal income tax.
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all accompanying transaction costs, including the fees charged
by independent brokers facilitating the sale. Thus, the time
and energy spent purchasing a tax credit may turn out to be
more trouble than it is worth. Finally, as noted above, other
states with similar programs have found the highest sales
price of a NHP tax credit to be approximately only 82% of the
face value of the credit. Setting a floor of 90% would likely
be a price above the point of equilibrium, pushing many buyers
out of the market and unintentionally leaving many taxpayers
without a way of liquidating acquired tax credits.
7)Grants versus Tax Credits. This bill uses the tax system as a
convenient means of delivering a specific subsidy. But, it
appears that a stand-alone tax credit is not sufficient to
encourage donations of land to the state and local governments
and may not be the most efficient way of accomplishing this
goal.
In its March 2011 report, Opportunities to Reduce Potential
Duplication in Government Programs, Save Tax Dollars, and
Enhance Revenue, the Government Accountability Office (GAO)
recommended that Congress consider converting the New Markets
Tax Credit program to a cash grant program. The GAO suggested
that replacing the tax credit with a grant likely would make
the federal subsidy more cost effective. Similarly,
Reassessing Renewable Energy Subsidies, a brief issued on
March 22, 2011, the Bipartisan Policy Council found that in
most circumstances cash grants are significantly more
effective and could be less expensive than the renewable
energy production tax credit or investment tax credit.<3>
As discussed above, the NHP tax credit operates differently from
other tax credits in that it is funded by bond proceeds,
private donations, and other specified moneys instead of
foregone GF revenues. The WCB is authorized to use specified
---------------------------
<3> As stated in the report, "Cash grants have simplified
financing structures for almost all renewable projects and made
the renewable industry less dependent on tax equity investors.
This has attracted a broader pool of lenders and reduced
transaction costs. As such, cash grants have been significantly
more efficient than other tax-based incentives, so ? that the
federal government would need to spend about half as much in
cash grants to subsidize a comparable project receiving the PTC
[Production Tax Credit]." p. 17.
.
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bond funds to reimburse the GF for the NHP tax credit's costs
and must reimburse the GF within 60 days of FTB's notification
that a taxpayer claimed a NHP tax credit. According to the
WCB Web site, the remaining Proposition 40 and Proposition 50
Fund balances are $89 million and over $300 million,
respectively. The Committee may wish to consider whether a
direct grant program by the WCB to compensate the donors
directly from Proposition 40 and 50 funds would be a better
way to incentivize charitable donations of property.
8)"Slippery Slope" and the Integrity of the Tax System. If this
bill were to become law, it would allow a sale of the NHP tax
credits to unrelated parties to encourage charitable donations
of property to the governmental and non-profit organizations.
While the preservation of open space, agricultural land,
wildlife and plant habitat is certainly important, so are
arguably many other socially beneficial activities, including
research and development, hiring new employees, encouraging
monetary charitable contributions, and rehabilitating historic
buildings, among others. Once the Legislature authorizes a
sale of the NHP tax credit in the open market, it may be asked
later to provide a similar treatment to other worthy tax
credits or expenditures, thus, departing from long-standing
tax policy of allowing taxpayers that earned a tax credit to
use it in offsetting only their tax liability and not the tax
liability of unrelated parties. It is a slippery slope to
enact laws intended to increase the utilization of a tax
credit benefiting just one class of taxpayers. The Committee
may wish to consider whether this bill will be one of many
suggesting extraordinary circumstances for which a sale of tax
credits is warranted. The Committee may also wish to consider
whether the benefits of a tax credit sale outweigh the
downside of creating a questionable policy precedent for other
tax expenditure programs.
9)Administration of the Tax Credit Sale . This bill requires a
seller of the NHP credit to provide to the WCB certain
information regarding the sale of the credit, including the
purchaser's Social Security number or a taxpayer
identification number. However, this bill does not prohibit
the sale of the credit prior to the completion of a federal or
state audit of the credit. This bill also fails to specify
how credits, which would be approved for sale and purchase and
then subsequently disallowed at audit, would or could be
recaptured by the FTB. The Committee may wish to consider
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granting FTB the ability to collect from either the buyer or
the seller of an NHP tax credit if the credit has been claimed
by more than one taxpayer, or if the taxpayer that generated
the credit was not entitled to claim the credit.
REGISTERED SUPPORT / OPPOSITION :
Support
California Council of Land Trusts
Trust for Public Land
California Rangeland Trust
Marin Agricultural Land Trust
Wildlife Heritage Foundation
Land Trust of Santa Cruz County
Sequoia Riverlands Trust
Peninsula Open Space Trust
Opposition
None on file
Analysis Prepared by : Oksana Jaffe - Carlos Anguiano / REV. &
TAX. / (916) 319-2098