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Bills

AB 1259: Personal income taxes: corporation taxes: credits: California New Markets Tax Credit.

Session Year: 2019-2020
House: Assembly
Latest Version Date: 2019-04-30

No summary is available yet.

Date	Status
Feb 3, 2020	From committee: Filed with the Chief Clerk pursuant to Joint Rule 56.
Jan 31, 2020	Died pursuant to Art. IV, Sec. 10(c) of the Constitution.
May 16, 2019	In committee: Held under submission.
May 16, 2019	Joint Rule 62(a), file notice suspended.
May 13, 2019	Joint Rule 62(a), file notice suspended. (Page 1609.)
May 15, 2019	In committee: Set, first hearing. Referred to APPR. suspense file.
May 7, 2019	From committee: Do pass and re-refer to Com. on APPR. (Ayes 10. Noes 0.) (May 6). Re-referred to Com. on APPR.
May 1, 2019	Re-referred to Com. on REV. & TAX.
Apr 30, 2019	From committee chair, with author's amendments: Amend, and re-refer to Com. on REV. & TAX. Read second time and amended.
Apr 29, 2019	In committee: Hearing for testimony only.
Apr 25, 2019	Re-referred to Com. on REV. & TAX.
Apr 24, 2019	Read second time and amended.
Apr 23, 2019	From committee: Amend, and do pass as amended and re-refer to Com. on REV. & TAX. (Ayes 7. Noes 0.) (April 23).
Mar 11, 2019	Referred to Coms. on J., E.D., & E. and REV. & TAX.
Feb 22, 2019	From printer. May be heard in committee March 24.
Feb 21, 2019	Read first time. To print.

Date	Description	Location	Votes
May 6, 2019	Do pass and be re-referred to the Committee on [Appropriations]	Assembly Standing Committee on Revenue and Taxation	10 0 1 Passed
Apr 23, 2019	Do pass as amended and be re-referred to the Committee on [Revenue and Taxation]	Assembly Standing Committee on Jobs, Economic Development, and the Economy	7 0 0 Passed

Key

Pro

Against

Did Not Vote

Date of Hearing: May 16, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 1259

Author:(Luz Rivas) – As Amended Ver:April 30, 2019

Policy Committee:	Jobs, Economic Development, and the Economy	Vote:	7 - 0
	Revenue and Taxation		10 - 0

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill creates, for tax years 2021 through 2025, the California New Markets Tax Credit (CNMTC) program, modeled after the federal New Markets Tax Credit (NMTC) program, for the purpose of allocating tax credits to a qualified community development entity (CDE) for purposes of providing capital to low income communities. This bill makes assorted modifications to the federal NMTC, including the credit’s percentage and how the California Office of Business Development (GO-Biz) will recapture the credit, if necessary.

FISCAL EFFECT:

Annual General Fund revenue loss of $3.8 million in 2020-21 and $13.0 million in 2021-22.

COMMENTS:

The federal NMTC program. The federal NMTC provides tax credit authority CDEs, which are corporations or partnerships with the primary mission of providing investment capital for low-income communities. Once a CDE receives tax credit authority, it can use that authority to attract investors who then claim the credit. The CDE uses the money raised to invest in low-income community projects. The NMTC model allows the CDE to serve as a community and financial intermediary between private capitol and low-income communities.

Qualified low-income community investments include investments in residential, commercial and industrial projects. Since the inception of the program, approximately half of the federal NMTC investments has been used for commercial real estate projects. 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).

Since its inception, the federal program has allocated $54 billion in federal tax credit authority to CDEs.

Purpose. This bill creates a state version of the federal NMTC. The goal of the author is to create a state program that will assist California in attracting a more significant share of federal-credit funded projects.
Recent legislation. A number of recent bills have attempted to create a California NMTC. Those bills include: AB 185 (E. Garcia), of the 2015-16 Legislative Session, which was held on this committee’s Suspense File; AB 305 (Author:V. Manuel Pérez), of the 2013-14 Legislative Session, which was held on this committee’s Suspense File; and AB 1399 (Medina), of the 2013-14 Legislative Session, which was vetoed by the governor. The governor’s veto message stated:

This bill creates a new markets tax credit that will cost – over time - $200 million.

I certainly endorse programs that result in private investments to help low-income areas, but a bill to spend this much should be considered with other priorities during the annual budget.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 6, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 1259 (

Author:Luz Rivas) – As Amended Ver:April 30, 2019

FOR VOTE ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: corporation taxes: credits: California New Markets Tax Credit

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. Specifically, this bill:

Contains the following legislative findings:
1. 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.
2. 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) and community development financial institutions (CDFIs), 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 communities.
3. Through 14 application rounds (2003 to 2017, inclusive) of the NMTC Program, the CDFI Fund has made 1,105 awards, allocating a total of $54 billion in tax credit authority to CDEs through a competitive application process, including $3 billion in American Recovery and Reinvestment Act of 2009 awards and $1 billion of special allocation authority to be used for the recovery and redevelopment of the Gulf Opportunity Zone. Since its inception, the CDFI Fund has allocated tax credit authority to 413 CDEs headquartered in 45 states, the District of Columbia, Puerto Rico, and Guam. Of the qualified equity investments deployed, more than 75% were in severely distressed areas and 55% with unemployment rates 150% above the statewide average.
4. Based on program activities reported through Fiscal Year 2016, CDEs and CDFIs disbursed a total of $44,421,718,023 in qualified equity investment proceeds toward 5,333 projects. Since 2003, the NMTC Program has created or retained an estimated 197,585 jobs nationally. It has also supported the construction of 32.4 million square feet of manufacturing space, 74.8 million square feet of office space, and 57.5 million square feet of retail space. The United States Department of the Treasury reports that a secondary benefit is that as these communities develop, they become more attractive to investors, catalyzing a ripple effect that spurs further investments and revitalization.
5. For every $1 invested by the Federal Government, the NMTC Program generates over $8 of private investment. The NMTC Program catalyzes investment in the most economically challenged areas of the state. Over 75% of NMTC investments have been made in highly distressed areas, meaning the household income was less than 60% of statewide median income and the poverty rate was higher than 30%.
6. 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.
7. Twelve states in the United States 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 a state. Further, several studies, including a January 1, 2011, case study by Pacific Community Ventures, showed that for every dollar of forgone tax revenue, the federal NMTC leverages twelve dollars ($12) to fourteen dollars ($14) of private investment.
Requires the Governor's Office of Business and Economic Development (GO-Biz) to administer the Program.
Allows, for taxable years beginning on or after January 1, 2021, and before January 1, 2026, a credit in an amount determined in accordance with Internal Revenue Code (IRC) Section 45D, as modified. For a taxpayer holding a "qualified 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:
1. Six percent with respect to the first two "credit allowance dates";
2. Three percent with respect to the third "credit allowance date"; and,
3. Six percent with respect to the remainder of the "credit allowance dates".
Modifies the federal definition of a "qualified active low-income community business" as follows:
1. 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;
2. 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, subject to certain exceptions;
3. A qualified active low-income community business shall only include a business located in specified census tracts based on poverty and unemployment rates;
4. 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;
5. A qualified active low-income community business shall not include any business that operates or derives revenues from the operation of a sexually oriented business, as defined; and,
6. A qualified active low-income community business shall not include a charter school.
Provides that the aggregate amount of qualified equity investments that may be allocated in any calendar year shall be one hundred million dollars per calendar year. The allocation of any undesignated qualified equity investments shall be returned to GO-Biz by March 1 of the year following allocation and the value of the undesignated qualified equity investment shall be available for allocation in the following calendar years in accordance with the application process. Any qualified equity investment attributable to recaptured credits shall be available to GO-Biz on March 1 of the year following recapture and shall be available for allocation in the following calendar years as specified.
Specifically modifies federal law to add the following provisions related to a recapture event:
1. GO-Biz shall establish a process, in consultation with the Franchise Tax Board, for the recapture of credits allowed under this bill from the entity that claimed the credit on a return;
2. Recaptured qualified equity investments revert back to GO-Biz and shall be reissued. The reissue shall not count toward the annual or cumulative allocation limitation; and,
3. Enforcement of each of the recapture provisions shall be subject to a six-month cure period.
Requires GO-Biz to adopt guidelines necessary or appropriate to carry out its responsibilities with respect to the allocation, monitoring, and management of the tax credit Program authorized by this bill.
Requires GO-Biz to establish and impose reasonable fees upon entities that apply for an allocation pursuant to this bill that in the aggregate defray the cost of reviewing applications for the Program. The fees collected shall be deposited in the California New Markets Tax Credit Account (Account), which this bill establishes in the California Economic Development Fund.
Requires GO-Biz to adopt an allocation process that does all of the following:
1. Creates an equitable distribution process that ensures that low-income community populations across the state have an opportunity to benefit from the Program;
2. Sets minimum organizational capacity standards that applicants must meet to receive an allocation, as specified;
3. Considers the qualified CDE's prior qualified low-income community investments under IRC Section 45D;
4. Gives priority to both of the following:
  1. Applications that commit to addressing the hardest to serve and undercapitalized lower income populations; and,
  2. Applications that support neighborhood revitalization strategies driven by local grassroots stakeholders.
Provides that GO-Biz shall begin accepting applications on or before January 15, 2021, and shall award authority to designate qualified equity investments annually through 2025.
Authorizes 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 GO-Biz within 30 calendar days of such transfer. The transferee shall be subject to the same rules, requirements, and limitations applicable to the transferor.
Includes additional administrative and reporting provisions.
Provides that, in cases where the credit amount exceeds the taxpayer's tax liability, the excess credit amount may be carried forward to the following year, and the six succeeding years if necessary, until the credit is exhausted.
Provides 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.
Provides that the credit authorized by this bill shall only be allocated by GO-Biz for those taxable years for which moneys are appropriated to GO-Biz to administer the California NMTC for that taxable year.
Provides that this bill shall take immediate effect as a tax levy.
Sunsets the credit provisions on December 1, 2026.
Declares that the provisions of this bill are severable.
Contains the following findings and declarations for purposes of complying with Revenue and Taxation Code (R&TC) Section 41:
1. Specific goals, purposes, and objectives: attract private sector investment in lower income communities in California.
2. Performance indicators:
  1. Amount of qualified low-income community investments issued;
  2. Amount of dollars deployed in qualified low-income community investments;
  3. Number of operating businesses assisted as a result of qualified low-income community investments; and,
  4. Number of employment positions created and retained as a result of qualified low-income community investments and the average annual salary of those positions.
3. Data collection requirements and baseline measurements:
  1. The baseline measurements include:
    1. The amount of tax credits issued in the year;
    2. The unemployment rate of the area; and,
    3. The poverty rate of the area.
  2. Data to collect includes:
    1. The amount of tax credits issued in the year;
    2. The number of operating businesses located in a low-income community that are assisted; and,

- - 1. The number of jobs created and retained as a result of qualified low-income community investments.

EXISTING FEDERAL LAW allows a NMTC to a taxpayer holding a qualified equity investment in an amount equal to the applicable percentage of the amount paid to the qualified CDE for investment in low-income communities.

EXISTING STATE LAW 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.

FISCAL EFFECT: Pending

COMMENTS:

The author has provided the following statement in support of this bill:

Despite robust economic recovery in parts of the state, many Californian communities are grappling from the lingering effects from the 2006 Financial Crisis and the 2010 global recession. As a result, small and medium businesses in low-income areas lack sufficient access to capital and technical assistance. Given that the state has many needs and limited resources, moneys from the private sector is necessary to fill this capital and investment gap.

As the 5th largest economy in the world, it is unacceptable that California has not done enough to revive our improvised communities. AB 1259 gives low income communities the economic boost [they need] to get out of poverty. A California NMTC program would double the benefits by allowing CDEs to take advantage of both state and federal NMTC Programs which will further incentivize Community Development Entities (CDE) to invest in and revitalize disadvantage [communities] through a state New Market Tax Credit (NMTC) Program.

Committee Staff Comments:
1. 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).

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. While this affords taxpayers greater financial predictability, 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 or cost, without a supermajority vote.

1. What would this bill do? This bill would enact a new tax expenditure program modeled after the federal NMTC, with the stated purpose of stimulating private sector investment in lower income communities.
2. 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.) with 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).

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. 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.

1. 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: Unlike the federal credit, the credit would be spread over the seven-year period as follows:
    1. Six percent with respect to the first two credit allowance dates;
    2. Three percent with respect to the third credit allowance date; and,
    3. Six percent with respect to the remainder of the credit allowance dates.
  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. Specifically, 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 generally limited to businesses that, at the time the initial investment is made, have 250 or fewer employees.
2. Government Accountability Office report: A 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 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.
3. Governor's veto: This bill is similar to AB 1399 (Medina), of the 2013-14 Legislative Session. Governor Brown vetoed AB 1399 with the following message:

This bill creates a new markets tax credit that will cost – over time - $200 million.

I certainly endorse programs that result in private investments to help low-income areas, but a bill to spend this much should be considered with other priorities during the annual budget.

1. Double referral: This bill was double-referred to the Assembly Committee on Jobs, Economic Development, and the Economy. This bill passed that committee on April 23, 2019, by a vote of 7 to 0. For additional discussion of this bill, please refer to that committee's analysis.
2. Policy on tax expenditures: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. This Committee has recently adopted a new policy, requiring that all new tax expenditure proposals comply with the requirements of R&TC Section 41. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. This bill currently complies with the Section 41 requirements.

In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote. According to the new policy, an "appropriate sunset provision" shall mean five years, except in the case of a tax expenditure measure providing relief to California veterans, in which case "appropriate sunset provision" shall mean 10 years. This bill, as currently drafted, complies with the Committee's policy on sunsets.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

Date of Hearing: April 29, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 1259 (

Author:Luz Rivas) – As Amended Ver:April 24, 2019

FOR TESTIMONY ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Personal income taxes: corporation taxes: credits: California New Markets Tax Credit

Contains the following legislative findings:
1. 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.
2. 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) and community development financial institutions (CDFIs), 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 communities.
3. Through 14 application rounds (2003 to 2017, inclusive) of the NMTC Program, the CDFI Fund has made 1,105 awards, allocating a total of $54 billion in tax credit authority to CDEs through a competitive application process, including $3 billion in American Recovery and Reinvestment Act of 2009 awards and $1 billion of special allocation authority to be used for the recovery and redevelopment of the Gulf Opportunity Zone. Since its inception, the CDFI Fund has allocated tax credit authority to 413 CDEs headquartered in 45 states, the District of Columbia, Puerto Rico, and Guam. Of the qualified equity investments deployed, more than 75% were in severely distressed areas and 55% with unemployment rates 150% above the statewide average.
4. Based on program activities reported through Fiscal Year 2016, CDEs and CDFIs disbursed a total of $44,421,718,023 in qualified equity investment proceeds toward 5,333 projects. Since 2003, the NMTC Program has created or retained an estimated 197,585 jobs nationally. It has also supported the construction of 32.4 million square feet of manufacturing space, 74.8 million square feet of office space, and 57.5 million square feet of retail space. The United States Department of the Treasury reports that a secondary benefit is that as these communities develop, they become more attractive to investors, catalyzing a ripple effect that spurs further investments and revitalization.
5. For every $1 invested by the Federal Government, the NMTC Program generates over $8 of private investment. The NMTC Program catalyzes investment in the most economically challenged areas of the state. Over 75% of NMTC investments have been made in highly distressed areas, meaning the household income was less than 60% of statewide median income and the poverty rate was higher than 30%.
6. 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.
7. Twelve states in the United States 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 a state. Further, several studies, including a January 1, 2011, case study by Pacific Community Ventures, showed that for every dollar of forgone tax revenue, the federal NMTC leverages twelve dollars ($12) to fourteen dollars ($14) of private investment.
Requires the Governor's Office of Business and Economic Development (GO-Biz) to administer the Program.
Allows, for taxable years beginning on or after January 1, 2021, and before January 1, 2026, a credit in an amount determined in accordance with Internal Revenue Code (IRC) Section 45D, as modified. For a taxpayer holding a "qualified 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:
1. Six percent with respect to the first two "credit allowance dates";
2. Three percent with respect to the third "credit allowance date"; and,
3. Seven percent with respect to the remainder of the "credit allowance dates".
Modifies the federal definition of a "qualified active low-income community business" as follows:
1. 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;
2. 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, subject to certain exceptions;
3. A qualified active low-income community business shall only include a business located in specified census tracts based on poverty and unemployment rates;
4. 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;
5. A qualified active low-income community business shall not include any business that operates or derives revenues from the operation of a sexually oriented business, as defined; and,
6. A qualified active low-income community business shall not include a charter school.
Provides that the aggregate amount of qualified equity investments that may be allocated in any calendar year shall be one hundred million dollars per calendar year. The allocation of any undesignated qualified equity investments shall be returned to GO-Biz by March 1 of the year following allocation and the value of the undesignated qualified equity investment shall be available for allocation in the following calendar years in accordance with the application process. Any qualified equity investment attributable to recaptured credits shall be available to GO-Biz on March 1 of the year following recapture and shall be available for allocation in the following calendar years as specified.
Specifically modifies federal law to add the following provisions related to a recapture event:
1. GO-Biz shall establish a process, in consultation with the Franchise Tax Board, for the recapture of credits allowed under this bill from the entity that claimed the credit on a return;
2. Recaptured qualified equity investments revert back to GO-Biz and shall be reissued. The reissue shall not count toward the annual or cumulative allocation limitation; and,
3. Enforcement of each of the recapture provisions shall be subject to a six-month cure period.
Requires GO-Biz to adopt guidelines necessary or appropriate to carry out its responsibilities with respect to the allocation, monitoring, and management of the tax credit Program authorized by this bill.
Requires GO-Biz to establish and impose reasonable fees upon entities that apply for an allocation pursuant to this bill that in the aggregate defray the cost of reviewing applications for the Program. The fees collected shall be deposited in the California New Markets Tax Credit Account (Account), which this bill establishes in the California Economic Development Fund.
Requires GO-Biz to adopt an allocation process that does all of the following:
1. Creates an equitable distribution process that ensures that low-income community populations across the state have an opportunity to benefit from the Program;
2. Sets minimum organizational capacity standards that applicants must meet to receive an allocation, as specified;
3. Considers the qualified CDE's prior qualified low-income community investments under IRC Section 45D;
4. Gives priority to both of the following:
  1. Applications that commit to addressing the hardest to serve and undercapitalized lower income populations; and,
  2. Applications that support neighborhood revitalization strategies driven by local grassroots stakeholders.
Provides that GO-Biz shall begin accepting applications on or before January 15, 2021, and shall award authority to designate qualified equity investments annually through 2025.
Authorizes 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 GO-Biz within 30 calendar days of such transfer. The transferee shall be subject to the same rules, requirements, and limitations applicable to the transferor.
Includes additional administrative and reporting provisions.
Provides that, in cases where the credit amount exceeds the taxpayer's tax liability, the excess credit amount may be carried forward to the following year, and the six succeeding years if necessary, until the credit is exhausted.
Provides 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.
Provides that the credit authorized by this bill shall only be allocated by GO-Biz for those taxable years for which moneys are appropriated to GO-Biz to administer the California NMTC for that taxable year.
Provides that this bill shall take immediate effect as a tax levy.
Sunsets the credit provisions on December 1, 2026.
Declares that the provisions of this bill are severable.
Contains the following findings and declarations for purposes of complying with Revenue and Taxation Code (R&TC) Section 41:
1. Specific goals, purposes, and objectives: attract private sector investment in lower income communities in California.
2. Performance indicators:
  1. Amount of qualified low-income community investments issued;
  2. Amount of dollars deployed in qualified low-income community investments;
  3. Number of operating businesses assisted as a result of qualified low-income community investments; and,
  4. Number of employment positions created and retained as a result of qualified low-income community investments and the average annual salary of those positions.
3. Data collection requirements and baseline measurements:
  1. The baseline measurements include:
    1. The amount of tax credits issued in the year;
    2. The unemployment rate of the area; and,
    3. The poverty rate of the area.
  2. Data to collect includes:
    1. The amount of tax credits issued in the year;
    2. The number of operating businesses located in a low-income community that are assisted; and,

- - 1. The number of jobs created and retained as a result of qualified low-income community investments.

FISCAL EFFECT: Pending

COMMENTS:

The author has provided the following statement in support of this bill:

Committee Staff Comments:
1. 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).

1. What would this bill do? This bill would enact a new tax expenditure program modeled after the federal NMTC, with the stated purpose of stimulating private sector investment in lower income communities.
2. 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.) with 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).

1. 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: Unlike the federal credit, which equals 39% of the taxpayer's investment in a qualified CDE, the state credit would actually be more generous by equaling 43% of the taxpayer's investment. Additionally, the credit would be spread over the seven-year period as follows:
    1. Six percent with respect to the first two credit allowance dates;
    2. Three percent with respect to the third credit allowance date; and,
    3. Seven percent with respect to the remainder of the credit allowance dates.

It is not entirely clear to Committee staff why the state should provide a tax incentive that is more generous than the federal credit to which this bill proposed conforming. This is especially so when one considers that, in combination with the federal program, this bill could effectively subsidize 82% of a taxpayer's underlying investment in a CDE. This would be a remarkably generous subsidy even considering the potential social benefits of the Program.

- 1. 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. Specifically, 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 generally limited to businesses that, at the time the initial investment is made, have 250 or fewer employees.
1. Government Accountability Office report: A 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 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.
2. Governor's veto: This bill is similar to AB 1399 (Medina), of the 2013-14 Legislative Session. Governor Brown vetoed AB 1399 with the following message:

This bill creates a new markets tax credit that will cost – over time - $200 million.

I certainly endorse programs that result in private investments to help low-income areas, but a bill to spend this much should be considered with other priorities during the annual budget.

1. Double referral: This bill was double-referred to the Assembly Committee on Jobs, Economic Development, and the Economy. This bill passed that committee on April 23, 2019, by a vote of 7 to 0. For additional discussion of this bill, please refer to that committee's analysis.
2. Policy on tax expenditures: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. This Committee has recently adopted a new policy, requiring that all new tax expenditure proposals comply with the requirements of R&TC Section 41. A tax expenditure proposal must outline specific goals, purposes, and objectives that the tax expenditure will achieve, along with detailed performance indicators for the Legislature to use when measuring whether the tax expenditure meets those stated goals, purposes, and objectives. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. This bill currently complies with the Section 41 requirements.

REGISTERED SUPPORT / OPPOSITION:

Support

None on file

Opposition

None on file

Analysis Prepared by: M. David Ruff / REV. & TAX. / (916) 319-2098

Date of Hearing: April 23, 2019

ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT, AND THE ECONOMY

Sabrina Cervantes, Chair

ABPCA Bill Id:AB 1259 (

Author:Luz Rivas, Cervantes, and E Garcia) – As Introduced Ver:February 21, 2019

SUBJECT: Personal income taxes: corporation taxes: credits: California New Markets Tax Credit

POLICY FRAME: Although California demonstrates policy leadership regarding the future of its economy in areas that emphasize our state’s roles as a technology giant, leader in environmental sustainability, significant participant in global supply chains, and driver for middle-skill workforce development, California remains short on one crucial piece. California’s increasing income inequality remains noticeably outside the scope of the state’s primary economic development programs. Addressing the state’s growing disparities among different geographic regions and population groups requires public policy solutions that bring market opportunity to the neighborhood level and establish access points for these low-income neighborhoods to become more integrated with their regional and state economies.

AB 1259 authorizes a new tool for delivering private capital to very low-income neighborhoods in a manner that incentivizes investors and empowers these communities in an innovative way. Used as an incentive to attract Opportunity Zone investors, the California New Markets Tax Credit (C-NMTC) offers an effective means for ensuring community benefits are realized.

The policy committee analysis includes a discussion of how a C-NMTC may address the state’s increasing income disparities, challenges in accessing business capital, background on the federal NMTC (F-NMTC) Program, reports and assessments of the federal program, and examples of NMTC programs in other states. Technical amendments are suggested in Comment 11.

SUMMARY: AB 1259 establishes the C-NMTC, a $100 million annual tax credit award program, for the purpose of attracting new private capital to very low-income neighborhoods in California. In general, the new state credit parallels the F-NMTC Program. Specifically, this bill:

Purpose of the Credit: Establishes the C-NMTC Program, administered by the Governor’s Office of Business and Economic Development (GO-Biz), for the purpose of stimulating private sector investment in lower-income communities, as specified.
Annual Credits Awards: Authorizes GO-Biz, beginning in 2020 and concluding in 2025, to award authority to designate qualified equity investments up $100 million per tax year to qualified community development entities (CDEs) and other entities authorized to participate in the federal program, including qualified community development financial institutions (CDFIs) and small business investment corporations (SBICs). [In order to finalize the designation of the qualified equity investment, the qualified CDE obtains cash from a taxpayer in the form of a qualified equity investment. Once the investment moneys are raised, the CDE submits documentation to GO-Biz, verifying that the investment funds have been obtained. This process is referred to as the “issuance of the qualified equity investment” by the CDE. Following the issuance, the qualified equity investment is available for deployment in qualified low-income communities in qualified active low-income community businesses. Most commonly, funds are deployed in the form of low-cost debt instruments.]
Value of Individual Credits: Authorizes a 39% tax credit to a taxpayer who makes a qualifying deposit with a CDE for a minimum of seven years and the CDE uses those funds in a manner consistent with the NMTC requirements. The credit may be applied against the taxpayer’s personal or corporate tax liability. A 2% credit may be applied in the first two tax years of the investment. In tax year three, a 6% credit may be applied, and in years four through seven, a 7% credit may be applied. [The federal credit allows taxpayers to apply the credit in the first year, as follows: 5% in the first three years and 6% in the final four years.]
Program Guidelines: Requires GO-Biz to adopt guidelines as necessary and appropriate to meet its responsibilities related to the allocation, monitoring, and management of the C-NMTC. Below is a list of required elements of these guidelines.
1. Allocation Process: The tax credit allocation process is required, at a minimum, to include or address the following:
  1. The first applications are required to be accepted by GO-Biz on or before May 15, 2020, to the extent the C-NMTC is authorized for that year, as specified.
  2. The application process is required to result in an equitable distribution of projects within qualified low-income communities so that low-income community populations across the state are engaged and have an opportunity to benefit from the program.
  3. Applicants are required to demonstrate they can meet organizational capacity standards including business strategy, targeted community outcomes, capitalization strategy, and management capacity. [These standards are consistent with the F-NMTC allocation process.]
  4. Consideration is given in the awards process of an applicant’s prior experience in making investments in low-income areas, including, but not limited to, qualified low-income community investments.
  5. Priority is provided to applications that:
    1. Commit to addressing the hardest to serve and undercapitalized lower-income populations.
    2. Support neighborhood revitalization strategies driven by local grassroots stakeholders.
  6. Applicants are provided a five-day cure period for applications GO-Biz determines to be incomplete.
  7. Members of the application review committee are prohibited from having any financial conflicts of interest, as specified.
2. Operating Costs: GO-Biz is required to set fees to cover the costs for administering the program, including one fee to cover the costs associated with the allocation process and a separate fee to cover program monitoring costs which are only paid by successful applicants, as specified. All fees are required to be deposited in the California New Markets Tax Credit Fund, which is established by this bill.
3. Raising Investment Capital: After receiving certification from GO-Biz of an award, the qualified CDE has 200 calendar days to obtain equity investments from taxpayers up to the value of the certified award and to notify GO-Biz that the CDE has successfully issued the qualified equity investment.
4. Reversion of Unused Investment Authority: Any portion of the certified award that is not covered by a qualified equity investment at the end of 200 days lapses and the value of the unused award reverts to GO-Biz.
5. Recording Tax Payer IDs: A qualified CDE that issues a qualified equity investment is required to notify GO-Biz of the names of taxpayers that are eligible to utilize tax credits pursuant to this program.
6. Deploying Capital: A qualified CDE that issues a qualified equity investment is required to submit a report to GO-Biz that includes documentation demonstrating that at least 85% of the qualified low-income community investments has been deployed within one year in qualified active low-income community businesses.
7. Ongoing Reporting on Deployed Capital: In years two through seven following the issuance of the qualified equity investment, the qualified CDE is required to annually report to GO-Biz on the social, economic, and environmental impacts of the qualified low-income community investments, as specified.
8. Process for Recapturing Credits: GO-Biz is required to work with the Franchise Tax Board on establishing a process for recapturing tax credits when the conditions of the C-NMTC are not met during the mandated seven years of compliance. Enforcement of the recapture provisions are subject to a six-month cure period.
9. Reallocation of Undesignated or Recaptured Credits: Specifies that the value of any undesignated qualified equity investments and recaptured credits may be re-awarded by GO-Biz without affecting the $100 million per year allocation limit, as specified.
Annual Reporting Details: Requires annual reporting on all of the following in the second through seventh years following the issuance of the qualified equity investment:
1. The social, environmental, and economic impact of the qualified equity investment on qualified low-income communities during the report period and cumulatively.
2. The amount of money invested in qualified active low-income community businesses.
3. The number of employment positions created and retained, and the average annual salary of such positions.
4. The number of operating businesses assisted by industry and number of employees.
5. The number of owner-occupied real estate projects.
6. The geographic locations of the assisted businesses.
7. Summary of the outcomes of each of the revenue impact assessments undertaken during the report period.
8. Any other information requested by the GO-Biz, as specified.
Use of Tax Credits by Taxpayers: Specifies the following provisions relative to the application of tax credits to a taxpayer’s tax liability:
1. Limits the application of a tax credit to only those calendar years in which the Legislature appropriates funds in the California New Markets Tax Credit Fund to pay for the cost of administering the C-NMTC program.
2. Prohibits a taxpayer from taking another state tax credit for the same investment.
3. Allows the C-NMTC to be taken in addition to the F-NMTC.
4. Authorizes a taxpayer to carry forward excess credits up to seven years.
Transfer of Investment Authority: Authorizes a qualified CDE to transfer all or a portion of its certified qualified equity investment authority to its controlling entity or any subsidiary qualified community development entity of the controlling entity, as specified. GO-Biz is required to be notified within 30 days of the transfer and the transferee is subject to the same rules, requirements, and limitations applicable to the transferor.
Definition of Qualifying Business: Defines a qualified active low-income community business as meeting the requirements of federal law, including having the business organized under a nonprofit or for-profit tax structure, with several modifications.
1. The qualified active low-income community business shall:
  1. Have less than 250 employees, with one exception. This requirement does not apply to a business located in a tribal trust land held communally by a federally recognized tribe and managed by the tribal government, as defined. [There are no size limitations in F-NMTC.]
  2. Derive less than 15% of its annual revenue from rental or sale of real estate, as specified. [There are no similar limitations in F-NMTC. However, reports by the Congressional Budget Office suggest that land development and property management companies may not be the highest and best use of the credits.]
  3. Be physically located in a census tract that meets one of the following criteria: a poverty rate above 30%, a median income less than 60% of California median income, or an unemployment rate 1.5 times the national average. [This is the federal definition for severely distressed and is more stringent than the general eligibility of the F-NMTC, which is 20% poverty or 80% median income.]
2. Excluded from the definition of a qualified active low-income community business are any businesses that:
  1. Operate or derive revenues from the operation of a charter school. [There are no similar exclusions in the F-NMTC. Removal of this activity from the California credit focuses the use of the credit on economic development-based investments.]
  2. Operate or derive revenues from the operation of a country club or golf course from C-NMTC funding.
  3. Operate or derive revenues from the operation of gaming establishments, massage parlors, liquor stores, and sexually oriented businesses, as defined, from qualifying as an active low-income community business. [There are no similar exclusions in the F-NMTC. There are, however, other state tax credits which have similar limitations, including the California Competes Tax Credit.]
Measuring Success of C-NMTC: Provides the following metrics for evaluating the success of the C-NMTC program:
1. Sets the goal, purpose, and objective of C-NMTC as attracting private sector investment in lower-income communities in California.
2. Sets the performance indicator as the:
  1. Amount of qualified low-income community investments issued.
  2. Amount of dollars deployed in qualified low-income community investments.
  3. Number of operating businesses assisted as a result of qualified low-income community investments. This data shall be compared to business development, including startups, tax revenues, and new investments within the most immediate geographic area for which data is reasonably available for the 12 and 24 months prior to the use of the C-NMTC in that area.
  4. Number of employment positions created and retained as a result of qualified low-income community investments and the average annual salary of those positions. These numbers shall be compared to the area median income and unemployment and poverty rates for the most immediate geographic areas for which data is reasonably available for the 12 and 24 months prior to the use of the C-NMTC in that area.
3. Sets the following baseline measurements and data collection requirements:
  1. The baseline measurements include:
    1. The amount of tax credits issued in the year.
    2. The unemployment rate of the area.
    3. The poverty rate of the area.
  2. Data to collect includes:
    1. The amount of tax credits issued in the year.
    2. The number of operating businesses located in a low-income community that are assisted.
    3. The number of jobs created and retained as a result of qualified low-income community investments.
Sunset: Contains a sunset of December 1, 2025.
Severability: Contains a severability clause.
Tax Levy: Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW

F-NMTC: Authorizes a taxpayer to claim a federal tax credit for qualified investments made to qualified CDEs, as specified. The value of the federal NMTC is 39% of the qualified equity investment. The credit is applied by the taxpayer over a seven-year period.
F-NMTC Applicants: Limits applications under the F-NMTC program to only federally certified CDEs, CDFIs, and small business investment companies.
1. Community Development Entity: The F-NMTC program defines a qualified CDE as any domestic corporation or partnership that meets the following three requirements:
  1. The entity has as its primary mission the serving or providing of investment capital for low-income communities or low-income persons.
  2. The entity maintains accountability to residents of low-income communities through representation on its governing board or an advisory board sponsored by the entity.
  3. The entity has been certified by the CDFI Fund at the U.S. Treasury as meeting the requirements of (i) and (ii).
2. Community Development Financial Institution: The F-NMTC program has a special rule that allows certified CDFI to apply for an award. A certified CDFI:
  1. Is a legal entity at the time of certification application;
  2. Has a primary mission of promoting community development;
  3. Is a financing entity;
  4. Primarily serves one or more target markets;
  5. Provides development services in conjunction with its financing activities;
  6. Maintains accountability to its defined target market;
  7. Is a non-government entity and not under the control of any government entity (Tribal governments excluded); and
  8. Is certified by the CDFI Fund at the U.S. Treasury as meeting the requirements of (i) through (vii).
3. Small Business Investment Company: A SBIC is a type of privately-owned and -managed investment fund that is licensed and regulated by the Small Business Administration. An SBIC uses its own capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses.
Definition of Qualified Investment: Defines a qualified low-income community investment to mean the same as in the F-NMTC:
1. Any capital or equity investment in, or loan to, a qualified low-income business, as defined;
2. Any capital or equity investment in, or loan to, a real estate project in a low-income community;
3. The purchase of a loan from another CDE that meets the other requirements for a low-income community investment;
4. Financial counseling and other services in support of business activities to businesses and residents of a low-income community; or
5. Any equity investment in, or a loan to, a CDE. [An equity investment includes any stock, other than nonqualified preferred stock, in a corporation or any capital interest in any partnership.]

FISCAL EFFECT: Unknown

COMMENTS & CONTEXT:

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 several decades. For example, the pretax income among the highest 1% of California taxpayers increased from 9.82% in 1980 to 25.1% of total income in 2013. This rise in 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 health.

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.

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 debt (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 and long-term debt products to established, larger businesses, smaller businesses are often bypassed because they lack the collateral or establishment history, or need too small of a loan.

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 or the egg” scenario whereby businesses are told they need to grow in order to access financing, while simultaneously being denied access to the financing they need to grow.

AB 1259 supports the development of new capital resources for businesses in low-income neighborhoods. According to the U.S. Treasury report on the F-NMTC program from inception through 2016, over 90% of investments were made at below market interest rates, 50.9% had more flexible borrower credit standards, 47.3% had lower than standard debt service coverage ratios, and 30.0% had subordinated debt.

Federal New Markets Tax Credit Program: Congress enacted the NMTC as part of the Community Renewal Tax Relief Act of 2000 to stimulate equity investments in low-income communities. Under the program, CDE’s 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.

Through 14 competitive application rounds (2003 to 2017, inclusive), the CDFI Fund has made 1,105 F-NMTC awards for a total of $54 billion in tax credits. This $54 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.

New Markets Tax Credits are uniquely designed to attract private capital to very low-income neighborhoods, including drawing money from national investment pools. Since its inception, the CDFI Fund has allocated tax credit authority to 413 CDEs headquartered in 45 states, the District of Columbia, Puerto Rico, and Guam. Of the qualified equity investments deployed, more than 75% were in severely distressed areas and 55% with unemployment rates 150% above the statewide average. The federal General Accounting Office (GAO) reports that the presence of the federal credit attracts capital for projects that may otherwise be overlooked.

Based on program activities reported through Fiscal Year 2016, CDEs and CDFIs disbursed a total of $44.4 billion in qualified equity investment proceeds toward 5,333 projects. Since 2003, the NMTC Program has created or retained an estimated 197,585 jobs nationally. The largest amount of investments by industry sectors went to single and mixed-use real estate (29.0%), followed by health care and social services (19.2%), manufacturing (11.2%), and educational services (9.5%). These investments supported the construction of 32.4 million square feet of manufacturing space, 74.8 million square feet of office space, and 57.5 million square feet of retail space. The U.S. Department of the Treasury reports that a secondary benefit of the program is that as these communities develop through F-NMTC investments, they become more attractive to other investors, catalyzing a ripple effect that spurs further investments and revitalization.

According to the U.S. Treasury, for every $1 invested by the federal government, the NMTC Program generates over $8 of private investment. Over 75% of NMTC investments have been made in highly distressed areas, meaning the household income was less than 60% of statewide median income and the poverty rate was higher than 30%.

Under legislation signed by President Obama in December 2015, $3.5 billion in New Markets Tax Credits will be available annually through 2019. Legislation is currently pending in both the U.S. House of Representatives and the U.S. Senate to permanently extend the NMTC Program. Congresswoman Terri Sewell (D-AL) and Congressman Tom Reed (R-NY), introduced the House bill and Senators Roy Blunt (R-MO) and Ben Cardin (D-MD) introduced the Senate bills.

California New Markets Competiveness: Community and economic developers have expressed concern that California communities are not receiving a greater benefit for the F-NMTC program. The New Markets Tax Credit Coalition, a nonprofit organization of CDEs, reports that states that regularly receive the largest shares of the federal credits are often the same states that offer parallel state tax credit programs or other resources that encourage community development within lower-income communities.

Since inception, California-based CDEs, CDFIs, and SBICs received 113 F-NMTC awards, and 187 awards went to a CDE, CDFI, or SBIC that serves California. Total qualified equity investments that were expended in California were $3.9 billion of the $54 billion. While that may seem like a considerable amount of money, it represents less than 10% of funds. California ranks 33^rd among states in terms of per capita income and represents over 12% of the U.S. population. The state has 14.3% of individuals living under the federal poverty line, and 19% of individuals living below the supplemental poverty rate that includes, among other things, the cost of shelter.

In 2017, 73 F-NMTC awards were made for a total of $3.5 billion. California’s share is as follows:

Five F-NMTC applicants serving California received $225 million; and
Two F-NMTC applicants serving multiple states including California received $120 million.

Compounding the impact of less than equitable F-NMTC allocations is that not every California-based CDE, CDFI, or SBIC uses the money raised through the federal credit in the state where they are headquartered. In fact, there are over 100 CDEs that have national service areas. In the 2013 and 2014 funding rounds, $3.7 billion in tax credit authority was awarded to 78 CDEs and CDFIs with a national service area. Of these 78 national awards, only 35% stated in their application that California would be a preference area. Relative to award level, of the $3.7 billion awarded, $1.3 billion (35%) went to national CDEs and CDFIs that were committed to trying to do projects in California.

Other State New Markets Tax Credits: Since the inception of federal NMTC, more than one dozen 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 offices of authors of similar bills previously introduced, several of these states have experienced a return on investment of 13 to 1. More details on state programs are provided below:
1. In Missouri, the state New Markets Tax Credit paid for itself during its first two years of operation, bringing in more in additional investment dollars than was allocated in state funds for the entire seven-year period.
2. 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.
3. The Ohio NMTC program awards $10 million annually to CDEs with federal allocations or who anticipate federal allocations. The award cycles are synced so that a CDE could co-apply at the time they are applying for the federal credit.
Impact of the Recession on F-NMTC Program: The 2014 GAO report covers F-NMTC investments made between 2010 and 2012. While this represents the most recent program data available at the time, it also represents the deployment of F-NMTCs at the height of the global recession. With global capital markets frozen, public policy makers, including the President and the U.S. Congress, were taking drastic actions to substitute public moneys where previously there would have been private funds. Most notably, the federal government passed the Stimulus Package (2009) and the Small Business Jobs Act (2011). It may have been useful if the GAO, among its other findings and recommendations, would have also addressed the potential impact of the assessment period on the complexity of the financial structures and the increase in the use of other government programs.
Federal Tax Cut and Jobs Act of 2017: The federal Tax Cuts and Jobs Act of 2017 (Federal Act) made a number of enhancements to federal community development tools. Among other actions, the Federal Act extended the NMTC and created Opportunity Zones (OZs), a new incentive for investors to deploy capital in lower-income neighborhoods.

Under the new Federal Act, Governors were authorized to nominate up to 25% of their respective states’ eligible low-income census tracts for designation. Up to 5% of the 25% of the nominated census tracts could be from census tracts adjacent to the eligible low-income census tracts. Once approved by the U.S. Treasury, census tracts remain designated for a term of 10 years.

Eligible Census Tracts: An Opportunity Zone is defined as any census tract that has either: (1) a poverty rate of at least 20%, or (2) a median family income that does not exceed 80% of statewide median income.
California Eligible Areas: Based on guidance from the U.S. Treasury, California had 3,516 eligible low-income census tracts, meaning California was able to nominate up to 879 census tracts. As census tracts are designed to capture geographic areas of approximately 4,000 people, more than 3 million Californians are potentially living within an Opportunity Zone. Link to online resources related to designated census tracts: http://www.dof.ca.gov/Forecasting/Demographics/opportunity_zones/index.html

Most significantly, the geographic specifications of the Opportunity Zone align with those in the NMTC program. The target areas also align with another federal tax credit program, the Workforce Opportunity Tax Credit, which provides credits to businesses who hire and retain workers who have historically faced barriers to employment.

Federal law authorizes a broad range of Opportunity Zone business investments, including investments in stock, partnership interest, and business property. A qualified OZ business property investment may include new and substantially improved tangible property, including commercial buildings, equipment, and multifamily housing complexes. The essential eligibility requirement of the tax incentive is that the investment must be made through a qualified Opportunity Fund. For investors who properly place moneys in a qualified Opportunity Fund, they will receive:

A temporary deferral of inclusion in taxable income for capital gains reinvested in an Opportunity Fund. The deferred gain must be recognized on December 31, 2026, or earlier if the Opportunity Zone investment is disposed;
A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least five years and is increased by an additional 5% if held for at least seven years, thereby excluding up to 15% of the original gain from taxation; and
A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years. This exclusion only applies to gains accrued after an investment in an Opportunity Fund.

It is difficult to accurately identify the scope of new investment dollars Opportunity Funds represent. The Economic Innovation Group, one of the early sponsors of the Opportunity Zone Program, estimates that there are up to $6.1 trillion in unrealized capital gains, including investments headed by U.S. households and corporations.

AB 1259 builds on these efforts by providing another financial resource to help lower the risk of development and to help California communities attract Opportunity Zone investors.

Leveraging NMTC to Attract Opportunity Zone Investments: California Forward, who serves as the secretariat for the California Economic Summit, is a lead partner in several strategic conversations on how California can maximize the use of the Opportunity Zone to direct private capital investment into lower-income communities across the state.

While the Opportunity Zone tax incentive has no mandate for community benefits, communities can use their existing authorities and resources to identify priority projects, remove regulatory impediments, and potentially provide local incentives to be more attractive to investors, such as permit streamlining, approvals of master land use plans, and dedicating community development funds. Creating new programs, such as the C-NMTC, provide broad-based support to lower-income neighborhoods, which can provide an extra financing tool for projects.

Below is a short overview of the top-five recommendations from the California Forward-facilitated discussions, based on notes from a meeting hosted by the Bay Area Council and which reflect contributions from numerous meetings around the state.

State programs and resources should be reviewed and made ready for layering with Opportunity Zone investments in order to bolster their effectiveness in achieving community benefits.
State tax laws should be amended to conform with the new federal capital gains rules to meet state policy objectives. It is reported that 34 other states have revised their tax structures to conform their treatment of capital gains to the new federal rules.
State financial assistance is needed for local capacity building in order for communities to be “Opportunity Zone Ready.”
Where possible, state and local regulatory processes should be streamlined, as well as other actions to create a short pathway to project implementation.
Results should be measured using performance-based models so that outcomes can be tracked over time to ensure new investments are actually improving local conditions.

The Milken Institute, a nonprofit and nonpartisan economic policy think tank known for developing financial innovations, also believes that states can play a vital role in the deployment of Opportunity Fund moneys within their respective states. While investors are already seeking deals, it is in the best interest of states to “align incentives for the spectrum of deals (e.g., mixed-use real estate, new business formation) in order to structure deal flow with smart exits. In doing so, states are building community benefit prerequisites into the process, creating a mechanism that retains the intended tangible benefits of the investment.” Ideally, according to Milken, states will benefit from having a pipeline of shovel-ready projects and a framework to direct Opportunity Zone deals.

NMTC Research Findings: Over the years the F-NMTC Program has been reviewed and evaluated by a number of sources including the GAO, Pacific Community Ventures; and the Urban Institute.

In 2010, the GAO released one of several statutorily mandated reports on the New Markets Tax Credit program that found:

1. Since 2003, NMTC investments totaling $26 billion have been made in all 50 states, the District of Columbia, and Puerto Rico;
2. NMTCs are often used as “gap financing,” accounting for a portion of total project costs; and
3. 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.

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. For every dollar of forgone tax revenue, NMTC leverages $12-$14 of private investment.”

In 2013, the Urban Institute released a report on the first four years of the program (2002-2006). This was the first independent evaluation of the F-NMTC program requested by the CDFI Fund:

The vast majority of qualified active low-income community businesses (93%) either could not otherwise have obtained financing or, compared with other available financing, received better rates and terms in conjunction with F-NMTCs;
77% of projects increased payroll, property, sales, corporate, or other taxes to the benefit of the local community; and
60% of projects saw an increase in their employment levels of more than 33% compared with pre-NMTC levels.
July 2014 Report from the Government Accountability Office: In the summer of 2014, the GAO issued a special report at the request of U.S. Senator Tom Coburn (R-OK) regarding the F-NMTC Program. The report was critical of the complexity of the projects and the lack of consistent reporting. More specifically, the report made the following findings:
Investments have become more complex and less transparent over time. One reason is the practice of combining New Markets Tax Credits (NMTCs) with other government assistance. While the GAO agrees that this can help finance projects that would not otherwise be economically viable, it raises questions about whether some amount of these additional subsidies are unnecessary.
The increasingly complex financial structures may also be masking investors’ actual rates of return. The GAO is concerned that the return on investment (ROI) may be above market and cite a 24% ROI reported by one investor. The GAO reports that the IRS and U.S. Treasury have the authority but have not updated guidance to reflect the inclusion of other government resources.
GAO also recommends that the CDFI Fund collect additional data on fees and other charges collected by the CDEs. Finally, the GAO report expresses concern over the lack and quality of data on equity remaining with the business in low-income areas and failure rates of NMTC projects.

In conclusion, the GAO recommended the U.S. Treasury issue further guidance to ensure:

Appropriate means for combining the F-NMTC with other government programs;
Adequate controls to limit the risks of unnecessary duplication and above-market rates of return;
That more complete and accurate data are collected on fees and costs, the equity remaining in the business after 7 years, and loan performance; and
That the CDFI Fund issues instructions to clarify the reporting of loan performance and making the reporting of that data mandatory.

The U.S. Treasury agreed with GAO’s recommendations to improve data collection on loan performance and equity remaining with the low-income business. The GAO also established a working group in response to the report to consider the other recommendations.

Proposed Amendments: Below is a list of amendments the committee members may wish to review when considering the bill.
1. Postpone the awarding of tax credit awards for one year to allow for development of the program and for the credits to be reflected in the 2020-21 state budget.
2. Modify the deadline for the first application round from March 15, 2020, to January 15, 2021, and make other technical and conforming amendments.
3. Modify schedule for earning tax credits by increasing the first and second year to 6% and lowering the third year to 3%.
4. Replace the requirement to create a new fund within the State Treasury with the creation of an account within an existing GO-Biz-related fund, the California Economic Development Fund.
5. Modify the authority for an applicant to add omitted information to an application after it has been submitted to GO-Biz, to allow applicants to correct minor and non-substantive errors and omissions after the application has been submitted to GO-Biz.
6. Revise the tax credit allocation limitation to only be those years in which funds are appropriated to administer the program.
7. Remove the limitation on the application of the credit to only those years that GO-Biz is awarded funds to administer the program.
8. Require annual documentation to GO-Biz as to the amount and percentage of equity investments deployed in qualified low-income community investments in qualified active low-income community businesses located in California during the reporting period.
9. Add authority for the Franchise Tax Board to adopt rules and have access to relevant information held by GO-Biz.
10. Make other technical and conforming changes.
Related Legislation: Below is a list of bills from the current and prior sessions.
1. AB 185 (E. Garcia and Medina) State New Markets Tax Credit: This bill would have authorized the creation of a New Markets Tax Credit for qualified investments made in low-income communities beginning in the 2016 tax year. The NMTC Program would have been administered through the Governor’s Office of Business and Economic Development. The bill would have authorized $40 million in tax credits over a five-year period for a total program of $200 million in credits. Total private investment raised was estimated at $512 million. Tax credit authority would have come from the reallocation of the unused portion of the State Sales and Use Tax Exclusion Program. Status: Returned to the Desk without action by the Assembly Committee on Appropriations, 2016.
2. AB 305 (V. Manuel Pérez) State New Markets Tax Credit: This bill would have authorized the creation of a New Markets Tax Credit for qualified investments made in low-income communities beginning in the 2013 tax year. The NMTC Program would have been administered through the California Tax Credit Allocation Committee. The bill would have authorized $30 million in tax credits over a seven-year period for a total program of $200 million. Tax credit authority would have come through the elimination of the underutilized Small Business New Hire Credit. Status: Held in the Assembly Committee on Appropriations, 2013.
3. AB 1399 (Medina and V. Manuel Pérez) State New Markets Tax Credit: This bill would have authorized the creation of a New Markets Tax Credit for qualified investments made in low-income communities beginning in the 2015 tax year. The NMTC Program would have been administered through the Governor’s Office of Business and Economic Development. The bill would have authorized $40 million in tax credits over a five-year period for a total program of $200 million in credits. Total private investment raised was estimated at $512 million. Tax credit authority would have come from the reallocation of the unused portion of the State Sales and Use Tax Exclusion Program. Status: Vetoed by the Governor, 2013. The veto message states, “This bill creates a New Markets tax credit that will cost – over time - $200 million. I certainly endorse programs that result in private investments to help low-income areas, but a bill to spend this much should be considered with other priorities during the annual budget.”
4. AB 1715 (JEDE Committee) California New Markets Tax Credit: This bill would have authorized the creation of a New Markets Tax Credit for qualified investments made in low-income communities beginning in the 2018 tax year. Funding for the credit would have come from the renegotiation of the Governor’s Economic Development Initiative (GEDI), an underperforming initiative which was created to replace the California Enterprise Zone Program. Status: Following discussions with Assembly Budget Subcommittee Four regarding the reworking of GEDI tax incentives, the bill was used for another purpose, 2017.
5. AB 2037 (Davis and V. Manuel Pérez) California New Markets Tax Credit: This bill would have authorized the creation of a New Markets Tax Credit for qualified investments made in low-income communities beginning in the 2011 tax year. The NMTC Program would have been administered through the California Tax Credit Allocation Committee. Tax credit authority would have come through the elimination of the underutilized Small Business New Hire Credit. Status: Held in the Assembly Committee on Appropriations, 2011.
6. AB 2647 (E. Garcia and Medina) California New Markets Tax Credit: This bill would have established a $40 million tax credit program for five years for the purpose of attracting new private capital to very low-income neighborhoods in California. In general, the new state credit would have paralleled the federal New Markets Tax Credit (F-NMTC) Program. Status: Held in the Assembly Committee on Appropriations, 2016.
7. AB 643 (Davis and V. Manuel Pérez) California New Markets Tax Credit: This bill would have created a New Markets Tax Credit for qualified investments made in low-income communities beginning in the 2012 tax year. The State Treasurer’s Office would have administered the new credit program and allocated credits of up to $50 million per year for a total amount equal to $300 million over six years. Status: Held in the Assembly Committee on Appropriations, 2012.
8. SB 1316 (Romero) California New Markets Tax Credit: This bill would have authorized the creation of a New Markets Tax Credit for qualified investments made in low-income communities beginning in the 2011 calendar year. The State Treasurer’s Office would have administered the new credit program and allocated credits in an amount equal to the estimated revenue gains resulting from the temporary elimination of specified like-kind property exchanges. Status: Died on the Senate inactive file, 2010.
Double Referral: The Assembly Committee on Rules has referred this measure to the Assembly Committee on Jobs, Economic Development, and the Economy and to the Assembly Committee on Revenue and Taxation (R&T). Should this measure pass the committee, it will be referred to R&T for further policy consideration.

REGISTERED SUPPORT / OPPOSITION:

Support

California Association for Micro Enterprise Opportunity

Opposition

None on File

Analysis Prepared by: Toni Symonds / J., E.D., & E. / (916) 319-2090