California Budget Proposal Would Severely Limit Ability to Claim State LIHTCs

Published by Michael Novogradac on Monday, May 18, 2020 - 12:00am

On May 14 California Governor Gavin Newsom proposed a revised budget that addresses what will be severe COVID-19 related revenue shortfalls. To help raise revenue over the near term, many changes are proposed, including a “three-year suspension of net operating losses and limitation on business incentive tax credits to offset no more than $5 million of tax liability per year.” This provision would limit the amount of state low-income housing tax credits (LIHTC) each investor could claim, each year, along with other California state tax credits to $5 million for 2020, 2021 and 2022.  

Many details remain to be released, but this proposal would dramatically and adversely affect the building and preservation of affordable housing in California.

In 2019 alone, the California Tax Credit Allocation Committee (CTCAC) awarded $73 million in state LIHTCs, with an average per property of $2.7 million. CTCAC made similar award amounts in the recent past. The state LIHTC flows to investors over four years.

According to CTCAC, only 16 investors claimed state LIHTC in 2018. Given that the state is proposing to make $500 million in state LIHTC available in 2020, not to mention the expected state tax credit claims in 2020 for prior investments, a $5 million dollar annual limit would severely adversely affect LIHTC equity pricing. 

If enacted, many existing investors would be required to defer claiming a portion of the tax credits for at least three years.  Many of these existing investors would likely attempt to sell some of their current California LIHTC investments, further adversely affecting equity pricing.

This development will be even more troubling if other states follow California’s example. Other states are facing similar budget challenges also have large, important state LIHTC programs and other economic development tax credit incentives. The concept has precedent from the Great Recession in 2009; several legislatures enacted similar limits.

Advocacy efforts are underway to address the effects of the proposal, including a possible exemption for state LIHTCs.