STAND. COM. REP. NO. 2879

Honolulu, Hawaii

RE: S.B. No. 2694

S.D. 1

Honorable Ronald D. Kouchi

President of the Senate

Thirtieth State Legislature

Regular Session of 2020

State of Hawaii

Sir:

Your Committee on Housing, to which was referred S.B. No. 2694 entitled:

"A BILL FOR AN ACT RELATING TO THE LOW-INCOME HOUSING TAX CREDIT,"

begs leave to report as follows:

The purpose and intent of this measure is to increase the number of low-income housing tax credit buyers by exempting state low—income housing tax credit investors from the federal "at—risk" and "passive activity loss" rules.

Your Committee received testimony in support of this measure from Hawaii Housing Finance and Development Corporation; Building Industry Association of Hawaii; Hawaii Regional Council of Carpenters; EAH Hawai‘i, Inc.; Stanford Carr Development, LLC; Pacific Resource Partnership; Castle & Cook Hawaii; Hunt Companies Hawaii; Sugar Creek Capital; Chamber of Commerce Hawaii; Hawai‘i Appleseed Center for Law & Economic Justice; and one individual. Your Committee received comments on this measure from the Department of Taxation and Tax Foundation of Hawaii.

Your Committee finds that one of the most important tools for developing affordable housing is the State's low—income housing tax credit program. However, the Hawaii low—income housing tax credit program needs several reforms that would enable it to produce more low—income rental units at little to no cost to the State. Your Committee further finds that the program is underutilized because only a limited number of Hawaii taxpayers can take advantage of the program. Currently, only a few dozen large financial institutions and insurance companies can purchase state low—income housing tax credits because state regulations do not specifically exempt Hawaii state low—income housing tax credit investors from rules imposed on federal low—income housing tax credit investors. The unintended consequence is that there are few eligible state low—income housing tax credit buyers, which in turn, results in the credits being valued and sold for a lower price.

Your Committee further finds that exempting state low—income housing tax credit investors from the federal "at—risk" and "passive activity loss" rules would dramatically increase the pool of potential low—income housing tax credit buyers by allowing any Hawaii taxpayer to benefit from purchasing state low-income housing tax credits. This would result by increasing the low—income housing tax credit sales price, which directly translates into millions of more dollars for affordable housing in Hawaii. For these reasons, this measure exempts state low—income housing tax credit investors from the federal "at-risk" and "passive activity loss" rules.

Your Committee received testimony from the Department of Taxation, who recommended amendments that would foreclose potential unintended consequences of the measure as written. Therefore, your Committee has amended this measure by:

(1) Disallowing the special treatment proposed by this measure if a building ceases to be a qualified low-income housing building;

(2) Preventing inflation of the depreciable basis by using nonrecourse financing; and

(3) Making technical, nonsubstantive amendments for the purposes of clarity and consistency.

As affirmed by the record of votes of the members of your Committee on Housing that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 2694, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 2694, S.D. 1, and be referred to your Committee on Ways and Means.

Respectfully submitted on behalf of the members of the Committee on Housing,

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STANLEY CHANG, Chair