Department of RevenueFebruary 28, 2017

Analysis of H.F. 1249 As Proposed to be Amended

Page 1

INDIVIDUAL INCOME TAX

CORPORATE FRANCHISE TAX

INSURANCE PREMIUMS TAX

Low-Income Housing Tax Credit

March 28, 2017

Department of Revenue

Analysis of H.F. 1249 (Hoppe)As Proposed to be Amended (HF1249A1)

Fund Impact

F.Y. 2018F.Y. 2019F.Y. 2020F.Y. 2021

(000’s)

General Fund($7,000)($14,000) ($21,000) ($28,000)

Department of RevenueFebruary 28, 2017

Analysis of H.F. 1249 As Proposed to be Amended

Page 1

Effectivebeginning in tax year 2017.

EXPLANATION OF THE BILL

Current Law:The federal low income housing tax credit (LIHTC), enacted in 1986, provides funding for rental housing projects whose owners agree to provide at least 20% of residential units to those with incomes below half of the area median income or at least 40% to those with incomes below 50% or 60% of the area median income.Low-income tenants can be charged no more than 30% of the maximum eligible income, which is 60% of the area’s median income adjusted for household size. The agreement is for a compliance period of 30 years.

There are two types of federal low-income housing tax credits: 9% credits and 4% credits. Each state receives a fixed allocation of 9% credits based on population, and state housing finance agencies administer the federal credits.Credits allocated to a taxpayer are claimed in equal amounts per year over ten years. Developers generally assign the federal credits to other taxpayers who provide equity for the project in exchange for the right to claim the credits. State housing finance agencies may also award federal low income housing tax credits in the form of 4% credits, which are issued in conjunction with the state’s tax-exempt bonding authority.

Proposed Law:The proposal would provide a state credit equal to the federal 4% credit for which a project would be eligible (even if no federal credit is awarded to the project). The credit would be received in the year in which it is allocated and in each of the five following taxable years, with each annual credit equaling one-sixth of the federal 10-year total.The proposed credit may be claimed against the individual income tax, corporate franchise tax, or insurance premiums taxes. The credit is not refundable, but unused credits may be carried forward for up to 11 years.

An eligible project must be located in Minnesota, financed with tax-exempt bonds, eligible for a federal low-income housing tax credit, and subject to a compliance agreement that the state can enforce. Credits may be awarded only to projects that the Minnesota Housing Finance Agency determines are not financially viable without the credit. Half of the total credits must be allocated to qualified projects outside the seven-county metropolitan area. Only one credit may be allocated to any one qualified Minnesota project.

EXPLANATION OF THE BILL (Cont.)

A total of $7 million of credits, in addition to any unused credits from previous years, may be allocated each year fromJanuary 1, 2017 to December 31, 2022. The Housing Finance Agency must submit a report to the Legislatureeach year it allocates credits.

REVENUE ANALYSIS DETAIL

  • It is assumed that the maximum amount of credits would be allocated and claimed in each year. It is assumed there are no unused or returned credits.
  • The total fiscal cost for tax years 2017 to 2022 would be $42 million.
  • Tax year impacts were allocated to the following fiscal year.

Source:Minnesota Department of Revenue

Tax Research Division

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