SENATE BILL REPORT

SB 5208

This analysis was prepared by non-partisan legislative staff for the use of legislative members in their deliberations. This analysis is not a part of the legislation nor does it constitute a statement of legislative intent.

As of February 28, 2017

Title: An act relating to creating the Washington rural jobs act.

Brief Description: Creating the Washington rural jobs act.

Sponsors: Senators Warnick, Takko, Dansel, Brown, Hawkins, Schoesler, Mullet and Saldaña.

Brief History:

Committee Activity: Agriculture, Water, Trade & Economic Development: 2/02/17.

Brief Summary of Bill

  • Provides a process to establish a rural growth fund in order to invest in rural business concerns.

  • Authorizes a tax credit for individuals or entities who invest in rural growth funds.

SENATE COMMITTEE ON AGRICULTURE, WATER, TRADE & ECONOMIC DEVELOPMENT

Staff: Greg Vogel (786-7413)

Background: RBICs and SBICs. Rural Business Investment Companies (RBIC) and Small Business Investment Companies (SBIC) are privately owned and managed investment funds, licensed and regulated by the US Department of Agriculture (USDA) and Small Business Administration (SBA) respectively, that make capital investments in small businesses and smaller enterprises located in rural areas. Both RBICs and SBICs raise private capital from investors and may receive leverage from the the USDA or SBA respectively in order to fund the investments.

An RBIC or SBIC program is a provision in a state or federal tax code that offers incentives for private capital to invest in small businesses, startups, low-income areas, or regions otherwise under economic distress. These programs often include special criteria for a certain quantity of the credit to focus on rural or underdeveloped areas.

Summary of Bill: Tax Credit Application, Approval, and Allocation. Beginning November 1, 2017, the Department of Commerce (Department) must accept applications for approval as a rural growth fund. The application must include all of the following:

The Department must make an application determination within 30 days of receipt on a first come, first-served basis. The Department may not approve more than $100 million in investment authority and not more than $60 million in credit-eligible capital contributions for the entire program.

The Department must deny an application if any of the following are true:

Upon approval of an application, the Department must provide a written approval to the applicant as a rural growth fund specifying the amount of the applicant's investment authority and a tax credit certificate to each investor whose affidavit was included in the application specifying the amount of the investor's credit-eligible capital contribution.

After receiving written approval, a rural growth fund must:

  1. collect the credit-eligible capital contributions from each taxpayer issued a tax credit certificate; and

  2. collect one or more investments of cash that, when added to the credit-eligible capital contributions, equal the rural growth fund's investment authority.

Application fees are deposited in the newly created rural job creation fund and may be used by the Department to administer the program.

Tax Credit Established. A nonrefundable tax credit is allowed for taxpayers that make a credit-eligible capital contribution to a rural growth fund and are issued a tax credit certificate. The credit may be claimed against:

The credit may not be sold, transferred, or allocated to any other entity other than an affiliate subject to business and occupation taxes or insurance premium taxes.

On the closing date, the taxpayer earns a credit equal to the amount of the taxpayer's credit-eligible capital contribution to the rural growth fund as specified on the tax credit certificate. The taxpayer may claim up to one-third of the credit for each of the taxable years that includes the third through fifth anniversaries of the closing date, exclusive of the amounts carried forward. The closing date is the date on which a rural growth fund has collected all credit-eligible capital contributions and investments of cash that make up the fund's investment authority.

If the amount of the credit for a taxable year exceeds the tax otherwise due for that year, the excess must be carried forward to ensuing tax years until fully used. In order to claim a credit, the taxpayer must submit a copy of the tax credit certificate with the taxpayer's return for each taxable year the credit is claimed.

Revocation of Tax Credit Certificates and Exit. The Department must revoke a tax credit certificate if any of the following occur with respect to a rural growth fund before it exits the program:

Before revoking one or more tax credit certificates, notice and opportunity to correct must be provided. If tax credit certificates are revoked, the associated investment authority and credit-eligible capital contributions do not count toward the limit on total investment authority and credit-eligible contributions and those are redistributed.

On or after the sixth anniversary of the closing date, a rural growth fund may apply to the Department to exit the program. The fact that no tax credit certificates have been revoked and that the rural growth fund has not received a notice of revocation that has not been cured is sufficient evidence to prove that the rural growth fund is eligible for exit. The Department may not revoke a tax credit certificate after the rural growth fund's exit from the program.

The state must share in all distributions and payments to equity holders in the rural growth fund in excess of the sum of the amount of equity capital invested in the fund by the equity holder and an amount equal to any projected increase in the equity holder's federal or state tax liability, related to the equity holder's ownership, management, or operation of the fund in the following amounts:

Request for Determination. A rural growth fund, before making a rural growth investment, may request from the Department a written opinion as to whether the business in which it proposed to invest is a rural business concern. If the Department fails to provide the opinion by the fifteenth business day from the receipt of the request, the business in which the rural growth fund proposes to invest must be considered a rural business concern.

Reporting Obligations. Each rural growth fund must submit a report to the Department on or before the fifth business day after the second anniversary of the closing date. The report must provide documentation as to the rural growth fund's rural growth investments and include:

On or before the last day of February of each year following the year in which the first report is due, the rural growth fund must submit an annual report to the Department including the following:

Tax Preference Performance Statement. A tax preference performance statement states that the public policy objective is to create and retain jobs in rural areas of Washington and a vested tax credit is provided to induce taxpayers to invest in rural growth funds.

JLARC review. The program expires July 1, 2023, unless the Joint Legislative Audit and Review Committee (JLARC) finds that the aggregate number of jobs created or retained, as a result of the tax preference established in the bill, matches or exceeds the aggregate number of jobs set forth in the business plans of approved rural growth funds in the six years following enactment of the tax preference.

Appropriation: None.

Fiscal Note: Available.

Creates Committee/Commission/Task Force that includes Legislative members: No.

Effective Date: Ninety days after adjournment of session in which bill is passed.

Staff Summary of Public Testimony: PRO: This bill comes from a recent paper written by a U.S. Senator and a doctor from Stanford. The paper discusses a key challenge for small business growth in rural areas, which is access to capital. There is unmet growth demand and need in these areas, and if this piece can be solved with smart and mentor capital, the jobs will follow. Twenty plus states use structures like these to drive capital and to meet economic development goals. Oregon has a similar program where in four years they have $106 million invested in rural areas, creating 1,309 jobs. The average salary of those jobs is $42,200. They estimate for every dollar of tax credit that has been foregone, $2.82 of new revenue has come from taxes, state and local. Utah has had similar success with a company that creates helicopter parts.

Persons Testifying: PRO: Ryan Brennan, Advantage Capital Partners; Eric Lohnes, Association of Washington Business.

Persons Signed In To Testify But Not Testifying: No one.