Community Development Financial Institutions.
A Community Development Financial Institution (CDFI) is a specialized financial institution certified by the United States Department of the Treasury (Treasury) to provide loans for community development purposes. The CDFIs work in economically distressed markets that are underserved by traditional financial institutions and provide financial products such as mortgage financing for low-income homebuyers and not-for-profit developers, flexible underwriting and risk capital for community facilities, and technical assistance and commercial loans to small businesses in low-income areas. The Treasury offers competitive financial and technical assistance awards to assist certified CDFIs in offering these financial products. An emerging CDFI may apply for a technical assistance award if it can demonstrate the ability to become a certified CDFI within three years. The CDFIs include institutions such as community development banks, credit unions, and venture capital funds. As of December 2020, 29 certified CDFIs were operating in Washington.
Business and Occupation Taxes.
Washington's major business tax is the business and occupation (B&O) tax. The B&O tax is imposed on the gross receipts of business activities conducted within the state, without any deduction for the costs of doing business. Businesses must pay the B&O tax even though they may not have any profits or may be operating at a loss. A taxpayer may have more than one B&O tax rate, depending on the types of activities conducted. Major B&O tax rates are 0.471 percent for retailing; 0.484 percent for manufacturing, wholesaling, and extracting; and 1.5 percent (businesses with taxable income of less than $1 million) or 1.75 percent (businesses with taxable income of $1 million or more) for services and for activities not classified elsewhere. Several preferential rates also apply to specific business activities. In addition, a taxpayer may be eligible to utilize other tax preferences, including credits and deductions, to reduce their tax liability. The B&O taxes are collected by the Department of Revenue (Revenue) and deposited into the State General Fund.
Tax Preference Performance Statement and Expiration Date.
All new tax preference legislation must include a tax preference performance statement, unless exempted. Tax preferences include deductions, exemptions, preferential tax rates, and tax credits. The performance statement must clearly specify the public policy objectives of the tax preference and the specific metrics and data that will be used by the Joint Legislative Audit and Review Committee (JLARC) to evaluate the efficacy of the tax preference. New tax preferences expire 10 years after the effective date of the tax preference, unless otherwise provided.
The Department of Commerce (Commerce) is directed to create and operate the Equitable Access to Credit Program (Program). The purpose of the Program is to award grants to qualified lending institutions (QLIs) to provide access to credit for historically underserved communities. The grants are funded by taxpayers who may receive a B&O tax credit for contributions to the Program.
The QLIs may receive grant funding under the program. A QLI must be:
In addition, a QLI must provide grant matching funds of: (1) at least 20 percent if recognized as an emerging CDFI; (2) at least 50 percent if recognized as a certified CDFI with assets of fewer than $3 million; or (3) 100 percent if recognized as a certified CDFI with assets of at least $3 million.
When a loan or investment of funds from the Program is repaid to a QLI, the QLI must offer the repaid funds as new loans or investments consistent with the terms of the Program for a period of 10 years from the date of the grant award.
Commerce must convene and staff a review committee to award Program grants. Commerce must seek to achieve a fair geographic balance of committee members and is encouraged to seek the following: (1) representatives of the banking industry who are familiar with CDFIs; (2) economic development professionals who have experience in rural development; (3) representatives of local government; (4) representatives of federally recognized Indian tribes; and (5) small business representatives who have experience with CFDIs or in rural development.
No more than 25 percent of all grants awarded in any calendar year may be awarded to the same grant recipient. In addition, at least 75 percent of the grant funds awarded each calendar year must be provided for grantees to provide services or invest in counties that have fewer than 100 persons per square mile or have an area of less than 225 square miles. Up to 20 percent of each grant award may be used by the grant recipient to fund a loan loss reserve, technical assistance, and small business training programs.
In awarding grants, the review committee also must consider the following:
Reporting by Qualified Lending Institutions.
A QLI receiving a grant under the Program must submit an annual report to Commerce that includes:
Reporting by the Department of Commerce.
Beginning in 2021, Commerce must submit an annual report to the Legislature that contains the following information:
Business and Occupation Tax Credit.
A tax credit is authorized against B&O taxes otherwise due for persons that contribute to the Program. The amount of the credit claimed for a reporting period may not exceed the B&O tax otherwise due for that reporting period. The credit may be used against any B&O tax due and may be carried over until used. No person may claim more than $1 million of credit in any calendar year, including credit carried over from a previous calendar year. No refunds may be granted for any unused credits.
Credits are available on a first-in-time basis. Revenue must disallow any credits, or portions thereof, that would cause the total amount of credits claimed under the Program for any calendar year to exceed $8 million. If this limitation is reached, Revenue must notify Commerce that the annual statewide limit has been met. In addition, Revenue must provide written notice to any person who has claimed tax credits in excess of the limitation.
No credit under the Program may be allowed before January 1, 2021. No credit may be earned for contributions made to the Program after June 30, 2031. Commerce may award grants under the Program beginning six months after the first tax credits are claimed. Commerce must cease to award grants when the Program expires on July 1, 2031.
Equitable Access to Credit Program Account.
The Equitable Access to Credit Program Account (Account) is created in the custody of the State Treasurer. Contributions to the Program must be deposited in the Account. Expenditures from the Account may be used only for the award of grants to the QLIs under the Program. Any funds remaining in the Account when the Program expires must be transferred to the State General Fund.
Tax Preference Performance Statement and Expiration Date.
The Program expires on July 1, 2031. The stated intent of the Legislature is to provide a tax preference that creates or retains jobs and encourages community and economic development in communities that have historically lacked access to capital. The stated intent of the Legislature is also to extend the expiration date of the tax preference if a review by the JLARC finds that the Program has a net positive impact on investment in communities historically underserved by credit and on state and local tax revenues.
The substitute bill encourages Commerce to seek small-business representatives with experience working with CDFIs or in rural development to serve on the grant review committee.
(In support) Many new and small businesses have funding needs. Community Development Financial Institutions often offer the first available access to credit for small businesses that are struggling or wishing to expand. Many CDFIs are helping small businesses survive during the pandemic. In addition to financial assistance, CDFIs can provide technical assistance to businesses to increase their likelihood of success and tend to serve more minority-owned businesses than traditional lenders. Tribes are taking steps toward economic development, but additional access to credit is still needed. Many CDFI clients are eventually able to access traditional credit. Currently, CDFIs receive more funding requests than they can fulfill, and more funds are needed to invest in target communities. Major corporations are investing millions of dollars in CDFIs nationwide. This bill would accelerate CDFI growth in Washington. The state has limited options to invest in small businesses with its constitutional restraints on its lending of credit. Instead, Washington uses its tax policy to encourage investments, such as this type of program.
(Other) The pandemic hit small businesses and rural communities hard. Commerce is already distributing funds under the Coronavirus Aid, Relief, and Economic Security Act, and this type of program would complement that funding. Commerce is looking at ways to streamline its role in this program.
The second substitute bill limits the business and occupation (B&O) tax credit to three years and does not allow for B&O tax credits to be applied to tax years prior to the creation of the Equitable Access to Credit program. It also specifies the amount of an annual B&O tax credit is $1 million or 100 percent of the annual contribution to the Equitable Access to Credit program, whichever is less.
The second substitute bill also makes changes to the Department of Commerce's (Commerce) administration of the program. It includes changes to the requirements for distribution of grants by adding native community development financial institutions (CDFI) and reducing the percentage of grant value required to be distributed to specific types of grantees to 65 percent. It also makes the program administered by Commerce to be subject to appropriation and allows for up to 30 percent of the program revenues to be used for program administration and staffing. Under the second substitute, Commerce is directed to consult the advisory board for assistance in ranking grant applications. Commerce is also authorized to adopt additional grant criteria it deems helpful in achieving the goal of ensuring equitable access to credit to underserved communities, to contract out for all or part of the program administration and to adopt rules necessary to implement the program.
(In support) This idea has been worked on in the past, and this bill represents bipartisan work during the past biennium. Many communities in Washington have struggled with high unemployment and low wages, including the Colville tribal community. The recovery from the generational recession is taking longer in the state's rural areas. There are entrepreneurs with brilliant ideas that are returning to their communities to help schools, the elders, the main street businesses. These entrepreneurs need assistance. This bill creates a framework for the future and provides a movement with an initial kickstart.
Washington has few economic development tools due to the constitutional prohibition on the lending of credit. This program represents an exciting new tool by leveraging a tax benefit to assist in public development. Business and occupation tax credits are used in other areas to promote economic growth, including the motion picture competitiveness program. The federal Paycheck Protection Program did not reach many low income or rural businesses. Community development financial institutions are better at reaching underserved communities, including low income or rural communities. This program will provide funding stability for businesses and communities. Moreover, specifically including native CDFI will help address access to capital and access to credit constraints in native communities. Native CDFI are seeing an increased demand for investments in businesses in these communities.
(Other) These businesses need access to working capital especially since the start of the COVID-19 pandemic. The Washington Recovery Loan Program being administered by Commerce will provide assistance right now, but this bill is complementary to that program. It will provide long-term sustainable access to capital. Commerce does have some friendly amendments to address the administration of the program.
No new changes were recommended.
(In support) This bill would establish a fantastic program for rural Washington. This bill is a request brought by tribes. There are current programs providing access to credit that are operated by tribes. Establishing a state grant program would provide greater access to credit and loans for small businesses working in rural and underrepresented communities as well as those operating on tribal lands. This bill will help the state's economy as it recovers from the pandemic. Tribes support this bill.