SENATE BILL REPORT

SB 6528

BYSenators Fleming, Lee, Bailey, Deccio, Warnke, Smitherman, Gaspard, Stratton, Garrett, Niemi and Moore

Revising the excise taxation of low-income housing projects.

Senate Committee on Economic Development & Labor

Senate Hearing Date(s):January 27, 1988; January 29, 1988

Majority Report:  That Substitute Senate Bill No. 6528 be substituted therefor, and the substitute bill do pass.

      Signed by Senators Lee, Chairman; Conner, Deccio, McMullen, Saling, Smitherman, Warnke.

Senate Staff:Dave Cheal (786-7576)

                  February 1, 1988

Senate Committee on Ways & Means

Senate Hearing Date(s):February 2, 1988

Senate Staff:Gary Benson (786-7715)

AS REPORTED BY COMMITTEE ON ECONOMIC DEVELOPMENT & LABOR, JANUARY 29, 1988

BACKGROUND:

The Tax Reform Act of 1986 significantly reduced the use of tax exempt bond issuance for the production of affordable multi-family housing.  Also, the act made the construction of low-income housing much less attractive to private developers because of more stringent requirements for the percentage of units to be set aside for low-income occupants and lower income levels for qualifying families.  These restrictions now apply for 15 years instead of the 10-year set aside required prior to 1986.

However, a new low-income housing tax credit program was included in the Tax Reform Act of 1986.  For projects financed with conventional loans, the credit is approximately 9 percent of the adjusted basis.  For projects using tax exempt bond financing, the credit is approximately 4 percent of the adjusted basis of the project. "Adjusted basis" equals the cost of the dedicated low income units minus the cost of the land.  The type of tax credit that uses other than tax exempt bond authority is limited to an amount equal to $1.25 per capita, or about $5.6 million in Washington State in both 1988 and 1989.  Based on current and near term projected applications, it seems clear that this authority will be fully used in both of those years.  1300 housing units will be produced, which is far short of obvious needs.

Therefore, to increase the use of available federal low-income housing tax credit, the type which uses tax exempt bond financing or another federal subsidy program must be made more attractive.  This type is not subject to the $1.25 per capita limitation.  However, due to the availability of only 4 percent credit and other severe restrictions, this is not an attractive program to developers without an additional financing incentive.

The construction of affordable housing produces significant economic activity in addition to the primary goal of increasing housing stock.

SUMMARY:

The labor and materials expended in the construction of "eligible housing projects" are exempted from the sales and use tax.

"Eligible housing projects" are defined as those that qualify for an allocation of the federal low-income housing tax credit under Section 42 of the Internal Revenue Code of 1986, and receive financing through the issuance of bonds by the State Housing Finance Commission for at least 60 percent of the total cost of labor, materials and services for the initial construction or rehabilitation of the project.

EFFECT OF PROPOSED SUBSTITUTE:

A sunset provision is added, terminating the sales/use tax exemption as of December 31, 1989.

Appropriation:    none

Revenue:    yes

Fiscal Note:      requested January 25, 1988

Effective Date:The bill contains an emergency clause and takes effect immediately.

Senate Committee - Testified: ECONOMIC DEVELOPMENT & LABOR:  Kim Herman and Dave Ballaine, Washington State Housing Finance Commission; Mark Triplett, Building Industry Association; David Page, Dominion Developments, Inc.