The budget for California’s next fiscal year is expected to be completed in the next month and through the budget process, leadership will determine the extent to which the state will provide state income tax opportunity zones (OZ) incentives to encourage investment in distressed communities. This process is an important opportunity for California to leverage this new community development tool to enhance the efficiency of other state, county or city programs that have limited resources.
California state income tax laws generally apply a “modified conformity” to federal income tax law, whereby state law mirrors federal statute, with certain exceptions and modifications. States that use a modified conformity approach have additional flexibility and opportunities to modify the manner in which state law does (or does not) conform to federal law to enhance program efficiency and further policy objectives. Many states have used this flexibility to facilitate community goals. A growing number of states offer tax incentives to encourage investments in historic rehabilitation, underserved communities, green technology and affordable housing. At this time, the number of states in which capital gains invested in qualified opportunity funds is still subject to state income taxes is less than 10. Several of those nonconforming states are currently exploring opportunities to conform.