BILL ANALYSIS
AB 2218
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Date of Hearing: May 24, 2006
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Judy Chu, Chair
AB 2218 (Torrico) - As Amended: May 17, 2006
Policy Committee: Revenue and
Taxation Vote: 6-0
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill exempts from the state sales and use tax purchases of
manufacturing equipment for a 10-year period beginning January
1, 2007. In order to maintain eligibility for the exemption, an
employer would need to demonstrate to the Board of Equalization
(BOE) that it continues to employ at least as many employees as
in the prior year, beginning in 2008.
FISCAL EFFECT
1)The BOE estimates annual General Fund revenue losses of $698
million ($33 million of which would be attributable to the
Fiscal Recovery Fund rate of .25%).
2)The BOE would incur administrative costs in the range of
$250,000 annually to verify employment levels of
manufacturers.
COMMENTS
1)Background . California's Sales and Use Tax Law imposes tax on
the sale or use of tangible personal property. Entities
engaged in activities such as manufacturing, research and
development, and software production pay sales and use tax on
their purchases of tangible personal property, unless that
property is an input to production that becomes physically
incorporated into a product for sale, in which case it is
exempt from tax. (The sales and use tax then is imposed on the
final product for sale.)
The combined state and local sales and use tax rate totals
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7.25%, as follows:
-----------------------------------------------------------------
|Rate |Jurisdiction |Purpose |
|---------------------+---------------------+---------------------|
|5.0% |State General Fund |General |
|---------------------+---------------------+---------------------|
|0.25% |State Fiscal |Repayment of |
| |Recovery Fund |Economic Recovery |
| | |Bonds |
|---------------------+---------------------+---------------------|
|0.50% |State Local Revenue |Health and welfare |
| |Fund |programs shifted to |
| | |local governments |
| | |under 1991-92 |
| | |realignment |
|---------------------+---------------------+---------------------|
|0.50% |State Local Public |Local public safety |
| |Safety Fund |programs under |
| | |Proposition 172 |
|---------------------+---------------------+---------------------|
|1.0% |Cities and counties |General and County |
| |(Bradley-Burns) |transportation |
|(0.75% city rate | | |
|credited against | | |
|1.0% county rate) | | |
|---------------------+---------------------+---------------------|
|7.25% |Total State and | |
| |Local Sales and Use | |
| |Tax | |
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Proposition 57, approved by the voters in 2004, temporarily
suspends the authority of a county or a city to impose the
local 1.25 percent Bradley-Burns sales and use tax rate and
instead provides for a local sales and use tax rate of 1
percent, in the case of a county, and 0.75 percent, in the
case of a city, for the duration of the "revenue exchange
period." During this period, the state sales tax rate is
increased by 0.25 percent, which is dedicated to the Fiscal
Recovery Fund for the retirement of Economic Recovery Bonds
authorized by Proposition 57. Cities and counties are
reimbursed for the 0.25 sales and use tax reduction through
property tax revenues shifted from the schools for the
duration of the revenue exchange period. The state, in turn,
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backfills the schools' revenue loss through the General Fund
(hence, the "Triple Flip").
Additionally, local agencies may establish a special taxing
jurisdiction to levy a "transactions and use tax" ranging from
0.25% to 2.0%, on the same tax base, and collected in the same
manner, as the sales and use tax,
2)Manufacturer's Investment Credit (MIC) . Prior California tax
law contained various tax incentives referred to as the MIC to
encourage investment in manufacturing equipment to be used in
California. The MIC provided for an exemption from the state
share of sales and use tax for purchases of manufacturing
equipment, or a credit against the personal income tax or
corporate tax liability (equal to 6%) of the amount paid or
incurred for qualified property placed in service in
California. The MIC expired on January 1, 2004, pursuant to
a finding by the Employment Development Department (EDD) that
total manufacturing jobs on the preceding January 1, did not
exceed the total manufacturing jobs in California on January
1, 1994 by 100,000 jobs.
3)Purpose . This bill is sponsored by the author. According to
the author's office, it is intended to stimulate California's
economy by reducing the costs of capital investments in the
research and development, manufacturing, and software
publishing industries.
Although the exemption would provide an incentive for
investment in new machinery and equipment, it would undermine
the fundamental objective of the state's tax structure - to
generate sufficient revenue to pay for state services. A more
pragmatic approach might be to offset the state General Fund
revenue loss of nearly $700 million annually by broadening the
sales and use tax base to include certain services.
Analysis Prepared by : Stephen Shea / APPR. / (916) 319-2081