BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 199 (Eggman) - Alternative energy: recycled feedstock.
          
           ----------------------------------------------------------------- 
          |                                                                 |
          |                                                                 |
          |                                                                 |
           ----------------------------------------------------------------- 
          |--------------------------------+--------------------------------|
          |                                |                                |
          |Version: August 25, 2015        |Policy Vote: GOV. & F. 7 - 0    |
          |                                |                                |
          |--------------------------------+--------------------------------|
          |                                |                                |
          |Urgency: Yes                    |Mandate: No                     |
          |                                |                                |
          |--------------------------------+--------------------------------|
          |                                |                                |
          |Hearing Date: September 10,     |Consultant: Marie Liu           |
          |2015                            |                                |
          |                                |                                |
           ----------------------------------------------------------------- 


          This bill meets the criteria for referral to the Suspense File. 


          Bill  
          Summary:  AB 199 would make personal property that primarily processes  
          or utilizes recycled feedstock that is intended to be reused in  
          the production of another product or soil amendment eligible for  
          sales and use tax exemption under the California Alternative  
          Energy and Advanced Transportation Financing Authority.


          Fiscal  
          Impact:  
           One-time costs in the high tens of thousands to low hundreds  
            of thousands (General Fund) to create a cost-benefit  
            evaluation for recycling manufacturing. These costs may  
            eventually be recovered through application fees, depending on  
            the level of program participation.
           Increased likelihood that up to $100 million from the General  
            Fund will be lost through sales and use tax exemptions.
           Unknown costs to the General Fund for CAEATFA's administrative  
            costs that are not recovered through application and  







          AB 199 (Eggman)                                        Page 1 of  
          ?
          
          
            administrative fees.


          Background:  The California Alternative Energy and Advanced Transportation  
          Financing Authority (CAEATFA) was established in 1980 as a means  
          to encourage the use of equipment using alternative or renewable  
          energy sources. CAEATFA's authority has since been expanded  
          several times including to include the financing of advanced  
          transportation technologies. Financial assistance can occur  
          through the issuance of revenue bonds, loan guarantees, loan  
          loss reserves, and insurance.

          As a result of the passage of SB 71 (Padilla) Chapter 10,  
          Statutes of 2010, CAEATFA was authorized to provide projects  
          financial assistance in the form of a sales and use tax  
          exemption on property (such as manufacturing equipment) used for  
          the design, manufacture, production, or assembly of advanced  
          transportation technologies or alternative energy products,  
          components, or systems. The program was expanded in 2012 by SB  
          1128 (Padilla) Chapter 677, Statutes of 2012 to include advanced  
          manufacturing projects. This program is referred to as the Sales  
          and Use Tax Exclusion (STE) Program. 


          For all project types under the STE Program, existing law  
          requires CAEATFA to evaluate project applications for  
          eligibility based upon certain criteria that encourages  
          manufacturing facilities and jobs located in California and the  
          reduction of greenhouse gases beyond the reduction required by  
          federal or state law or regulation. Projects must meet the "net  
          benefits test" by showing that the new project will create jobs  
          in the state. No more than $100 million in tax exemptions may be  
          approved by CAEATFA in any calendar year. 


          The STE Program sunsets on January 1, 2021. 


          Proposed Law:  
            This bill would expand the definition of projects eligible  
          under the STE Program to include property that is used at least  
          50% for processing recycled feedstock so that it may be reused  
          in the production of another product or property that utilizes  
          recycled feedstock to produce another product or soil amendment.  








          AB 199 (Eggman)                                        Page 2 of  
          ?
          
          
          Property that is used for waste disposal, as defined under the  
          Integrated Waste Management Act.


          Related  
          Legislation:  AB 1269 (Dababneh) would extend the eligibility of advanced  
          manufacturing projects to receive state and local sales and use  
          tax exemptions by the California Alternative Energy and Advanced  
          Transportation Financing Authority until January 1, 2021. This  
          bill is on the Senate Floor.


          AB 1021 (Eggman, 2013) was substantially similar to this bill  
          and was held on the Senate Appropriation Suspense File.


          Staff  
          Comments:   Potential one-time administrative costs:  To implement this  
          bill, CAEATFA will need to update its regulations for the  
          program, including modifying its net-benefits evaluation to be  
          appropriate for recycling projects. The Treasurer's office  
          estimates that that this will take approximately 9 months. While  
          the Treasurer's office estimates that it would not ask for  
          additional funds to cover this workload cost, redirecting staff  
          for this purpose would displace other work responsibilities.  
          Additionally, staff notes that the development of net-benefits  
          evaluations is contracted out and this bill would potentially  
          affect that contract. As such, staff estimates that this bill  
          would result in workload costs in the high tens of thousands to  
          low thousands of dollars. 

           This bill will increase the odds that the maximum tax exemptions  
          are issued:  Since December 2013, CAEATFA has approved $104  
          million in tax exemptions in the STE program, with another $6.7  
          million in exemptions pending approval at the August and  
          September 2015 CAEATFA board meetings. According to the  
          Treasurer's office, the STE program has hit the $100 million  
          limit once. As such, expanding the eligible projects under the  
          program will likely result in increased sales tax revenue  
          losses. These losses are likely only for local sales tax as many  
          of these projects are already eligible for a state sales tax  
          exemption under AB 93 (discussed below).










          AB 199 (Eggman)                                        Page 3 of  
          ?
          
          
           Granting more tax exemptions may assist in the recovery of  
          ongoing administrative costs:  CAEATFA incurs administrative  
          costs to administer the STE program. These costs are supposed to  
          be covered by an application and administrative fee. However,  
          historically the fee revenues have not been sufficient to cover  
          the administrative costs. According to the Treasurer's office,  
          fee revenues have fallen short because the fee schedule was  
          based on $100 million in award per year and that the majority of  
          the applicants would move forward with their projects. However,  
          the program has only reached its $100 million limit once and  
          fewer awarded projects have moved forward than anticipated.  
          CAEATFA staff is currently working with the Treasurer's office  
          to improve outreach and participation program. This bill would  
          increase its workload to consider additional problems, but it  
          would also result in increased collection application fees,  
          thereby helping the Treasurer's office more completely recover  
          its ongoing costs. 


           Granting more tax exemptions may (ironically?) assist in the  
          repayment of loans made to the program for startup costs  : When  
          the STE program was first enacted, CAEATFA received a $2.4  
          million loan to cover initial program development costs.  
          CAEATFA's ability to repay back this loan is dependent on  
          participation in the program (i.e. there must be applicants on  
          which a fee can be assessed) and the amount of the fee. To the  
          extent that this bill increases participation in the program,  
          this increased participation can help ensure the repayment of  
          the loan. As part of this year's budget, the Treasurer's office  
          received a three-year extension on the loan payments. Three  
          annual payments of $804,000 are now due on June 30, 2017, 2018,  
          and 2019.  


          Tax exemptions are not necessarily offset by increased revenues  
          to the state:  The STE program only has authority to grant tax  
          exemptions to projects that are estimated to have benefits to  
          the state that equal or exceed the exemption. However, the net  
          benefits test makes a number of assumptions that may over  
          attribute benefits to the program. For example, the net benefits  
          test assumes that the project would not go forward at all if not  
          for the STE exemption. Therefore, even if a project would have  
          gone forward on the natural but the STE exemption resulted in  
          earlier project completion, the net benefits test still credits  








          AB 199 (Eggman)                                        Page 4 of  
          ?
          
          
          all economic activity from the project to the STE program.


           This bill creates a Proposition 26 tax:  Because the  
          participation of advanced manufacturing projects in the STE  
          program can prevent the participation of other project types  
          under the STE program should the program become oversubscribed,  
          Legislative Counsel has determined that the measure can increase  
          a tax on a taxpayer for the purposes of Section three of Article  
          XIIIA of the California Constitution. As such, this measure  
          requires a 2/3 vote. 




                                      -- END --