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 --