BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 199| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 199 Author: Eggman (D), et al. Amended: 9/10/15 in Senate Vote: 27 - Urgency SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 9/10/15 AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Moorlach, Pavley SENATE APPROPRIATIONS COMMITTEE: 6-1, 9/10/15 AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza NOES: Nielsen ASSEMBLY FLOOR: 77-0, 8/27/15 - See last page for vote SUBJECT: Alternative energy: recycled feedstock SOURCE: Californians Against Waste DIGEST: This bill makes eligible for the California Alternative Energy and Advanced Transportation Financing Authority's (CAEATFA) state and local sales tax exemption program projects using recycled feedstock. ANALYSIS: Existing law: 1)Establishes CAEATFA in the Office of State Treasurer, which provides financing through conduit or revenue bonds, loan guarantees, loan loss reserves, and a state and local sales and use tax exemption for facilities that use alternative energy sources and technologies or engage in advanced manufacturing. AB 199 Page 2 2)Creates CAEATFA's board, composed of the State Treasurer, State Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission. 3)Directs CAEATFA to administer a state and local sales and use tax exemption for manufacturers of renewable technology, subject to an application and evaluation process, and board approval, which sunsets on July 1, 2021 (SB 71, Padilla, Chapter 10, Statutes of 2010), and to administer a similar state and local sales and use tax for advanced manufacturing, which sunsets on July 1, 2016 (SB 1128, Padilla, Chapter 677, Statutes of 2012): a) Allows CAEATFA to allocate exemptions to successful applicants under for programs up to $100 million annually; however, CAEATFA must evaluate all applicants to determine whether the net environmental and economic benefits received by the state will outweigh forgone sales and use tax revenue, and can only allocate exemptions to projects that demonstrate such a benefit. b) Requires CAEATFA to study the efficacy and cost benefit of the program, including the number of jobs created, the costs of each job, as well as its annual salary, and consider a dynamic analysis of the economic output of the state without the exemption by January 1, 2017. c) Requires CAEATFA to submit interim reports to the Legislature with specified contents by January 1, 2015. This bill: 1)Expands the definition of a "project" eligible for CAEATFA's sales and use tax exemption program to include tangible personal property where at least 50% of its use is to process recycled feedstock intended to be reused in the production of another project, or using recycled feedstock in the production of another product or soil amendment, as defined. 2)Bars from eligibility for the exemption property that AB 199 Page 3 processes or uses recycled feedstock in a manner that would constitute disposal. 3)Sunsets on January 1, 2021. 4)Contains provisions necessary to resolve conflicts with AB 1265 (Dababneh). Background In 2013, the Legislature enacted AB 93 (Committee on Budget, Chapter 69, Statutes of 2013), which reformed California's economic development policies by eliminating enterprise zones and other geographically-targeted economic development areas, instead allowing three new tax benefits: Tax credits for wages paid by taxpayers to qualified employees within former enterprise zones, and other areas that suffer from high levels of poverty and unemployment. The credit lasts from the 2014 taxable year until the 2019 taxable year. The California Competes Tax Credit, where the California Competes Tax Credit Committee, also created by the bill, can award various tax credits up to an annually capped amount to taxpayers who apply. The Committee is comprised of the Treasurer, the Director of Finance, the Director of the Governor's Office of Business and Economic Development, one appointee of the Speaker of the Assembly, and one appointee from the Senate Committee on Rules. A state-only (4.1875%) sales and use tax exemption on purchases of manufacturing equipment made by taxpayers within specific North American Industrial Classification System codes, capped at $200 million annually per taxpayer, effective July 1, 2014, and ending July 1, 2022. The exemption largely superseded the SB 71 and SB 1128 programs, as they applied to almost all the same taxpayers. Instead of applying to CAEATFA, taxpayers simply print a resale certificate from the Board of Equalization's website, and present it to the retailer to purchase the property sales-tax free. AB 199 allows CAEATFA to approve applications for projects where AB 199 Page 4 at least 50% of the use is to process recycled feedstock into another product or soil amendment. The sponsor of this bill indicate that the change is intended to apply to: Material recovery facilities, which sort and separate recyclables from curbside recycling programs. Pre and post-processing equipment at composting facilities, Plastics recycling and remanufacturing, and Tire recycling. The sponsor indicate that some of this equipment may be eligible for the general AB 93 exemption, but other equipment may not, because AB 93 only makes eligible for the exemption those businesses that are principally engaged in certain activities, such as manufacturing and biotechnology, among others. AB 199 specifically includes this equipment in the definition of "project" that CAEATFA uses; however, the exemption would not be automatic, as applicants would have to obtain approval from CAEATFA to obtain the exemption. In its report to the Legislature regarding both the SB 71 and 1128 programs, CAEATFA states that it has approved 76 projects worth a total of $273 million of foregone revenue; however, only 63 applicants eventually purchased $43.3 million of equipment because many projects are built out over a course of years, and the revenue effect doesn't occur until the applicant purchases the property. CAEATFA adds that most of the unspent allocation comes from a few, larger, more recent applicants, with only two comprising one-third of the unspent amount. Smaller projects of less than $1 million constitute the majority of granted applications and foregone revenue. CAEATFA projects net environmental benefits of $82 million, economic benefits of $299 million, with a fiscal cost of $244 million, for a total net benefit of $137 million realized over the expected useful life of the equipment, which is about 5 to 29 years. However, at the time of the report, only six projects had been approved as part of the advanced manufacturing program. AB 1021 (Eggman, 2013) contained substantively identical AB 199 Page 5 provisions to AB 199, and passed out of both the Senate Committees on Governance and Finance and Environmental Quality, but was subsequently held on the Senate Committee on Appropriations' suspense file. The Senate Committee on Environmental Quality noted of that bill: "AB 1021 would encourage the creation of new recycling infrastructure, such as materials recovery facilities (MRFs), which sort and process waste and recover marketable materials, processors that clean and mechanically process those materials, and manufactures who utilize those mechanically processed materials to create new products. According to CalRecycle's report 'California's New Goal: 75% Recycling,' recycling infrastructure must be significantly expanded in order to meet the 2020 goal. The report also proposes financial incentives, such as a tax credits, for the purchase of equipment and materials used in the manufacture of recycled content products and suggests that those incentives could include a tax credit for equipment." Comments SB 71 and SB 1128 were the first state tax incentives for manufacturing in California since the Manufacturer's Investment Credit expired in 2000. In these bills, the Legislature set forth an application process that required CAEATFA to only approve applications that demonstrated net environmental and economic effects in public meetings after a thorough due diligence review. However, the Legislature wanted to further expand manufacturing in the state by extending the sales and use tax exemption to include almost all manufacturing, and put its own money at risk by only exempting the state share of the sales tax. AB 93 trumps AB 199 except to the extent successful CAEATFA applicants can obtain an exemption from the local share too. CAEATFA can allocate sales and use tax exemptions up to $100 million. Because expanding the program to include new applicants may crowd out current ones seeking an exemption under that cap, Legislative Counsel has determined that the measure increases a tax on any taxpayer for the purposes of Section Three of Article XIIIA of the California Constitution. As such, this bill is keyed a two-third vote. AB 199 Page 6 Related Legislation AB 1269 (Dababneh, 2015) extends the SB 1128 advanced manufacturing sales and use tax exemption to January 1, 2021, the same date AB 199 uses, and the sunset date for the SB 71 program. AB 1269 is currently pending on the Senate Floor. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No According to the Senate Appropriations Committee: 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 administrative fees. SUPPORT: (Verified9/10/15) Californians Against Waste (source) Association of California Recycling Industries Association of Compost Producers Association of Postconsumer Plastic Recyclers California Association of Sanitation Agencies California Compost Coalition California Electronic Asset Recovery California League of Conservation Voters California Manufacturing and Technology Association California Refuse Recycling Council CarbonLITE Industries City of Los Angeles Command Packaging AB 199 Page 7 CRM CR&R Environmental Services Don't Waste LA Coalition ECS Refining Glass Packaging Institute Global Plastics Institute of Scrap Recycling Industries Los Angeles Alliance for a New Economy Napa Recycling and Waste Services Natural Resources Defense Council PC Recycle Potential Industries Recology RePet RePlanet Republic Services Solid Waste Association of North America State of California, Treasurer StopWaste Strategic Materials Tri-City Economic Development Corporation Talco Plastics Verdeco Recycling Waste Management OPPOSITION: (Verified9/10/15) None received ARGUMENTS IN SUPPORT: According to the author, "California exports 20 million tons of recyclables annually, worth nearly $8 billion. With AB 199, the state would help incentivize the recycling sector to invest more in manufacturing. Keeping more of these valuable materials in-state would allow Californians to share in both the environmental and economic benefits of their recycling." ASSEMBLY FLOOR: 77-0, 8/27/15 AB 199 Page 8 AYES: Achadjian, Alejo, Baker, Bigelow, Bloom, Bonilla, Bonta, Brough, Brown, Burke, Calderon, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Dahle, Daly, Dodd, Eggman, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins NO VOTE RECORDED: Travis Allen, Campos, Frazier Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119 9/10/15 23:31:11 **** END ****