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  ****