BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |AB 1269                          |Hearing    |7/15/15  |
          |          |                                 |Date:      |         |
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          |Author:   |Dababneh                         |Tax Levy:  |No       |
          |----------+---------------------------------+-----------+---------|
          |Version:  |2/27/15                          |Fiscal:    |Yes      |
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          |Consultant|Grinnell                                              |
          |:         |                                                      |
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                                  Alternative energy



          Extends the sunset on the CAEATFA advanced manufacturing program  
          until January 1, 2021.


           Background and Existing Law

           Housed in the office of the State Treasurer, the California  
          Alternative Energy and Advanced Transportation Financing  
          Authority (CAEATFA) provides financing through conduit or  
          revenue bonds, loan guarantees, loan loss reserves and a sales  
          and use tax exemption for facilities that use alternative energy  
          sources and technologies or engage in advanced manufacturing.   
          CAEATFA's board, composed of the Treasurer, Controller, Director  
          of Finance, Chairperson of the Energy Commission, and President  
          of the Public Utilities Commission, decides which projects to  
          assist.  The Governor's budget proposes a total of $27.5 million  
          for CAEATFA in 2014-15, funded primarily through transfers from  
          the California Energy Commission.  In addition to its sales and  
          use tax program, CAEATFA administers other programs, including:

                 A $10 million loan loss reserve program that directs the  
               state to reimburse the original mortgage lender for the  
               costs associated with the Property Assessed Clean Energy  
               program assessments during a foreclosure (SB 96, Committee  
               on Budget and Fiscal Review, 2013).  








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                 A $25 million loan loss reserve program to backstop  
               loans made by participating financial institutions for  
               energy efficiency improvements and distributed generation  
               technology (ABx1 14, Skinner, 2011).

          When the Legislature created CAEATFA in 1980, it provided that  
          both the state and local shares of the sales and use tax didn't  
          apply to its purchases of tangible personal property.  However,  
          CAEATFA didn't do much until 2008, when Governor Arnold  
          Schwarzenegger and State Treasurer Bill Lockyer announced that  
          CAEATFA would use this authority to grant sales and use tax  
          exemption for normally taxable manufacturing equipment purchased  
          by Tesla Motors under a sale-leaseback agreement.  Subsequently,  
          the Legislature directed CAEATFA to administer sales and use tax  
          exemptions for manufacturers of renewable technology, subject to  
          an application and evaluation process (SB 71, Padilla, 2010),  
          which was soon after expanded to advanced manufacturing (SB  
          1128, Padilla, 2012). 

          CAEATFA can allocate exemptions up to $100 million annually to  
          successful applicants; however, CAEATFA evaluates all applicants  
          to determine whether the benefits received by the state will  
          outweigh forgone SUT revenue, and can only allocate exemptions  
          to projects that produce net fiscal and environmental benefits  
          for the state.  SB 1128 required 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.  The measure  
          also required CAEATFA to submit interim reports to the  
          Legislature with specified contents by January 1, 2015.

          In 2013, the Legislature enacted AB 93 (Committee on Budget) and  
          SB 90 (Committee on Budget and Fiscal Review), measures 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  








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               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  
               (GO-BIZ), 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 1186  
               programs, as they applied to almost all the same taxpayers.  
                Instead of applying to CAEATFA, taxpayers simply print a  
               resale certificate from BOE's website, and present it to  
               the retailer to purchase the property sales-tax free.   

          Today's CAEATFA advanced manufacturing applicants qualify for  
          the general sales and use tax exemption, but apply to also  
          obtain both the state and local exemption.  To date, CAEATFA has  
          approved 18 applications in the past year since AB 93 was  
          effective, and will consider applications from Las Gallinas  
          Valley Sanitation District (Marin County), Hi Shear Corporation  
          (Los Angeles County), Fisker Automotive (Riverside and Orange  
          Counties), and Orbital ATK Defense Electronic Systems (Los  
          Angeles County) at its July and August meetings.

          While CAEATFA's blanket sales and use tax exemption authority  
          doesn't have a sunset, the Legislature placed a July 1, 2021  
          sunset on the renewable energy production program, but a July 1,  
          2016 sunset on the advanced manufacturing.  State Treasurer John  
          Chiang wants to extend the sunset on the advanced manufacturing  
          program.   

           Proposed Law

           Assembly Bill 1269 extends the sunset on the CAEATFA advanced  
          manufacturing program until January 1, 2021.


           State Revenue Impact

           No estimate.








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          Comments


           1.   Purpose of the bill  .  According to the author, "The sales  
          and use tax exclusion program for advanced manufacturing under  
          CAEATFA is critical for attracting and retaining cutting edge  
          high tech companies and jobs in California.  While AB 93 (2014)  
          is providing a partial sales and use tax exemption at just over  
          4% for qualifying businesses, the CAETFA exclusion for all state  
          and local taxes continues to provide added value for the state  
          and companies by encouraging targeted high tech manufacturing  
          projects with a high return on investment.  To date the program  
          has approved projects that will generate 3,535 jobs and create  
          over $146 million in fiscal benefit for a cost of just over  
          $77,000,000.  Extending the sunset date of this successful  
          program will allow business to plan investments and help further  
          grow the state's high tech manufacturing industry."

          2.    The general and the specific  .  SBs 71 and 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 all manufacturing,  
          and put its own money at risk by only exempting the state share  
          of the sales tax.  AB 93 trumps SB 1128 except to the extent  
          successful CAEATFA applicants can obtain an exemption from the  
          local share too.  As such, extending AB 1269 will only come at  
          the cost of local sales tax revenues.  The Committee may wish to  
          consider whether extending the SB 1128 program will result in  
          additional manufacturing in the state above and beyond the  
          general exemption, and if so, asking local agencies to pay for  
          it is fair. 








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          3.   Review  .  In its report to the Legislature regarding both the  
          SB 71 and 1128 programs, CAEATFA states that its 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 6 projects had  
          been approved as part of the advanced manufacturing program that  
          AB 1269 seeks to extend.  As part of the report, CAEATFA  
          recommends extending the advanced manufacturing program to  
          provide businesses with stability and a sufficient planning  
          horizon, and removing the $100 million cap on the combined  
          program as a signal to green businesses and investors that the  
          exemption would be available for large projects choosing to  
          locate in California.

          4.   Hard times  .  The recently enacted Budget Act extended the  
          repayment date on the $2.4 million loan from the Renewable  
          Resources Trust Fund made to start the program in 2010-11to the  
          2018-19 fiscal year.  In its Budget Change Proposal, CAEATFA  
          stated that it had "erratic application volume and program  
          activity" due to the economic recession, localized industry  
          trends such as the disruption of the solar manufacturing market,  
          and the enactment of the general sales and use tax exclusion, so  
          revenue for the agency wasn't sufficient to repay the loan.   
          CAETFA collects .0005 of the total amount of anticipated  
          qualified machinery in the application, not to exceed $10,000  
          per applicant, and .004 of the machinery purchases, not to  
          exceed $350,000.  CAETFA states that renewed outreach efforts  
          will result in more applications, and therefore application  
          fees, so it should be able to repay the loan by 2018-19.   
          Without AB 1269, it's unlikely CAEATFA will be able to repay the  
          loan.









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          5.   2/3  .  CAEATFA can allocate sales and use tax exemptions up  
          to $100 million.  Because extending the advanced manufacturing  
          program may crowd out an applicant seeking an exemption for  
          renewable energy manufacturing 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, the measure is keyed a  
          2/3 vote.


           Assembly Actions

           Assembly Floor                80-0

          Assembly Appropriations       17-0
          Assembly Revenue and Taxation   9-0

           Support and  
          Opposition   (7/9/15)


           Support  :  California Manufacturers and Technology Association,  
          Capstone, Large Scale Solar Association.


           Opposition  :  None received.



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