BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 1269 |Hearing |7/15/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Dababneh |Tax Levy: |No | |----------+---------------------------------+-----------+---------| |Version: |2/27/15 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- 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). AB 1269 (Dababneh) 2/27/15 Page 2 of ? 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 AB 1269 (Dababneh) 2/27/15 Page 3 of ? 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. AB 1269 (Dababneh) 2/27/15 Page 4 of ? 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. AB 1269 (Dababneh) 2/27/15 Page 5 of ? 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. AB 1269 (Dababneh) 2/27/15 Page 6 of ? 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. -- END --