BILL ANALYSIS                                                                                                                                                                                                    Ó



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

                              
          
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          |Bill No:  |SB 1338                          |Hearing    |4/27/16  |
          |          |                                 |Date:      |         |
          |----------+---------------------------------+-----------+---------|
          |Author:   |Lara                             |Tax Levy:  |Yes      |
          |----------+---------------------------------+-----------+---------|
          |Version:  |4/4/16                           |Fiscal:    |Yes      |
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          |Consultant|Bouaziz                                               |
          |:         |                                                      |
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                  Sales and use taxes:  exemption:  zero-emission and  
                            near-zero-emission equipment



          Provides a partial sales and use tax exemption for zero and near  
          zero-emission port equipment.


           Background 

           California law allows various income tax credits, deductions,  
          and sales and use tax exemptions to provide incentives to  
          compensate taxpayers that incur certain expenses, such as child  
          adoption, or to influence behavior, including business practices  
          and decisions, such as research and development credits.  The  
          Legislature typically enacts such tax incentives to encourage  
          taxpayers to do something that but for the tax credit, they  
          would not do.  The Department of Finance is required to annually  
          publish a list of tax expenditures.

          State law imposes a sales and use tax (SUT) on the sale,  
          storage, or use of tangible personal property unless exempted by  
          state law.  Cities and Counties may increase the SUT rate up to  
          2% as a transactions and use tax for either specific or general  
          purposes with a vote of the people.
                     
          The current state SUT is 7.5%, but beginning January 1, 2017,  
          the state SUT rate on tangible personal property will be 7.25%  
          and imposed as follows:







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                   ------------------------------------------------------------- 
                  |       |                    |                                |
                  | Rate  |    Jurisdiction    |       Purpose/Authority        |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  |3.9375%|State (General      |State general purposes          |
                  |       |Fund)               |                                |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  |1.0625%|Local Revenue Fund  |Realignment of local public     |
                  |       |2011                |safety services                 |
                  |       |                    |                                |
                  |       |                    |                                |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.50% |State (Local        |Local governments to fund       |
                  |       |Revenue Fund)       |health and welfare programs     |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 0.50% |State (Local Public |Local governments to fund       |
                  |       |Safety Fund)        |public safety services          |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 1.25% |Local (City/County) |                                |
                  |       |                    |                                |
                  |       |                    |                                |
                  |       |1.00% City and      |City and county general         |
                  |       |County              |operations.                     |
                  |       |                    |                                |
                  |       |0.25% County        |                                |
                  |       |                    |Dedicated to county             |
                  |       |                    |transportation purposes         |
                  |       |                    |                                |
                  |-------+--------------------+--------------------------------|
                  |       |                    |                                |
                  | 7.25% |Total Statewide     |                                |
                  |       |Rate                |                                |








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                  |       |                    |                                |
                   ------------------------------------------------------------- 
          

          State law fully exempts many items from SUT (prescription drugs,  
          food, poultry litter), while other items are exempted from the  
          state sales tax, but not the local share, such as farm equipment  
          and machinery, diesel fuel used for farming and food processing,  
          teleproduction and postproduction equipment, timber harvesting  
          equipment and machinery, and racehorse breeding stock.


           Proposed Law

           Senate Bill 1338 provides a partial sales and use exemption for  
          zero and near zero-emission port equipment.  Specifically this  
          bill:

                 Provides a General Fund (3.9375%) sales and use tax  
               exemption for "qualified tangible personal property"  
               purchased by a "qualified person" to be used "primarily"  
               in, at, or on a marine terminal of a California public port  
               for carriage, handling, or movement of freight, cargo, and  
               goods.

                 Defines "qualified tangible personal property" as any of  
               the following:

                  o         Zero-emission or near-zero-emission equipment  
                    used in conjunction with the movement of goods or  
                    freight, including computers, data-processing  
                    equipment, and computer software required to operate,  
                    control, regulate, or maintain the qualified  
                    equipment. 

                  o         Parts used for the repair and replacement of  
                    qualified equipment with a useful life of one or more  
                    years.

                  o         Special purpose buildings and foundations used  
                    as an integral part of the utilization process of  
                    zero-emission or near-zero-emission equipment.

                  o         Leases of qualified tangible personal  








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                    property.

                 Defines "primarily" as 50 percent or more of the time.

                 Defines "qualified person" as a stevedore, marine  
               terminal operator, operator of a port or freight yard, or  
               any other person that is engaged in cargo and freight  
               loading, delivery, movement, storage, and conveyance at or  
               within a California public seaport.

                 Defines "Zero-emission or near-zero-emission equipment"  
               means equipment, vehicles, and related technologies used at  
               a California public seaport that reduces or eliminates  
               greenhouse gas emissions and improves air quality as  
               identified by the State Air Resources Board in consultation  
               with the State Energy Resources Conservation and  
               Development Commission.  Additionally, "zero-emission and  
               near-zero-emission equipment" may include advanced or  
               alternative fuel engines and hybrid or alternative fuel  
               technologies for seaport equipment.

          The exemption will not apply if, within one year from the date  
          of purchase, the qualified person (1) uses the qualified  
          property in a manner not qualifying for the exemption, (2)  
          converts the qualified property from an exempt use to a  
          non-qualifying use, or (3) removes the qualified property from  
          California.

          The bill contains reporting requirements and makes Legislative  
          findings.

          SB 1338 applies to taxable years beginning January 1, 2017, and  
          until January 1, 2030.



















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          State Revenue Impact

           According to the Board of Equalization (BOE), SB 1338 results in  
          yearly revenue losses of $4.6 million.  


           Comments

           1.   Purpose of the bill.   According to the author, "The  
          California economy is largely dependent on international trade  
          and commerce. The state is home to three of the largest ports in  
          the nation, located in Los Angeles, Long Beach, and Oakland, and  
          eight smaller public-owned ports situated from Humboldt Bay and  
          south to San Diego. More than 40% of containerized cargo  
          arriving in the United States enters through the state's 11  
          seaports.  The Southern California region allows for the  
          quickest, direct shipping routes to the Pacific Rim. 75% of  
          total container volume coming through the Ports of Los Angeles  
          and Long Beach come from East Asia alone.  However, greenhouse  
          gas emissions from the transportation sector continue to impact  
          public health throughout the state.  According the American Lung  
          Association's State of the Air 2016 report, the Los Angeles  
          region leaders the nation in harmful ozone pollution.  Simply  
          put, air quality degradation, congestion, and additional  
          infrastructure impacts cripple not only the economic viability  
          of a region, but also the health and quality of life for those  
          living in communities situated in high volume transportation  
          corridors.  Capital expenses associated with the procurement of  
          the latest zero-emission or near-zero emission cargo handling  
          equipment is in the tens of billions of dollars.  Replacing  
          current equipment at the ports of Los Angeles, Long Beach, and  
          Oakland is estimated to cost $23 billion.  Smart investments to  
          offset and eliminate negative environmental impacts from freight  
          transport positions the state to work towards achieving clean  
          energy and climate goals established by landmark legislation  
          such as AB 32 (Nunez, Chaptered 2006) and SB 350 (De Leon,  
          Chaptered 2015).  To that end, the state has a critical role in  
          assisting California ports transition from the more conventional  
          to next generation infrastructure to improve the public health  
          of communities in and around our goods movement sector."

          2.   A new tax expenditure.   Existing law provides various  








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          credits, deductions, exclusions, and exemptions for particular  
          taxpayer groups.  In the late 1960s, U.S. Treasury officials  
          began arguing that these features of the tax law should be  
          referred to as "expenditures," since they are generally enacted  
          to accomplish some governmental purpose and there is a  
          determinable cost associated with each (in the form of foregone  
          revenues).  This bill would create new tax expenditure, costing  
          the general fund almost $4.6 million dollars in foregone revenue  
          each year.  The tradeoff for providing new tax expenditure,  
          resulting in revenue losses, is higher taxes or reductions to  
          other services or programs.

          3.   How is tax expenditure different from a direct expenditure?    
          As the Department of Finance notes in its annual Tax Expenditure  
          Report, there are several key differences between tax  
          expenditures and direct expenditures.  First, tax expenditures  
          are reviewed less frequently than direct expenditures once they  
          are put in place.  This can offer taxpayers greater certainty,  
          but it can also result in tax expenditures remaining a part of  
          the tax code without demonstrating any public benefit.  Second,  
          there is generally no control over the amount of revenue losses  
          associated with any given tax expenditure.  Finally, once  
          enacted, it takes a two-thirds vote to rescind an existing tax  
          expenditure absent a sunset date.  This effectively results in a  
          "one-way ratchet" whereby tax expenditures can be conferred by  
          majority vote, but cannot be rescinded, irrespective of their  
          efficacy, without a supermajority vote.

          4.   Incentive?   Generally, tax expenditures are enacted to  
          encourage socially beneficial behavior that would not take place  
          without a financial incentive.  This bill instead provides a  
          sales and use tax exemption for behavior that is outlined in  
          Executive Order B-32-15.  In July of 2015, Governor Brown issued  
          the Executive Order B-32-15 directing the California State  
          Transportation Agency, the California Environmental Protection  
          Agency, and the Natural Resources Agency to lead other relevant  
          state departments, including the California Air Resources Board,  
          the California Department of Transportation, the California  
          Energy Commission, and the Governor's Office of Business and  
          Economic Development, to develop an integrated action plan by  
          July 2016.  The plan must establish clear targets to improve  
          freight efficiency, transition to zero-emission technologies,  
          and increase competitiveness of California's freight system,  
          which includes California's seaports.  Given that California is  








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          moving towards requiring zero and near zero-emission vehicles  
          and equipment, it is unclear whether the tax incentive  
          ultimately encourages new behavior or rewards behavior that was  
          going to occur anyway.   

          5.   Moving in the right direction.   The ports of Los Angeles and  
          Long Beach are the busiest in the nation and generate more air  
          pollution than any other facility in the Los Angeles Basin.  In  
          2006, the ports of Long Beach and Los Angeles together adopted  
          the landmark Clean Air Action Plan (CAAP).  The CAAP focuses on  
          strategies to reduce health risks to communities surrounding the  
          ports by reducing air pollutants.  Both the ports of Los Angeles  
          and Long Beach have each reduced diesel particulates by over 80  
          percent, but more needs to be done. According to the Air  
          Resources Board, despite substantial progress over the last  
          decade, the remaining localized risks of cancer and other  
          adverse effects near major freight hubs must be significantly  
          reduced.  Infants and children are 1.5 to three times more  
          sensitive to the harmful effects of exposure to air toxics, like  
          those emitted from freight equipment, than previously  
          understood, which heightens the need for further risk reduction.  
            

          6.   Administrative burden.   Currently, most sales and use tax  
          exemptions are applied to the total applicable sales and use  
          tax.  However, several partial exemptions exist in which only  
          the state tax portion of the sales and use tax rate is exempted,  
          such as the farm equipment and teleproduction equipment  
          exemptions.  These partial exemptions are difficult for both  
          retailers and BOE, and complicate return preparation and  
          processing.  Moreover, errors attributable to these partial  
          exemptions occur frequently, resulting in additional return  
          processing workload for BOE.

          7.   Let's get clear.   Several terms in the bill may need to be  
          clarified.  For example, a "qualified person" includes  
          stevedores, marine terminal operators, operators of a port or  
          freight yard, or any other person engaged in cargo and freight  
          loading, delivery, movement, storage, and conveyance at a  
          California public seaport.  Since a freight yard may include a  
          rail yard, is the proposed exemption intended to apply to any  
          freight yards located in California that receive cargo from a  
          California public seaport?  Would the freight yard have to be  
          contained within the boundaries of the California port or  








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          operate as an intermodal rail yard?  The Committee may wish to  
          consider amending the bill to reduce potential disagreements  
          between taxpayers and BOE. 


           Support and  
          Opposition   (4/21/16)


           Support  :  Bay Area Air Quality Management District; Breathe  
          California; California Electronic Transportation Coalition;  
          California League of Conservation Voters; Coalition for Clean  
          Air; Environment California; Environmental Defense Fund; Move  
          LA; Natural Resources Defense Council; Pacific Merchant Shipping  
          Association. 

           Opposition  :  Unknown.



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