BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Jenny Oropeza, Chair
SB 1194 - Battin
Amended: March 24, 2008
Hearing: April 23, 2008 TAX LEVY Fiscal: YES
SUMMARY: Creates the Clean Technology Commerce Zone within
the Coachella Valley
EXISTING LAW provides special tax incentives for
taxpayers located in enterprise zones (EZ) and other
geographically targeted economic development areas,
including:
An income or corporate tax credit equal
to 50% of an employee's wages in the first year
of employment, up to 150% of the minimum wage,
for employees meeting specified criteria,
diminishing by 10% of wages each year until
expiring in the sixth year of employment. The
credit is not refundable, but may be carried
forward infinitely.
An income or corporate tax credit on the
sales and use tax paid on qualified equipment in
the year the equipment was purchased. For
personal income taxpayers, the credit may be
taken on sales tax paid on qualified equipment
with a cost up to $1,000,000 that year. For
corporate taxpayers, the credit may be taken on
sales tax paid on qualified equipment with a cost
up to $20,000,000 that year. The credit is not
refundable, but may be carried forward infinitely
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A credit for lenders equal to the net
interest on loans made to taxpayers doing
business in an enterprise zone.
Net operating losses and business expense
deductions with a 15 year carry-forward.
Accelerated depreciation expensing for
equipment.
THIS BILL, beginning January 1, 2008 and sunsetting on
December 1, 2014, creates the Clean Technology Commerce
Zone (CTCZ) within the Coachella Valley. For businesses in
the CTCZ that in any manner advance California's goals of
renewable energy usage qualify for tax incentives. The CTCZ
shares many of the same special tax incentives of an EZ,
including:
An income or corporate tax credit equal
to 50% of an employee's wages in the first year
of employment, up to 150% of the minimum wage,
for employees meeting specified criteria,
diminishing by 10% of wages each year until
expiring in the sixth year of employment. The
credit is not refundable, but may be carried
forward infinitely.
An income or corporate tax credit on the
sales and use tax paid on qualified equipment in
the year the equipment was purchased. The credit
is not refundable, but may be carried forward
infinitely
A credit for lenders equal to the net
interest on loans made to taxpayers doing
business in an enterprise zone.
Net operating losses and business expense
deductions with a 15 year carry-forward.
Accelerated depreciation expensing for
equipment.
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FISCAL EFFECT:
Franchise Tax Board estimates a revenue loss of less
than $500,000 for 2008-09, $1 million for 2009-10, and $1.2
million for 2010-11.
COMMENTS:
A. Purpose of the Bill
According to the author, "With the requirements
imposed by AB 32 (2006), businesses are needed to develop,
manufacture, produce, distribute, and install clean
technology. The purpose of SB 1194 is to induce businesses
to create jobs, raise median income, and reduce poverty all
while tackling the issues of environmentally friendly
technology and energy."
B. If at First you Don't Succeed
Currently, there are 42 EZ designated by the
Department of Housing and Urban Development (HCD). The
Coachella Valley has a 56 square mile conditionally
designated EZ, covering the cities of Indio, Coachella,
Thermal and Mecca. However, HCD recently denied an
application for a second EZ within the Coachella Valley
covering Desert Hot Springs and Cathedral City. As SB 1194
gives many of the same tax incentives as an EZ, this bill
may grant the very incentives HCD just denied to the
Coachella Valley. Is SB 1194 an end run around HCD and
their EZ designation process?
C. Why Just the Coachella Valley?
State tax law provides various tax credits designed to
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provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions. If a statewide
need exists to develop clean technology, and a tax
incentive helps that development, why limit those
incentives only to the Coachella Valley and not for all of
California? Is there some reason why a tax credit just for
the Coachella Valley produces greater results than a credit
for any other part of California? Furthermore, opponents
note that the Coachella Valley is already a major center
for solar, wind, and geothermal energy. Accordingly, SB
1194 may not induce new activity; rather, it may simply
reward an activity currently taking place.
D. The Right Tool for the Job?
The EZ program seeks to remedy a socioeconomic
problem: underemployment in certain economically challenged
areas throughout the state because of low levels of
investment. EZ offers some of the strongest tax incentives
for hiring workers: 50% of the employee's wage up to 150%
of the minimum wage in the first year. While the efficacy
of the EZ program achieving its goals is debatable, SB 1194
uses the same tax incentives to address a completely
different problem. SB 1194 uses a tax incentive package,
designed to correct underemployment, to address a
manufacturing and production issue. The Committee may
wish to consider if offering hiring credits is the best way
to provide incentives for producing clean technology.
E. What is Clean Technology?
Ostensibly, SB 1194 seeks to provide incentives to
produce clean technology; however the bill's definitions
are vague and unclear. The only definition relative to
clean technology or clean energy is in the definition of a
what a qualified taxpayer means, "a person or entity
engaged in a trade or business that primarily develops,
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manufactures, produces, distributes, installs, delivers, or
in any other manner advances this state's goals of
renewable energy usage." This definition is broad and may
lead to disagreements between the Franchise Tax Board and
taxpayers over who qualifies for the tax incentives. The
Committee may wish to consider more narrowly defining the
activities that qualify for the tax incentives.
Lastly, this bill does not cap the value of the sales
and use tax credit. Current law under the EZ program caps
the value of equipment subject to the sales and use tax
credit at $20 million. The Legislature drew this line
because credits that exceed $20 million are costly, but
more importantly because a larger credit would function
more as a reward than an incentive to change behavior. A
firm able to invest more than $20 million would not likely
choose not to do so only because of a cap on the base
amount, especially in combination with the state's
lucrative enterprise zone hiring credit. The Committee may
wish to consider putting a similar cap on the sales and use
tax credit.
Support and Opposition
Support:none received
Oppose: California Tax Reform Association
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Consultant: Brendan P. Hughes
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