BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 462 - Strickland
Introduced: February 26, 2009
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Enacts a $10,000 Tax Credit for Manufacturers of
Verified Diesel Emission Control Strategies
EXISTING LAW provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
EXISTING LAW authorizes the California Air Resources
Board (CARB) to regulate emissions of criteria pollutants
and generally protect air quality and public health. As
part of this effort, CARB enacted regulations limiting
emissions from off-road diesel engines of 25 horsepower or
greater, often used in the construction, agricultural, and
goods movement industries. To comply with the regulations,
many business owners must purchase verified diesel emission
control strategies (VDECS).
THIS BILL authorizes a $10,000 credit for a
manufacturer of VDECS, defined as emissions control
strategies designed primarily for the reduction of diesel
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particulate emission, and are either approved or pending
approval by CARB. The taxpaying manufacturer must obtain a
certification from CARB that it makes approved VDECS, and
provides the certification to the Franchise Tax Board (FTB)
upon request. The credit may be carried over to subsequent
taxable years. The measure also defines its terms.
FISCAL EFFECT:
According to the FTB, SB 462 results in revenue losses
of $300,000 in 2009-10, $400,000 in 2010-11, and $500,000
in 2011-12.
COMMENTS:
A. Purpose of the Bill
According to the Author, "In 2000, the California Air
Resources Board (CARB) adopted a comprehensive Diesel Risk
Reduction Plan to reduce diesel emissions from new and
existing diesel-fueled engines and vehicles. Regulations
were adopted by the CARB on July 26, 2007 to reduce diesel
particulate matter (PM) and nitrogen oxide (NOx) emissions
from engines used in off-road equipment. These regulations
became effective on June 15, 2008. The CARB plan seeks to
reduce PM emissions by approximately 90 percent for new
vehicles. Existing diesel engines and vehicles would be
required to implement retrofit technology and there would
be accelerated turnover of fleets to newer, cleaner
engines. Compliance dates for the fleets range from 2010
to 2015 depending on the size of the fleet. The largest
fleets (over 5,000 horsepower of affected vehicles) must
comply first. Compliance will be extremely difficult for
the fleet owners because there are only a few manufacturers
currently making equipment certified by the CARB. The
equipment is extremely limited and does not address the
various makes and models that require the retrofit. If the
fleet owners are not able to make the necessary changes to
the engines, then the equipment will have to be retired.
This means, equipment purchased at tens of thousands of
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dollars is sold at a loss to out of state buyers or the
equipment is scrapped. Achieving cleaner engines is a
laudable goal, but we must give the operators the resources
to meet the goal. The state cannot expect compliance nor
punish noncompliance when the technology to meet the goals
is not yet available."
B. An Uncertain Benefit?
Responding to public health concerns and the state's
persistent non-attainment of federal ambient air quality
standards, CARB issued regulations on July 27, 2007 that
require off-road diesel engines to substantially reduce
emissions by establishing fleet average emission rates for
PM and NOx that decline over time. Each year, the
regulation requires each fleet to meet the fleet average
emission rate targets for PM or apply the highest level
VDECS to 20 percent of its horsepower. In total, the
regulation is expected to reduce 187,000 tons of NOx
emissions and 33,000 tons of PM emissions between 2009 and
2030. The regulations were to take effect for large fleets
(5,000 hp of vehicles and above) in 2010, and apply to
smaller fleets in subsequent years, although the
Legislature recently eased theoe deadlines (ABx2 8,
Nestande).
According to CARB, off-road diesel engines emit up to
one quarter of particulate matter (PM) and nitrogen oxide
(NOx ), pollutants that cause respiratory illness and
premature death. While the regulation will surely enhance
air quality and public health, businesses will certainly
incur significant costs for businesses to purchase and
install compliant VDECS in most cases. CARB's analysis
indicates that regulation will incur more than $3 billion
in costs. If businesses do not comply, CARB may levy civil
penalties, swatting those who do not follow the law with a
stick. SB 462 seeks to offer a carrot, instead granting a
tax credit to taxpayers who manufacture VDECs.
However, a tax credit for a manufacturer may not end
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up benefiting businesses subject to the regulation.
Offering a tax credit for manufacturers a credit will
reduce costs of production, but tax incidence theory posits
that the company will only lower the price based on
elasticities of supply and demand for VDECS, or whether the
supplier can sell more goods at lower prices than at higher
ones. Given the CARB regulation, VDEC manufacturers will
likely be able to charge higher prices because the law
compels buyers to purchase VDECs and have the opportunity
to pocket the value of the tax credit as a windfall.
Additionally, all VDEC manufacturers may claim the $10,000
tax credit regardless of the firm's individual behavior,
size, or quantity or cost of VDECs produced. SB 462 also
allows a double benefit: the manufacturer may claim the
credit in addition to deducting any normal and usual
business expenses or depreciating manufacturing equipment
used in making the product.
C. Suggested Amendments
FTB suggests on Page 1, Line 4, to strike out
"December" and insert "January" to conform the deadlines
for the credit under the Personal Income and Corporation
Tax laws.
Support and Opposition
Support:
Oppose:California Tax Reform Association
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Consultant: Colin Grinnell
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