BILL ANALYSIS Ó
AB 865
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Date of Hearing: April 11, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 865 (Nestande) - As Introduced: February 17, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Property tax: exclusion from newly constructed:
active solar energy system.
SUMMARY : Extends the "new construction" exclusion for active
solar energy systems to improvements constructed through the
2032-33 fiscal year (FY). Specifically, this bill :
1)Extends the exclusion of an active solar energy system from
the definition of "newly constructed" through FY 2032-33.
2)Provides for an automatic repeal of the exclusion on January
1, 2034.
3)Provides that, notwithstanding Revenue and Taxation Code
(R&TC) Section 2229, no appropriation is made by this bill and
the state shall not reimburse local agencies for property tax
revenues lost by them pursuant to this bill.
4)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Limits ad valorem taxes on real property to 1% of the full
cash value of that property. For purposes of this limitation,
"full cash value" means the assessor's valuation as shown on
the 1975-76 tax bill or, thereafter, the appraised value of
the property when purchased, newly constructed, or when a
change in ownership has occurred.
2)Requires the assessor, with respect to any new construction,
to determine the added value upon completion. The value is
established as the base year value for those specific
improvements qualifying as "new construction" and is added to
the property's existing base year value. When new
construction replaces certain types of existing improvements,
the value attributable to those preexisting improvements is
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deducted from the property's existing base year value. (R&TC
Section 71).
3)Grants the Legislature the authority to exclude the
construction or addition of any active solar energy system
from the definition of assessable new construction.
ÝCalifornia Constitution, Article XIII A, Section 2(c)(1)].
Proposition 7 was approved by the voters on the November 1980
statewide ballot authorizing the Legislature to provide that
active solar energy systems shall be excluded from
reassessment as "new construction."
4)Excludes, pursuant to an authorization in the California
Constitution, the construction or addition of an "active solar
energy system" from classification as "newly constructed"
through the 2015-16 FY.
5)Defines an "active solar energy system" as a system that uses
solar devices, which are thermally isolated from living space
or any other area where the energy is used, to provide for the
collection, storage, or distribution of solar energy.
FISCAL EFFECT : The state Board of Equalization (BOE) staff
estimates that this bill may reduce property tax revenues (at
the basic 1% property tax rate) by $1 million annually,
beginning with FY 2016-17. The staff also mentions that for any
FY in which a large-scale solar power project is completed and
qualifies for the new construction exclusion, the revenue impact
could be substantially more for that particular year.
COMMENTS :
1)Author's Statement . The author states that, "California has
historically been a leader in renewable energy development and
Investor Owned Utilities (IOU) currently procure an average of
18% of their energy needs through qualifying renewable energy
sources (some municipal owned utilities have a higher
percentage). Proposed legislation would increase the
requirement to procure renewable energy resources to 33% by
December 31, 2020. In order to facilitate the development of
renewable facilities, it is important to extend this incentive
to provide regulatory certainty when renewable energy
developers seek financing."
2)Arguments in Support . The sponsor of this bill states that AB
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865, by extending the property tax exclusion to January 1,
2034, "will encourage and foster development of solar
renewable energy projects in the State of California." The
sponsor argues that large "solar developments require several
years of planning, permitting, development, financing, and
construction" and many of these projects will not be ready
prior to January 1, 2017, to qualify for this exclusion, which
makes it even more difficult to obtain financing for those
projects. The sponsor concludes that, as "lesser credit is
available for the development of large solar facilities,"
those projects will require either "more equity on the part of
the project sponsor or curtailment of project size and/or
cancellation of projects because of economics," which will
have a negative impact on employment in California. Finally,
the sponsor contends that, if this bill is enacted, "an
important support for development of renewables and employment
of Californians in the renewable energy sector will be in
place at a crucial time."
3)Arguments in Opposition . The opponents of this bill state
that AB 865 "fails to reimburse local agencies for the
resulting revenue loss." The opponents emphasize that, over
the past three years, "counties have laid off thousands of
employees, furloughed many more, and eliminated services,
despite growing needs in safety net services, all in response
to historic declines in their major revenue sources." Thus,
the opponents argue that, if supporting solar energy projects
is an issue of statewide concern, then "the state should be
willing to use statewide revenues to reimburse counties for
their losses," instead of unilaterally "using county revenue
to favor these projects during times of such fiscal stress."
4)The Benefits of Solar Power . Solar energy provides
significant benefits both to the environment and the economy.
Solar energy is pollution-free, so investments made to
generate solar energy mean that less energy from fossil fuel
sources is necessary, thereby reducing exposure to greenhouse
gasses and pollutants. Solar energy helps electricity
grid reliability and assuages electricity prices during
periods of peak demand because it is most plentiful when
temperatures are highest. Solar energy is most suitable for
remote areas that are not connected to energy grids. Finally,
some proponents of the solar energy industry argue that it
represents a sector for growth in potential skilled and
unskilled jobs. All in all, solar energy is a valuable
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resource that needs to be further developed and improved.
5)The Tax Benefits to the Solar Power Industry . Both the
federal government and the State of California offer numerous
incentives for individuals to install solar energy systems,
including $2.2 billion of California Solar Initiative rebates,
net-metering (where ratepayers sell excess solar electricity
back into the grid and pay bills based on net energy usage),
accelerated depreciation for commercial purposes under federal
law, low-interest loans for solar panels on low-income
housing, the possibility of renewable energy credit sales, and
time-of-use electricity pricing.
Furthermore, federal law allows a renewable electricity income
tax credit for the production of electricity from qualified
energy resources at qualified facilities, including solar
energy. In addition to the renewable electricity production
tax credit, a taxpayer is allowed to claim a federal tax
credit for the investment in certain property, including fuel
cell and solar property or receive a grant. The grant
proceeds are exempt from both the federal and state income
taxes. Finally, new solar energy systems and solar energy
systems incorporated into a new building are eligible for the
exclusion from under California's property tax laws.
6)Background: Property Tax Exclusion for Solar Energy Systems.
Existing law imposes an annual property tax on the assessed
value of real property. Under Article XIII A of the
California Constitution, real property is reassessed for
property tax purposes only upon a change in ownership of the
property, or when "new construction" occurs on the property.
"Newly constructed" or "new construction" includes additions
to the real property, or the alteration of the real property
that amounts to a rehabilitation or conversion of the property
to a different use since the preceding lien date. The
assessor must determine the value of the new construction and
add that amount to the assessed value of the property.
R&TC Section 73 excludes the construction or addition of an
active solar energy system from the definition of "new
construction," which means that a property owner could install
an active solar energy system on his/her property and the
installation would not trigger a reassessment of the property.
Furthermore, an active solar energy system constructed as
part of a new building is also excluded from the definition of
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"newly constructed." This exclusion allows a purchaser of a
new building that incorporates an active solar energy system
to file a claim with the county assessor to exclude the value
of the solar system from the assessment value of the building,
subject to certain restrictions. The extension of the
exclusion from an owner-builder, who never intended to occupy
the new building, to the initial purchaser puts the owner that
purchased from a builder's inventory in the same position
(with respect to the active solar energy system) as a property
owner that hired the same builder to construct a building with
an active solar energy system on land already owned.
An "active solar energy system" is defined as a system that uses
solar devices, which are thermally isolated from living space
or any other area where the energy is used, to provide for the
collection, storage, or distribution of solar energy. It
includes storage devices, power conditioning equipment,
transfer equipment, and parts related to the functioning of
those items, as well as pipes and ducts that are used
exclusively to carry energy derived from solar energy. It
does not include solar swimming pool heaters, hot tub heaters,
passive energy systems, and wind energy systems. The active
solar energy systems exclusion applies both to homeowners who
install solar energy systems as part of their home and to
businesses that generate solar energy for sale to public or
municipal utilities. The Legislature enacted this exclusion
in FY 1980-81 until FY 1993-94, reinstated it in FY 1999-2000
until FY 2004-05, extended it from 2004-05 to FY 2008-09 and,
then again, from FY 2008-09 to FY 2015-16.
7)Exclusion versus Exemption. The staff at the BOE, in its
analysis of this bill, emphasized that R&TC Section 73 is an
exclusion, and not an exemption, for solar energy facilities.
The difference between an exemption and an exclusion is
important because (a) the exclusion does not apply once there
is a transfer of the property resulting in change in ownership
of that property (reappraisal event); (b) the exclusion does
not apply to any property that is under the assessment
jurisdiction of the BOE; and (c) in the case of any locally
assessed large scale solar project only the "improvements" are
eligible for the exclusion, whereas the land remains subject
to property tax.
The BOE staff further explains that active solar energy systems
owned by public utilities and subject to assessment by the BOE
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do not benefit from the "new construction" exclusion of R&TC
Section 73. Instead, their value is captured under the
unitary approach because state-assessed property is not
subject to the assessment limitations of Article XIII A of the
California Constitution.
8)What Is the Urgency ? AB 865 proposes to extend the "new
construction" exclusion for active solar systems from FY
2015-16 to FY 2032-33, inclusive. The early extension would
provide certainty to businesses that are developing large
solar projects and would help them in obtaining low-cost
financing. It should be noted, however, that the repeal of
the exclusion does not make an existing solar system subject
to reassessment immediately. As explained by the BOE staff,
the "new construction exclusion remains in effect until the
property changes ownership, at which point the entire
property, including the portion of the property (or additional
value) previously exempted from taxation under the new
construction exclusion, will be reassessed at its current
market value pursuant to the change in ownership provisions of
Proposition 13." In other words, if R&TC Section 73 were to
be repealed on January 1, 2017, a solar system that previously
qualified for the existing exclusion will continue to qualify
for that exclusion and will not be reassessed for property tax
purposes, absent any other change in circumstances.
The current sunset date was originally chosen to coincide with
the sunset of the California Solar Initiative, which is part
of the California program with a $2.2 billion budget and a
goal of installing 1,940 MW by the end of 2016. Given that
the existing sunset is not due to expire for another four
years, and the fact that the California Solar Initiative
program will not be re-evaluated until 2016, the Committee may
wish to postpone the consideration of this bill until 2015.
9)BOE Suggested Amendments . The BOE staff notes that, while
this bill simply changes the sunset dates, it highlights a
pre-existing problem with current law regarding the date by
which qualifying construction must be completed in order to
receive the exclusion from the definition of "newly
constructed." Specifically, R&TC Section 73(g), as proposed
to be amended, provides that it applies to property tax lien
dates from FY 1999-2000 until FY 2032-33, inclusive. However,
subdivision (h) states that this section shall remain in
effect until January 1, 2034, and as of that date is repealed.
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The BOE staff is concerned that those provisions may be
interpreted differently, which may lead to litigation of the
issue. For example, one interpretation is that qualifying
construction must be completed by January 1, 2032, which is
the lien date for FY 2032-33; another interpretation is that
construction must be completed by June 30, 2033, the last date
of the 2032-33 FY. Finally, it may also be interpreted to
require that construction be completed by January 1, 2034, the
last day on which R&TC Section 73 remains in effect.
Consequently, the BOE staff recommends that these provisions
be combined into a single subdivision with a precise date for
the completion of qualifying construction and the repeal date.
10)Related Legislation .
AB 15 x1 (Hill), introduced in the current legislative session,
would revise the definition of "active solar energy system"
and would declare the legislative intent to extend the current
exclusion from property tax reassessment to active solar
energy systems that are sold in sale-leaseback arrangements.
AB 15 x1 is pending in the Senate Governance and Finance
Committee.
AB 1451 (Leno), Chapter 538, Statutes of 2008, extended the
exclusion from "newly constructed" for active solar systems to
FY 2015-16 and clarified that buyers of newly constructed
homes and buildings with builder-installed solar energy
systems also qualify for this exclusion.
AB 1099 (Leno), Chapter 193, Statutes of 2005, extended the
exclusion to FY 2008-09.
SB 1017 (Campbell), introduced in the 2004-05 legislative
session, would have also extended the sunset date to FY
2016-2017. SB 1017 was never heard in any committee.
AB 1755 (Keeley), Chapter 855, Statutes of 1998,
re-established the exclusion for six FYs - from 1999-2000
through 2004-05.
SB 103 (Morgan), Chapter 28, Statutes of 1991, among other
things, extended the exclusion for three more FYs - 1991-92
through 1993-94.
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AB 4090 (Wyman, Alquist), introduced in the 1989-1990
legislative session, proposed extending the exclusion through
FY 1993-94. AB 4090 passed both houses, but was vetoed by
Governor Deukmejian.
SB 1311 (Greene), introduced in the 1989-90 legislative
session, proposed repealing the exclusion on January 1, 1990.
SB 1311 was not heard in any committee.
AB 1412 (Wyman), Chapter 878, Statutes of 1985, extended the
exclusion for another five FYs - 1986-87 through 1990-91. It
also required the Legislative Analyst's Office to report to
the Legislature by January 1, 1990 on the fiscal and economic
effects of the exclusion.
SB 1306 (Alquist), Chapter 1245, Statutes of 1980, added R&TC
Section 73 to implement Proposition 7. Its provisions were
operative for five FYs - 1981-82 through 1985-86.
Proposition 7 (SCA 28, Alquist) was approved by voters in 1980
and amended the California Constitution by giving the
Legislature the authority to exclude from property tax
assessment the addition of active solar energy systems as
assessable new construction.
REGISTERED SUPPORT / OPPOSITION :
Support
SunPeak Solar LLC (Sponsor)
The Coalition of California Utility Employees and the
International Brotherhood of Electrical Workers
Opposition
California State Association of Counties (CSAC)
The Regional Council of Rural Counties (RCRC)
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
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