BILL ANALYSIS Ó AB 1339 Page 1 Date of Hearing: May 9, 2011 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Henry T. Perea, Chair AB 1339 (Gorell) - As Introduced: February 18, 2011 Majority vote. Tax levy. Fiscal committee. SUBJECT : Income tax credits: emergency standby generators SUMMARY : Allows a credit under both the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law for costs incurred in purchasing and installing an "emergency standby generator" at a "service station." Specifically, this bill : 1)States that the credit is intended to incentivize service station operators to purchase and install emergency standby generators in California so service stations can continue to provide public services during power outages. 2)Allows a credit, for taxable years beginning on or after January 1, 2012, and before January 1, 2017, equal to 50% of the amount paid or incurred during the taxable year to purchase and install an "emergency standby generator" at a "service station" located in California. 3)Defines an "emergency standby generator" as an electrical generator that is rated by the manufacturer to generate at least 30 kilowatts of electricity and whose sole function is to automatically provide electric power when electric power from a utility service is interrupted. 4)Defines a "service station" as an independently owned and operated establishment that offers for sale or sells to the public, gasoline or other fuel to power motor vehicles. 5)Provides that the depreciable basis of any emergency standby generator shall be reduced by the amount of any credit allowed. 6)Provides that if, in any calendar year, the State Air Resources Board (ARB) or the State Energy Resources Conservation and Development Commission (Commission) establishes a certification standard for energy efficient or AB 1339 Page 2 low emission emergency standby generators, the credit shall be limited, for subsequent taxable years, to emergency standby generators that satisfy that certification standard. 7)Requires the ARB or the Commission to notify the Franchise Tax Board (FTB) of the certification standard within 10 working days of establishing the standard. 8)Specifies that if a generator for which a credit is allowed is thereafter sold, returned to the vendor, or removed from service within one year from the date it was placed in service, the amount of the credit allowed shall be recaptured, as specified. 9)Provides that, in cases where the credit amount exceeds the taxpayer's tax liability, the excess credit amount may be carried over for up to eight years until the credit is exhausted. 10)Takes immediate effect as a tax levy. 11)Sunsets on December 1, 2017. EXISTING LAW allows various tax credits under both the PIT Law and the CT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses. FISCAL EFFECT : The FTB estimates that this bill would reduce General Fund revenues by $300,000 in fiscal year (FY) 2011-12, $1.3 million in FY 2012-13, and $2.4 million in FY 2013-14. COMMENTS : 1)The author has provided the following statement in support of this bill: AB 1339 is an emergency preparedness measure that will provide independently owned gas stations an incentive to purchase and install standby generators so that they can continue to provide fuel during power outages, which is critical for emergency relief efforts. Knowing that our State is prone to natural disasters - with floods, fire, and earthquakes - we should not be left flat footed in the case of a tragic event. This bill is not only asking our AB 1339 Page 3 service Ýstation] owners to be prepared, but for the entire state to be prepared when natural disasters occur. Through the incentives provided in AB 1339, we are helping to ensure that emergency relief efforts will be efficient and Ýas] effective as possible. 2)Proponents state, "The lessons learned from hurricane Katrina and again from the recent cataclysmic events in Japan underscore the true frailty of a country or states' ability to respond to a natural disaster when one of the things we take for granted, in this case electricity, is lost; resulting in a crippling of the efforts of the emergency responders we depend upon." 3)The FTB notes the following implementation concern in its staff analysis of this bill: This bill defines "service station" as an independently owned and operated establishment that offers for sale or sells gasoline or other fuel to power motor vehicles to the public. The term "independently owned and operated" is undefined and could lead to disputes between the department and taxpayers. If the author's intent is to prevent vertically-integrated oil companies that produce and/or refine crude oil and that own and operate service stations from claiming the credit, amendments to the bill are necessary. 4)Committee Staff Comments: a) What is a "tax expenditure"? : Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960's, United States 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 enact a new tax expenditure program, in the form of an income tax credit, to incentivize service station operators to purchase and install emergency backup generators. b) How is a tax expenditure different from a direct expenditure? : As the Department of Finance notes in its AB 1339 Page 4 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, it should also be noted that, once enacted, it generally 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. c) Credit or grant? : The credit this bill provides would only benefit service station owners with an income tax liability to offset. If the Legislature determines that, in the interest of public safety, service stations should have backup generators, it could accomplish this goal through a grant program under which service stations would receive an equal monetary incentive irrespective of their tax liability. Of course, the state could also mandate that certain service stations purchase and maintain backup generators without subsidizing the cost. d) 5%, 50%, or something in between? : This bill appears to be modeled after AB 2665 (Strickland) of the 2009-10 Legislative Session. AB 2665 would have allowed a credit equal to 5% of the amount paid or incurred to purchase and install an emergency standby generator at a service station located in California. In this Committee's analysis of AB 2665, Committee staff questioned whether a 5% credit was sufficient to actually incentivize purchasing decisions. AB 1339, in turn, would increase this credit percentage to 50%, which is quite high in comparison to other state income tax credits. The Committee may wish to consider a percentage somewhere between these two numbers in an effort to strike an appropriate balance. Alternatively, the Committee may wish to retain the current percentage, but cap the amount of credit allowable for each purchased generator. AB 1339 Page 5 e) Proposed amendments : The author's office has asked the Committee to take amendments to: i) Explicitly provide that vertically-integrated oil companies shall not be eligible for the credit; and, ii) To add Assembly Member Chesbro as a joint author. f) Related legislation : i) AB 2665 (Strickland), of the 2009-10 Legislative Session, would have allowed a credit equal to 5% of the amount paid or incurred during the taxable year to purchase and install an emergency standby generator at a service station located in California. AB 2665 was held by the Assembly Committee on Appropriations. ii) AB 2623 (Strickland), of the 2007-08 Legislative Session, would have allowed a credit equal to 5% of the amount paid or incurred during the taxable year to purchase and install an emergency standby generator at a service station located in California. AB 2623 failed passage in this Committee. iii) SB 220 (Oller), of the 2001-02 Legislative Session, would have allowed a credit for the purchase of backup generators and related equipment. SB 220 failed passage in the Senate Environmental Quality Committee. REGISTERED SUPPORT / OPPOSITION : Support Association of California Healthcare Districts CDF Firefighters Local 2881 Opposition None on file Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098 AB 1339 Page 6