BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1339
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          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 








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            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 








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               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 








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               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.  









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              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 











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