BILL ANALYSIS Ķ
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SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 358 HEARING: 1/11/12
AUTHOR: Cannella FISCAL: Yes
VERSION: 1/4/12 TAX LEVY: Yes
CONSULTANT: Faulkner
GROSS INCOME: INCOME EXCLUSION FOR AIR QUALITY FUNDS
Excludes air quality funds from gross income when computing
taxes.
Background and Existing Law
Existing federal and state laws provide that gross income
includes all income, from whatever source derived,
including compensation for services, business income, gains
from property, interest, dividends, rents, and royalties
unless specifically excluded. Exclusions are generally
enacted to change behavior, encourage growth in the
economy, or for other stated policy objectives. California
typically conforms to federal law for exclusions to gross
income for ease of administration. In 2010, the state
conformed to federal law to exclude the American Recovery
and Reinvestment Tax Act of 2009 grants for renewable
energy from gross income (SB 401, Wolk).
The California Air Resources Board (CARB) is responsible
for a number of air pollution incentives, grants, and
credit programs to reduce air pollution. While CARB has
program oversight, some programs are implemented as a
partnership with local air districts.
Funds received from CARB or local air districts for the
purpose of air pollution reduction are included in gross
income.
Proposed Law
Senate Bill 358 excludes grants or funds from CARB, an air
pollution control district, or an air quality management
district for the purpose of air pollution reduction from
gross income. The basis of property for determining gain
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or loss on the sale or disposition, as well as for
determining depreciation, would be reduced to the extent
the property was acquired with any amount excluded from
gross income under this bill.
State Revenue Impact
The Franchise Tax Board (FTB) estimates this bill will
result in the following revenue losses:2012-13: $8.0
million
2013-14: $2.4 million
2014-15: $1.6 million
Comments
1. Purpose of the bill . The author states, "California has
some of the toughest air quality standards in the nation
and compliance with regulations has proven to be a
challenging task for some businesses and individuals.
California's business community has strived to comply with
regulations and some have undertaken the herculean task of
exceeding rigorous standards or achieving early compliance.
Because grants are taxable, an individual or business
entity will never receive the full grant amount. For
example, many businesses in the San Joaquin Valley have
worked to comply with regulations by either purchasing new
vehicle fleets or upgrading their equipment to more
efficient models that produce fewer emissions. Not only
can purchases end up costing businesses extra money but
under current law, they do not receive the full grant award
because it is fully taxed. Therefore, the benefit of
receiving grant moneys is diminished. SB 358 will
eliminate the penalty that individuals and businesses incur
when they choose to comply early or elect to meet and
exceed CARB regulations. SB 358 will exempt any grant
funding provided by CARB or local air districts for the
purposes of air mitigation from state income tax. Full
grants will then be available to businesses and individuals
to help purchase cleaner technologies. This bill seeks to
fulfill California's commitment to cleaner air while also
supporting jobs and the business community."
2. Programs, programs, and more programs . There are
approximately a dozen incentive and grant programs offered
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through CARB to reduce air pollution. Some of these
programs are in conjunction with California's 35 local air
districts. For example:
The Carl Moyer Program provides grants for
cleaner-than required engines and emission control
devices that reduce toxic particles and smog-forming
gases through retrofitting, repowering or replacing
equipment. The Carl Moyer Program was established in
1998 (AB 1368, Villaraigosa) and received $25 million
in funding its first year. Since its inception, it
has provided over $680 million in incentive funding.
Local air districts administer the programs for their
areas.
The Air Quality Improvement Program (AQIP),
established by the California Alternative and
Renewable Fuel, Vehicle Technology, Clean Air, and
Carbon Reduction Act of 2007 (AB 118, Nuņez), is a
voluntary incentive program to fund clean vehicle and
equipment projects, research on biofuels production
and the air quality impacts of alternative fuels, and
workforce training. AB 118 provided approximately
$200 million annually through 2015 for three new
programs. AQIP, one of the three programs, receives
$30-$40 million per year contingent on state revenues.
The bill created a dedicated revenue stream for the
programs through smog abatement, vehicle registration,
and vessel registration fees. This program is
administered exclusively by CARB.
Goods Movement Emission Reduction Program and
Lower-Emission School Bus Program. These programs
focus on near-term emission reductions from fully
commercialized emission control technologies.
Local air districts also oversee programs developed
at the local level including the Clean Green Yard
Machine Program. Air districts receive funding at the
state level from CARB, at the local level through
business permits and DMV fees, and at the federal
level. The San Joaquin Valley Air Control District,
the bill's sponsor, received $112,103,821 in incentive
grants in 2010. Approximately 90% of the funds were
from the state and local level.
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AB 2766 (Sher, 1990), SB 1928 (Presley, 1990), AB
434 (Sher, 1991), SB 709 (Florez, 2003), and AB 923
(Firebaugh, 2004) each imposed a fee on motor vehicles
for air districts to use to reduce air pollution from
motor vehicles from 2008/09 through 2010/11 the air
districts received $521,313,036 in project and
administration funds from these fees. The revenue
estimate states that 20% of these annual fees are
earmarked for air quality grants. Could a portion of
the remaining 80% be used to cover the revenue losses
generated by SB 358? Air districts also receive
federal money and revenue from local permits which
they disburse as incentive grants, and are not
included in the revenue estimate, as well as funds for
operations. In 2010, the San Joaquin Air District
received approximately $10 million in federal funds
and the South Coast Air District received over $16
million in federal funds in 2009.
3. Double dip . SB 358 provides an income exclusion for
clean air awards. If the state's stated goals are to
encourage cleaner air and business expansion, the existing
awards already meet those objectives. In addition to the
monetary awards, the organizations that receive these funds
will also benefit from the income exclusion. Was this the
intent of the original legislation that created the various
grant programs? Did the Legislature intend to provide
public money grants to private entities and exclude the
funds from taxation? The Committee may wish to consider if
these organizations should receive a double benefit or if
one monetary benefit award is enough.
4. Why and why now ? All programs are voluntary incentive
programs and fund air pollution reductions that are in
excess of what is already required by law. By most
accounts, the pollution reduction programs operated by CARB
and local air districts are successful. For example, CARB
is required to report to the Legislature biennially on its
implementation of AQIP. The 2010 Biennial Report to the
Legislature states: "With the success and popularity of
AQIP to date, CARB does not recommend any Legislative
changes to the program at this time."
Funds offered by these programs are in demand. A news
release from the San Joaquin Valley Air Pollution Control
District announcing a new round of incentive funding ($60
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million) to replace, repower and retrofit heavy-duty,
diesel-powered trucks, stated; "Initial funds were quickly
exhausted, signaling a critical need for fresh funds by
heavy-duty truck owners." (March 7, 2011)
5. The little guy . The bill's sponsor agrees that grant
funds are popular. However, the sponsor states that they
cannot always reach all the areas they need such as small
businesses and individuals. There is concern that this
problem will only grow and become more complex in the
future. They state that many small businesses and
individuals cannot afford the taxes owed on grants and the
cost can preclude participation by these groups. SB 358
bill does not focus on small businesses and individuals who
cannot afford to accept an air quality grant. The bill
provides an exclusion for all businesses and individuals.
The Committee may wish to consider amending the bill to
specify these groups.
6. Reverse non-conformity . California typically conforms
to federal law for income tax purposes to allow for
substantial simplification of state tax forms. For federal
purposes, air quality funds are taxable and will continue
to be taxed into the foreseeable future. Any changes to
the computation of gross income for state purposes,
different from federal law, could potentially be burdensome
for taxpayers and FTB.
Proponents of SB 358 purport that the elimination of state
income tax on air quality funds will enable more small
businesses and individuals to participate in air quality
programs. However, by comparison, the federal portion of
the tax bill associated with these grants is much higher
than the state portion. State personal income tax rates
range from 1 to 9.3 percent with an additional 1 percent
surcharge for taxpayers making more than $1 million.
Federal personal income tax rates range from 10 to 35
percent. Federal tax rates on corporate taxable income
vary from 15 to 35 percent; the state rate is 8.84 percent.
If small businesses and individuals cannot afford to
accept an air quality grant because of state income taxes,
more than likely, the continued existence of federal income
tax on air quality funds will still preclude participation
in the programs.
6. Show me the money . Comment 2 outlines the various
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grant programs available in this state to provide for these
incentive programs including the local air district funds
provided through AB 2766 (Sher). Through a variety of
programs, air districts receive millions of dollars for
clean energy programs. In order to absorb the General Fund
costs, the Committee may wish to require local air
districts to reimburse the General Fund for funds lost by
the provisions of this bill. Alternatively, the Committee
may wish to consider amending this bill to allow a debit
against the air districts' project funds, out of which they
are awarding grants, to compensate the small businesses
they intend to help through this bill.
7. Making it work . This version of the bill addresses
implementation concerns the FTB expressed with prior
versions. Additionally, the author will take technical
amendments in Committee to address further concerns.
Support and Opposition (1/5/12)
Support : San Joaquin Valley Air Pollution Control District
(Sponsor); California Air Pollution Control Officers;
California Cotton Ginners and Growers Associations;
California Partnership for the San Joaquin Valley;
California Taxpayers Association; Engineering and Utility
Contractors Association; South Coast Air Quality Management
District; Western Agricultural Processors Association.
Opposition : Unknown.