BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1128 HEARING: 4/11/12
AUTHOR: Padilla FISCAL: Yes
VERSION: 4/9/12 TAX LEVY: No
CONSULTANT: Miller
Expands the sales and use tax exemption under the CAEATFA
program to include "advanced manufacturing."
Background and Existing Law
The California Alternative Energy and Advanced
Transportation Financing Authority (CAEATFA) provides
financing through conduit or revenue bonds, loan
guarantees, loan loss reserves and a sales and use tax
exemption for facilities that use alternative energy
sources and technologies. CAEATFA also provides these
financing mechanisms for facilities needed to develop and
commercialize advanced transportation technologies that
conserve energy, reduce air pollution, and promote economic
development and jobs. CAEATFA's board, composed of the
Treasurer, Controller, Director of Finance, Chairperson of
the Energy Commission, and President of the Public
Utilities Commission, decides which projects to assist. On
March 24, 2010, Governor Arnold Schwarzenegger signed SB 71
(Padilla) which authorizes the CAEATFA to provide eligible
projects financial assistance in the form of a sales and
use tax exemption on property used for the "design,
manufacture, production, or assembly" of either advanced
transportation technologies or alternative energy source
products, components or system. Prior to the passage of SB
71, Governor Schwarzenegger used CAEATFA to assist a joint
venture between Tesla Motors and Toyota Motors to purchase
the Nummi assembly plant in Fremont, California where the
two companies focus on manufacturing hybrid and electric
vehicles, including the TESLA brand.
The SB 71 program promotes the creation of California-based
manufacturing, California-based jobs, and the reduction of
greenhouse gases, air and water pollution, or energy
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consumption. To date, CAEATFA has approved financial
assistance for private entities in the following fields:
electric vehicle manufacturing, solar photovoltaic
manufacturing, landfill gas capture and production, biogas
capture and production (dairies and waste water treatment
plants), demonstration hydrogen fuel production, electric
vehicle battery manufacturing, biomass processing and fuel
production, and others.
Current law provides that CAEATFA may only issue more than
$100 million for the sales and use tax exemption with a
letter to the Legislature but without budget approval.
Eligibility Criteria . Applicants must show the property to
be purchased will be used to design, manufacture, produce
or assemble an eligible advanced transportation technology
or alternative source product - including energy efficiency
- component or system. Each applicant is required to meet
the "net benefits test" showing that the new project will
create jobs in this state. Applicants are awarded the
sales and use tax exemption by CAEATFA and are all publicly
disclosed on their website and in annual report documents.
This definition includes manufacturers of alternative
source electricity generation equipment such as solar
panels or wind turbines, but it excludes the purchase of
that equipment for power generation.
Proposed Law
Senate Bill 1128 adds "advanced manufacturing" to the list
of qualified manufacturing that may qualify for the sales
and use tax exemption. The bill defines advanced
manufacturing that improves existing, or creates entirely
new, materials, products, and processes through the use of
science, engineering and information technologies;
high-precision tools and methods; a high-performance
workforce; and innovative business or organizational models
in any of the following technology areas: micro and
nanoelectronics, including semiconductors, advanced
materials, integrated computational materials engineering,
nanotechnology, additive manufacturing and industrial
biotechnology. Advanced manufacturing shall include all
the following:
A production system capable of furnishing a mix of
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products in small or large volumes, with both the
efficiency of mass production and the flexibility of
custom manufacturing, to respond rapidly to customer
demand and desired quality.
Systems that result from substantive advancements
(whether incremental or breakthrough) over the current
state of the art in the production of materials and
products: these advancements include improvements in
manufacturing processes and systems which are often
referred to as "smart" or "intelligent" manufacturing
systems, integrate computational predictability and
operational efficiency.
Systems that produce goods that minimize the use of
resources while maintaining or improving cost and
performance.
Systems that are sustainable.
State Revenue Impact
Unknown but potentially significant. "Advanced
Manufacturing" would be included in the $100 million cap as
provided above which CAEATFA may exceed with 20-day notice
to the Legislature.
Comments
1. Purpose of the bill . The Author cites states such as
Massachusetts, Michigan and Georgia that are creating
collaborative centers between industry and government to
attract advanced manufactures and draw down the federal
dollars. California must act to remain competitive. The
California Alternative Energy and Advanced Transportation
Financing Authority (CAEATFA) is an existing authority
within the Office of the State Treasure that can attract
and retain manufacturers. SB 71 (Padilla, 2010) created a
sales and use tax financing program under CAEATFA for
manufacturers of green technology industry. In the first
year alone the program approved 26 projects which generated
$950 million in investments in California. These
investments are projected to create an estimated 6,027
jobs; 3,936 permanent jobs and 2,091 construction jobs.
CAEATFA is a successful model for leveraging state dollars
to create new jobs and investments. SB 1128 will expand the
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success of the program by adding "Advanced Manufacturing"
as a criteria CAEATFA will use to determine the allocation
of exemptions.
2. Measuring performance SB 1128 proposes expanding a
program that is only two-years old. While this tax
exemption provides more data and information than any other
(all applicants, awards, and applicant scoring are public),
it is still difficult to measure the efficacy of the
existing exemption, and even more so to measure how
effective adding advanced manufacturing will be. For
example, at the October 11th, 2011 informational hearing of
this Committee and the Committee on Energy, Utilities and
Communications, the Committees learned that the current SB
71 program costs about $153,000 per job created, including
the Solyndra<1> allocation. Having approved $110.5 million
in exemptions with 721 jobs to be created (also about
$153,000 per job created).
In order to measure the performance and accountability of
the these increased duties of the program program with ,
the Committee may wish to consider the following
performance standards:
Sunset the advanced manufacturing program after
three-years.
Review and study the number and cost of jobs
created and seek a dynamic analysis of the economic
output that would occur without the sales and use tax
exemption. The review should include whether there is
a more efficient and less costly way to create jobs in
this state.
Request an academic peer review of the net benefits
test to analyze whether the test is in fact measuring
increased economic output. (See discussion of net
benefits in comment 5).
3. What is "advanced manufacturing?" This Committee and
the Committee on Energy, Utilities and Communications held
an informational hearing on March 21st of this year to
discuss the definition of advanced manufacturing. The
Committee learned that the definition is still a work in
progress and many states and the federal government do not
have a consistent definition. The background paper that
-------------------------
<1>
Solyndra filed for bankruptcy on September 6, 2011. The
company qualified for $24 million in sales and use tax
exemptions.
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discusses the various definitions from that hearing is
attached. The definition this bill uses focuses on
industries that manufacture more efficiently while using
sustainable standards. It draws on three primary sources:
1. "Preparing for our future: Developing a common
strategy for key enabling technologies in the EU,"
September 30, 2009
2. "High Level Group on Key Enabling Technologies,
Thematic Report by the Working Team on Advanced
Manufacturing Systems," December 9, 2010
3. "Emerging Global Trends in Advanced Manufacturing,"
Institute for Defense Analyses, March 2012
As general policy, the State should not award financial
incentives to firms to only comply with existing laws and
regulations. The Committee may wish to consider expanding
the definition to ensure that the sustainability standards
are above and beyond those required in existing state and
federal law.
4. $100 million or more? The SB 71 sales and use tax
exclusion includes a $100 million cap but provides that
once the exclusions exceed $100 million annually, the
"authority shall provide a 20-day notice to the Legislature
prior to making additional approvals." Applicants, the
Treasurer and businesses have stated that a "hard" $100
million cap would remove the flexibility from the program
and make it less effective. Given the State's budget
shortfall and the relative uncertainty about the definition
of "advanced manufacturing," the Committee may wish to
establish a more definitive cap for this portion of the
program pending more review, study, and information.
5. Net Benefits Test . CAEATFA created the net benefits
test to ensure that the program "pays for itself" according
to the statute. The test requires CAEATFA to asses the
overall effectiveness of each applicant. For example, in
the case of Solyndra, the authority provided the following
calculation: CAEATFA calculated that the program had
$22,202,063 in environmental benefits, $20,765,274 in
economic benefits, providing a $8,226,021 net benefit to
the state according to its test for the $34,741,616 in
sales and use tax exemptions approved by CAEATFA in
November, 2010. CAEATFA granted the exemptions for
property that Solyndra would use in its Fab 2 facility, the
same funded by the Untied States Department of Energy loan
guarantee that has been defaulted on. Solyndra applied
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$25,127,322.31 of that amount to property it purchased.
This test provides more information to the State and public
than any other state tax credit, deduction or exemption.
It also provides a barrier to apply as it is time consuming
for the taxpayer. If the SB 71 program is required to use
the net benefits test, any expansion of the program should
as well so as not to favor the taxpayers applying under the
advanced manufacturing definition.
However, the information provided for the net benefits test
is self-reported by project sponsors. The information is
not certified by an outside party and for the purposes of
SB 71, for example, assumes significant increases in
product demand that likely do not exist without significant
price parity in the energy market. As suggested in comment
2, in order to review the efficacy of this test, the
Committee may wish to require that the test go through a
peer review both for the advanced manufacturing component
required by this bill and also for the SB 71 program.
The net benefit test fundamentally relies on a potentially
flawed assumption. The test provides that firms receiving
the exemption take the funds that would have been used to
pay the sales and use tax, and always use them to purchase
more equipment. The test then adds the incremental
increase in income and property taxes from the machine,
products it creates, and additional employees into the
"economic benefit" amount. However, firms strive to avoid
purchasing costly excess manufacturing capacity that
exceeds its proven demand, and dread excess, unsold
inventory. The Committee may wish to consider whether the
economic benefits derived using the net benefits test
represents actual firm-level decision making.
Support and Opposition (4/5/11)
Support : California Healthcare Institute.
Opposition :
Unknown.