BILL ANALYSIS �
AB 886
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Date of Hearing: May 13, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 886 (Allen) - As Amended: April 16, 2013
Majority vote. Tax levy. Fiscal committee.
SUBJECT : California Transportation Financing Authority: tax
credit certificates for exporters and importers: income tax
credit
SUMMARY : Authorizes the California Transportation Authority
(Authority) to award $500 million in tax credit certificates to
exporters and importers, as defined, for the specified increases
in cargo tonnage or value, net increases in the number of
qualified full-time employees hired in California, or capital
investment in a cargo facility. Specifically, this bill :
1)Contains legislative findings relating to the international
trade and competitiveness of California's ports and declares
the legislative intent to boost exports and imports through
California ports and airports by providing tax incentives for
California importers and exporters.
2)Authorizes the Authority, in a taxable year beginning on or
after January 1, 2014, and before January 1, 2019, to award a
tax credit certificate to an exporter or importer that
demonstrates to the satisfaction of the authority that met any
of the following requirements:
a) Has increased its export or import:
i) Cargo tonnage, whichever is applicable, through
California ports by at least 5% over its export/import
cargo tonnage, respectively, for the preceding taxable
year; or,
ii) Cargo value, whichever is applicable, through
California airports by at least 5% over its export or
import cargo value, respectively, for the preceding
taxable year.
b) Has exported or imported through California ports
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export or import:
i) Cargo tonnage in excess of $400,000, provided it did
not export or import cargo through California ports in
the preceding taxable year; or,
ii) Cargo with cargo value in excess of $250,000,
provided it did not export or import cargo through
California airports in the preceding taxable year.
c) Has a net increase, as specified, in the number of
qualified full-time employees hired in California during
the taxable year.
d) Has incurred capital costs for a cargo facility
constructed in California during the taxable year.
3)Requires the Authority to do all of the following:
a) Establish a procedure for applicants to apply for the
tax credit certificates and a process to award those
certificates on a first-come-first-served basis;
b) Determine the information necessary to be provided by an
applicant to the Authority;
c) Develop and provide application forms for use by
applicants;
d) Establish and charge fees in the amount sufficient to
cover all of its costs;
e) Deposit the fee revenues in the Job and Trade
Competitiveness Fee Account, established in the State
Treasury, to be available to the Authority, upon
appropriation by the Legislature, for purposes of
implementing provisions of this bill;
f) Determine the amount of each tax credit allowed under
this bill and provide the Franchise Tax Board (FTB) with an
electronic copy of each tax credit certification, within 30
days after issuing the certificate;
g) Establish audit procedures of taxpayers who have been
awarded a tax certificate to verify that the certificate
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was awarded consistent with the requirements of this bill;
h) Conduct an audit within 12 months of issuing a tax
credit certificate;
i) Cancel any unapplied amount erroneously awarded and
recapture any previously allowed credit erroneously
awarded;
j) Notify the FTB of any amounts of a tax credit
certificate that were erroneously awarded and were
canceled; and,
aa) Report to the Legislature, on or before February 1 of
the year following a year in which allocations are made, on
the program's activities, including the number of
allocations, the number of jobs created, the amount of
capital investment leveraged, and the volume and value of
imports and exports that received credit certificates.
4)Provides that the Authority may borrow money for purposes of
meeting its expenses under this bill, not to exceed the amount
appropriated. A loan shall be repayable solely from the
moneys appropriated to the Authority from the Job and Trade
Competitiveness Fee Account and is not a general obligation of
the state for which the full faith and credit of the state are
pledged.
5)Specifies that a tax credit certificate awarded by the
Authority is not transferable.
6)Allows the Authority to prescribe rules, guidelines, or
procedures necessary or appropriate to carry out the purposes
of the tax credit certificate program, including an appeals
process for denied or disqualified applications and audit
findings.
7)Limits the total amount of tax credit certificates to be
awarded in each of the five calendar years to $100 million,
for a total of $500 million. Specifies that any portion of
the authorized amount not awarded in a calendar year may be
awarded in a future calendar year ending before January 1,
2019.
8)Allows, for taxable years beginning on or after January 1,
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2014 and before January 1, 2019, an import/export cargo (IEC)
tax credit, a hiring tax credit, and a cargo facility tax
credit, under both the Personal Income Tax (PIT) and the
Corporation Tax (CT) Laws, to a taxpayer that has been awarded
a tax credit certificate by the Authority.
9)Provides that an amount of the IEC tax credit shall be
determined as follows:
a) In the case of an importer or exporter that imported or
exported through California ports or airports during the
preceding taxable year:
i) $3.125 per ton of increased exports or imports
through ports in California in a tax year attributable to
the importer or exporter.
ii) $1,000 for each $10,000 of increased exports or
imports through airports in California in a tax year
attributable to the exporter or importer.
b) In the case of an importer or exporter that did not
import or export in the preceding taxable year:
i) $3.125 per ton of exports or imports through
California ports for an importer or exporter that exports
or imports at least 400,000 tons through California ports
in a taxable year.
ii) $1,000 for each $10,000 of exports and imports
through California airports in California for an exporter
or importer that exports or imports at least $250,000 of
imports or exports through California airports in a
taxable year.
10)Specifies that an amount of the hiring tax credit is equal to
$3,000 for each net increase in qualified full-time employees
hired in California during the taxable year by an exporter or
importer.
11)Specifies that an amount of the cargo facility tax credit for
each taxable year is equal to an amount of up to 2% of the
total capital costs for a cargo facility constructed in
California by an exporter or importer during the taxable year.
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12)Limits the aggregate amount of the IEC tax credit, hiring tax
credit, and the cargo facility tax credit that may be allowed
to an importer or exporter in a taxable year to the lesser of
(a) $250,000, or (b) the amount specified in the tax credit
certificate issued to the taxpayer by the Authority.
13)Defines a "tax credit certificate" as a certificate awarded
by the Authority to an exporter or importer to claim the tax
credits in the amount specified in the certificate.
14)Defines "exporter" as a California taxpayer that is a shipper
of record of agricultural or manufactured goods on an ocean
bill of lading or an air waybill.
15)Defines "export cargo tonnage" as the weight of cargo
exported through California ports by an exporter to
destinations outside the United States (U.S.).
16)Defines "export cargo value" as the value of cargo exported
through California airports by an exporter to destinations
outside of the U.S. as certified by the applicant for a tax
credit certificate.
17)Defines "importer" as a California taxpayer that is a
consignee of record of agricultural products or manufactured
goods on an ocean bill of lading or an air waybill.
18)Defines "importer cargo tonnage" as the weight of cargo
imported by an importer through California ports by that
importer from outside the U.S.
19)Defines "import cargo value" as the value of cargo imported
through California airports by an importer from outside the
U.S. as certified by the applicant for a tax credit
certificate.
20)Defines "increased exports or imports" as the difference
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between the amount of exports and imports, whether measured by
tons or dollars, in a current taxable year and the preceding
taxable year if the current taxable year has a greater amount
of exports or imports.
21)Defines "qualified full-time employee" as either a qualified
employee who was paid qualified wages by the exporter or
importer for services not less than an average of 35 hours per
week or a qualified employee who was a salaried employee and
was paid compensation during the taxable year for the
full-time employment, within the meaning of Labor Code Section
515.
22)Excludes from the definition of a "qualified full-time
employee" a qualified employee in an enterprise zone, a
manufacturing enhancement area, a targeted tax are, or a local
agency military base recovery area, as specified.
23)Defines "capital costs" as all costs and expenses incurred by
one or more exporter or importer in connection with the
acquisition, construction, installation, and equipping of a
cargo facility, including any environmental mitigation
undertaken specifically to reduce the impacts of a cargo
facility, during the period commencing with the date on which
the acquisition, construction, installation, and equipping
commences and ending on the date on which the cargo facility
is placed in service. Provides that capital costs shall not
include project costs that were expended prior to January 1,
2014.
24)Defines "cargo facility" as a capital project at a port or
airport in California designed to increase cargo-moving
capacity at the port or airport and that is expended in a
taxable year and has a useful life of five years or more.
25)Allows a credit that exceeds the tax liability in a taxable
year to be carried over to the following taxable year, and
succeeding nine years, if necessary, until the credit is
exhausted.
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26)Is repealed on December 1, 2019.
27)Takes effect immediately as a tax levy.
EXISTING LAW :
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices and decisions.
2)Allows a depreciation deduction for the obsolescence or wear
and tear of property used in the production of income or
property used in a trade or business. The amount of the
deduction is determined, in part, by the cost (or basis) of
the property.
3)Includes in the definition of "depreciable property"
equipment, machinery, vehicles, and buildings, but excludes
land.
4)Allows a New Jobs Tax Credit for taxable years beginning on or
after January 1, 2009, to qualified employers equal to $3,000
for each net increase in qualified full-time employees hired
during the taxable year. The credit is limited to small
businesses (i.e., taxpayers with 20 or fewer employees as of
the last day of the preceding taxable year). The credit is
capped at roughly $400 million for all taxable years.
FISCAL EFFECT : The FTB estimates revenue loss of $25 million in
fiscal year (FY) 2013-14, $85 million in FY 2014-15, and $100
million in FY 2015-16.
COMMENTS :
1)The Author has provided the following statement in support of
this bill:
California has the potential to lower its high unemployment
rate through a plan that promotes and fosters business in
California and proves that we are willing to invest in our
infrastructure to support goods movement and the
substantial market access that we share with the West Coast
going forward.
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2)Proponents of this measure state:
AB 886 recognizes that California's international trade
sector is a powerful engine driving the state's economy and
is critically important to our state's job recovery. As
the international trade leader of the United States,
California's three customs districts lead the nation,
supporting almost $580 billion in two-way trade value in
2012. California's port activities alone employ more than
half a million people throughout the state and add an
estimated $7 billion in state and local tax revenues to our
General Fund coffers annually.
And let's not forget that it's just not California's
seaports that light up the economy; it's the airports
shipping and receiving high-value, time-sensitive products
and technologies, such as medical devices, microchips and
biopharmaceuticals, and our state's entire supply chain
that are supported by trade activities, including the
manufacturing, retail and wholesale trade, construction,
transportation and warehousing sectors that provide
well-paying, high-value jobs.
AB 886 helps to protect and grow this vitally important
international trade sector and creates jobs for
Californians by providing tax incentives for boosting
exports and imports through California seaports and
airports and, most importantly, for creating new
cargo-moving jobs in our state. For example, exporters that
increase their cargo tonnage by at least five percent (5%)
over the preceding year would qualify for a state income
tax credit. Tax credits would be awarded to those creating
and filling new cargo-moving jobs.
AB 886 also advances President Obama's National Export
Initiative to double U.S. exports by the end of 2014.
Export-related jobs are important and typically pay up to
16 percent more than the average U.S. wage.
We cannot afford to take California's competitive edge in
international trade for granted. California continues to
face stiff competition from Canadian and Mexican ports, as
well as from other parts of America's east, west and Gulf
coasts. Moreover, competition will intensify as Gulf and
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east coast ports aggressively pursue California's market
share once the widened Panama Canal becomes operational in
2015. Make no mistake, ports in Virginia, North Carolina,
Louisiana and other competing regions are already preparing
to poach our trade business.
Not only are these ports investing billions of dollars in
capital improvement programs, they have also put powerful
port and other trade-related tax incentives in place to
steal our state's lucrative international trade business
and the jobs supported by it. We must not cede our
leadership to those regions.
3)California's Ports and International Trade : California is a
major trade gateway on the Pacific Rim and is home to three of
the world's 50 largest ports. The local economies surrounding
the ports depend on California's ability to attract and grow
its cargo volumes. California's major public ports saw trade
peak in 2006, then decline in 2007 while the economy, as a
whole, continued to grow. In 2007, of the world's 50 largest
container ports, only two failed to post positive growth
numbers - Los Angeles and Oakland. In 2009, the ports moved
about 2.5 million fewer containers than in the year before,
the equivalent of shutting down the country's fourth busiest
seaport - Savannah, Georgia - for the entire year.
Some of the decline in volume is attributable to the weak
economy, but one cannot ignore the growing competition around
the world. On the West Coast, Canada is aggressively
marketing its mega port in Vancouver and new port facilities
in Prince Rupert, specifically highlighting the economic and
time advantages over Southern California ports. Mexico is
also beginning to compete against American ports. The biggest
competition, however, may come from improvements to the Panama
Canal. In 2014, a $5.25 billion expansion of the Panama Canal
will be completed. The new expansion will allow larger ships
to move through the canal, allowing for a bigger share of
Asian container freight to move directly through to the
eastern U.S.
4)The Potential Impact of the Expansion of the Panama Canal on
California's Ports and Economy : According to Paul Bingham,
Economic Service Line Leader for Wilbur Smith Associates, as
many as 100,000 jobs could be lost in California due to the
expansion of the Panama Canal. Additionally, there could be
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as much as a 25% cargo diversion from Los Angeles-Long Beach
ports. This diversion amounts to about 3 million containers
which, in turn, will reduce the number of dockworkers, trucks,
and trains needed to move cargo. Recently, California State
University, Long Beach, held a series of forums to discuss the
economic impact of an expanded Panama Canal. Though it had
been mentioned that cargo volumes in California may likely
increase as the economy improves, most of the speakers
acknowledged some loss in economic activity due to the Canal's
expansion. In answering the question of who wins and who
loses, Dr. Mary Brooks, the William A. Black Chair of Commerce
at Dalhousie University in Halifax, noted that the winners
will be American ports who improve service and reliability.
However, Mr. Todd Thomas, Los Angeles Branch Manager for
Expeditors International, was not as optimistic. He explained
that, in the long run, West Coast ports would be the losers,
primarily due to the lower cost of shipping vessels through
the Canal. Many of the speakers agreed that California would
lose business if nothing is done to improve its international
competitiveness.
5)What Does This Bill Do? : AB 886 creates a new and unique
program - the Jobs and Trade Competitiveness Act - intended to
offset the negative economic impact of the Panama Canal's
expansion on California's ports. This bill creates three
distinct tax credit programs:
a) IEC credit, designed to encourage cargo growth
originating in, or destined to, California;
b) Qualified employee hiring credit, intended to increase
the number of full-time employees employed by California
ports ; and,
c) Cargo facility tax credit, created to incentivize
private investment in California's port infrastructure.
These credits are not traditional tax expenditures. In order
to claim any of these tax credits, a taxpayer must receive a
tax credit certificate from the Authority showing the
taxpayer's eligibility and the amount of credit that was
allocated to the taxpayer by the Authority. While the same
taxpayer may be eligible for all three credits, the aggregate
amount of credits allocated by the Authority to the taxpayer
in a taxable year may not exceed $250,000. Furthermore,
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similarly to the California's Film Tax Credit Program, the
total amount of credits that may be allocated by the Authority
in a particular tax year is capped at $100 million. The
allocation of the credits will be done on a
first-come-first-served basis. The program will be effective
for five taxable years beginning on or after January 1, 2014,
and before January 1, 2019.
6)What is a "Tax Expenditure"? : Existing law provides various
credits, deductions, exclusions, and exemptions for particular
taxpayer groups. In the late 1960s, U.S. 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).
As the Department of Finance notes in its 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.<1> Finally, it should also be noted that, once
enacted, it 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.
7)Measuring the Success of a Tax Expenditure Program (TEP) :
Several studies have looked at tax credits and other forms of
tax incentives as ways of generating economic growth. While
some studies have shown that tax credits have some positive
impact, others have found that these types of incentives have
little or no impact on economic activity.
Generally, advocates for tax incentives, such as Arthur Laffer
and N. Gregory Mankiw, argue that reduced taxes allow
---------------------------
<1> This is not so in the case of the existing New Jobs Tax
Credit, which is capped at roughly $400 million for all taxable
years.
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taxpayers to invest money that would otherwise be paid in
taxes to better use, thereby, creating additional economic
activity. "Supply-siders" posit that higher taxes do not
result in more government revenue; instead, they suppress
additional innovation and investment that would have led to
more economic activity and, therefore healthier public
treasuries, under lower marginal tax rates. Industry-specific
credits complement this theory by lowering tax costs for
industries that provide positive multiplier effects, such as
stimulating economic activity among suppliers and increasing
economy-wide purchasing power resulting from hiring additional
employees.
Critics, however, state that tax incentives rarely result in
additional economic activity. Companies locate in California
because of its competitive advantages, namely its environment,
weather, transportation infrastructure, access to ports,
highways, and railroads, as well as its highly skilled
workforce and world class higher education system. These
advantages trump perceived disadvantages resulting from its
tax structure and other policies. Additionally, critics argue
that industry-specific tax incentives do not actually effect
business decisions; instead, enhanced credits and deductions
reward firms for investments they would have made anyway.
[See, e.g., D. Neumark, J. Zhang, and J. Kolko, Are Businesses
Fleeing the State? Interstate Business Location and
Employment Change in California, (a PPIC report showing that,
while California loses jobs due to firms leaving the state,
these losses have a minimal effect on the economy); D.
Neumark and J. Kolko, Are California Companies Shifting Their
Employment to Other States? (finding that, while California
companies have shifted jobs to other states, out-of-state
firms have offset these losses by hiring more in California)].
Though $500 million is a sizeable amount of available tax
credits, it may not be enough to offset global financial
decisions. In 2014, a $5.25 billion expansion of the Panama
Canal will be completed, allowing ships to bypass California
ports and move cargo directly to the East Coast. The $250,000
available to an importer/exporter may be too little of an
incentive in the long run. However, assuming $250,000 is
enough to offset the higher cost of transporting shipments
through a California port, what occurs after 2019? California
may find itself permanently subsidizing ports that are unable
to compete on a global scale. Additionally, this program may
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be subsidizing importers and exporters who have no intention
of shipping cargo to the East Coast. In this scenario,
California still loses the importers and exporters who have
decided to utilize the expanded Panama Canal, and rewards
behavior that would have occurred regardless of this program.
As noted by the Legislative Analyst's Office (LAO) in the
presentation at this Committee's hearing "Assessing Tax
Expenditure Programs in Light of California's Fiscal
Challenges" on February 22, 2012, "policymakers should regard
many TEP evaluations with skepticism." It was further
explained that, "Analysis of alternative uses of public funds
is difficult and often omitted entirely from such studies.
These studies also usually rely on extensive and sometimes
subjective assumptions, which, if changed, can produce very
different results? It is rare that the value of TEPs can be
demonstrated conclusively compared to these alternate uses of
tax dollars. If the Legislature wishes to use TEPs, despite
these challenges, it is important that TEPs be used
cautiously, structured carefully, and reviewed regularly to
consider if they operate in an effective and cost-efficient
manner."
8)Do Hiring Credits Actually Produce Jobs? : AB 886 also
proposes a hiring credit in an amount of $3,000 for each net
increase in qualified full-time employees hired in California
by an exporter or importer in a taxable year. The proposed
credit is similar to the New Jobs Tax Credit enacted by the
Legislature in 2009. The New Jobs Tax Credit is allowed for
taxable years beginning on or after January 1, 2009, to
qualified employers in an amount equal to $3,000 for each net
increase in qualified full-time employees hired during the
taxable year. Unlike the proposed hiring credit, however, the
existing credit is limited to small businesses (i.e.,
taxpayers with 20 or fewer employees as of the last day of the
preceding taxable year). It is also capped at roughly $400
million for all taxable years.
With the national unemployment rate hovering below 8%, some have
advocated job creation tax credits as a means of revitalizing
the struggling economy. The question, however, is whether
such credits actually work. Recently, Daniel Wilson,
assistant director of the Center for the Study of Innovation
and Productivity at the Federal Reserve Bank of San Francisco,
attempted to answer this question. In a paper co-authored
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with Robert Chirinko of the University of Illinois at Chicago,
Wilson examined the period between January 1990 and August
2009, and found that, among states where employers could
qualify for credits immediately after enactment of the credit
legislation, there was a slight employment increase of 0.12%.
These findings would suggest that hiring credits, at least at
the state level, are a blunt tool for stimulating job growth.
Furthermore, at this Committee's recent oversight hearing on
tax expenditure programs, Professor Suzanne O'Keefe of
Sacramento State University addressed the question of whether
the New Jobs Tax Credit actually encourages job creation.
Professor O'Keefe began by noting that the program provides
small businesses with a $3,000 credit for each net increase in
full-time employees. However, she was quick to point out that
any new full-time hire costs his/her employer a minimum of
$21,000 per year, assuming an $8 minimum wage and other
legally required benefits. Thus, a $3,000 credit represents,
at most, only 14% of the cost of hiring a new full-time
employee. Professor O'Keefe testified that the New Jobs Tax
Credit only serves to tip the scales in favor of hiring for
relatively few small businesses. It would seem that, in the
majority of cases, the New Jobs Tax Credit serves to reward
small businesses for hiring decisions they would have made
even without the credit. The FTB reports that, as of April 7,
2012, 16,539 personal income tax and business entity returns
had been filed claiming the New Jobs Tax Credit, with the
cumulative credit amount totaling only $98 million. At this
rate, it could take several years for the existing $400
million cap to be reached absent significant growth in the
economy.
It should also be noted that the national unemployment rate
has continually declined for the last four years. As provided
by the Bureau of Labor Statistics, national unemployment
peaked in October of 2009 with an unemployment rate of 10 %.
The unemployment rate declined to 9.5% in 2010, 8.9% in 2011,
and 7.9% in 2012. As of now, the national unemployment rate
stands at 7.5%. California's unemployment rate follows the
national trend. It currently stands at 9.4% but has been
steadily declining from its peak of 12.4% in October of 2010.
Providing a hiring tax credit now would likely only reward
individual companies that would have hired an employee
regardless of the tax incentive. The Committee may wish to
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consider whether the hiring tax credit proposed by this bill
will be instrumental in reducing the unemployment rate in
California or increasing the international cargo volumes in
California's ports.
9)Multiple Claims : It appears that, under this bill, taxpayers
would be able to claim the cargo facility tax credit for the
capital costs that are generally required to be capitalized
and are added to the basis of the property to be deducted
later. The author may wish to clarify that taxpayers will not
be eligible to receive several tax incentives for the same
expenses.
10)Related Legislation.
SB 810 (Price), introduced in the 2013 legislative session,
would authorize the FTB to award tax credit certificates to
taxpayers who invest in, and use, public facilities in
California. SB 810 is scheduled to be heard in Senate
Committee on Government and Finance.
AB 2656 (Calderon), introduced in the 2012 Legislative
Session, would have enacted similar provisions. AB 2656
failed to pass out of the Assembly Appropriations Committee.
SB 830 (Wright and Bradford), introduced in the 2011
Legislative Session, would have created a trade infrastructure
tax credit for taxpayers that invest in, and use, public port
facilities in California. SB 830 failed to pass out of the
Senate Committee on Governance and Finance.
AB 2687 (Bradford), introduced in the 2009-10 Legislative
Session, would have created a trade infrastructure investment
tax credit and an import-export cargo tax credit for taxpayers
that invest in, and use, public port facilities in California.
AB 2687 failed to pass out of the Assembly Appropriations
Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
Bay Area Council
Los Angeles County Economic Development Corporation
North Bay Leadership Council
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Southern California Leadership Council
Opposition
None
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098