BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1560
                                                                  Page  1

          Date of Hearing:   August 11, 2014


                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Raul Bocanegra, Chair

                 AB 1560 (Quirk-Silva) - As Amended:  August 7, 2014
           

           Fiscal Committee.  Majority vote.  Tax levy.
           
          SUBJECT  :   Income tax credits: California Competes Tax Credit  
          Program. 

           SUMMARY  :   Increases the total aggregate amount of the  
          California Competes Tax Credit that may be annually allocated by  
          the Governor's Office of Business and Economic Development  
          (GO-Biz) to eligible businesses, as provided.  Specifically,  
           this bill  :  

          1)Authorizes the Director of the Department of Finance (DOF) to  
            increase the aggregate amount of the California Competes Tax  
            Credit available for an annual allocation by $25 million per  
            each fiscal year (FY) through 2019. 

          2)Specifies legislative intent that the Director of DOF that  
            increase the aggregate amount of the California Competes Tax  
            Credit in order to compensate for the decrease in the   
            California Competes program's funding due to the recently  
            enacted tax credit program for the aerospace industry. 

          3)Takes effect immediately as a tax levy. 

           EXISTING LAW  :  

          1)Allows a credit against the taxes imposed under the  
            Corporation Tax (CT) Law and the Personal Income Tax (PIT) Law  
            for each taxable year beginning on or after January 1, 2014,  
            and before January 1, 2025, in an amount as provided in a  
            written agreement between GO- Biz and the taxpayer, based on  
            certain specified factors, including the number of jobs the  
            taxpayer will create or retain in the state and the amount of  
            investment in the state by the taxpayer.  The credit is  
            generally referred to as the "California Competes Tax Credit."









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          2)Authorizes GO-Biz to allocate the California Competes Tax  
            Credit with respect to the FY 2013-14 and each FY thereafter,  
            through and including FY 2017-18.

          3)Limits the aggregate amount of the California Competes Tax  
            Credit that may be allocated to taxpayers under both the CT  
            and PIT laws to a certain specified sum per fiscal year. 

          4)Allows a tax credit under the CT Law to a qualified taxpayer  
            in an amount equal to 17.5% of qualified wages paid by the  
            qualified taxpayer during the taxable year to qualified  
            employees ("Advanced Strategic Aircraft Tax Credit").  Defines  
            a "qualified taxpayer" as any taxpayer that is a major  
            first-tier subcontractor awarded a subcontract to manufacture  
            property for ultimate use in, or as a component of, a new  
            advanced strategic aircraft for the U.S. Air Force.  Defines  
            "major first-tier subcontractor" as a subcontractor that was  
            awarded a subcontract in an amount of least 35% of the amount  
            of the initial prime contract awarded for the manufacturing of  
            a new advanced strategic aircraft for the U.S. Air Force.  The  
            Advanced Strategic Aircraft Tax Credit program is authorized  
            for each taxable year beginning on or after January 1, 2015,  
            and before 1, 2030.

          5)Reduces the aggregate amount of the California Competes Tax  
            Credit that may be allocated to taxpayers in the 2015-16 FY  
            year, and each FY thereafter, by the annual aggregate amount  
            allowed under the Advanced Strategic Aircraft Tax Credit  
            program for years one through ten of this credit program. 

          6)Provides that, if the amount available under the California  
            Competes Tax Credit program is less than the amount allowed  
            under the Advanced Strategic Aircraft Tax Credit program, then  
            the latter will not be decreased.  Instead, the California  
            Competes Tax Credit amount allowed for the next FY shall be  
            reduced by the amount of that deficit. 

          7)States legislative intent that the reductions in the aggregate  
            amount of the California Competes Tax Credit shall continue if  
            the Advanced Strategic Aircraft Tax Credit program is extended  
            beyond its existing repeal date.  

           FISCAL EFFECT  :   Unknown. 

           COMMENTS  :   








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           1)The Author's Statement  .  The author has provided the following  
            statement in support of this bill:

          " AB 1560 authorizes the Director of Finance to increase the  
            amount of funding available in the California Competes  
            program. In July the Governor signed AB 2389 (Fox) which  
            created a tax credit program for the aerospace industry  
            specifically an "advanced strategic aircraft program."  
            Provisions in AB 2389 require that the tax credit be funded  
            from the monies available to the California Competes program.  
            In order to fund the first five years of AB 2389, the  
            California Competes Tax Credit program will face a potential  
            deficit of up to 25 million dollars per year until 2019.  It  
            is important to ensure as much funding as possible remains in  
            the program in order to have California be a competitive state  
            to attract business and guarantee small businesses have the  
            tools to succeed.  Therefore, AB 1560 authorizes the Director  
            of Finance to increase the amount of funding available in the  
            California Competes program, by up to $25 million per year  
            through 2019 to help bolster California's business climate and  
            put Californians to work."

           2)The "California Competes" Tax Credit Program  .  Last year,  
            Governor Brown signed legislation that reformed California's  
            economic development policies.  [AB 93 (Committee on Budget)  
            Chapter 69, Statutes of 2014.].  The new law eliminated  
            enterprise zones and other geographically targeted economic  
            development areas and, instead, created three new tax  
            benefits:  (a) a temporary tax credit for wages paid by  
            taxpayers to qualified employees within former enterprise  
            zones, and other areas that suffer from high levels of poverty  
            and unemployment; (b) a temporary sales and use tax exemption  
            on purchases of manufacturing equipment made by qualified  
            taxpayers, capped at $200 million annually per taxpayer; and  
            (c) the California Competes Tax Credit program.  Existing law  
            limits the total annual amount of these three tax incentives -  
            the wage credit, the sales and use tax exemption, and the  
            California Competes Tax Credit - to $750 million. 

          While the California Competes Tax Credit program is scheduled to  
            sunset on January 1, 2025, Go-Biz is only authorized to award  
            this credit to qualified taxpayers until FY 2018-19 up to an  
            annually capped amount.  The amount equals $30 million for the  
            FY 2013-14, $150 million for the FY 2014-15, and $200 million  








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            for the FY 2015-16, FY 2016-17, and FY 2017-18, plus certain  
            statutorily prescribed adjustments.  Out of the $30 million  
            available for allocation in FY 2013-14, $28.9 million was  
            awarded.  Due to the unallocated credit adjustment, the  
            Director of DOF has estimated the annual allocation of the  
            California Competes Tax Credit for FY 2014-15 to be $151.1  
            million. 

            In FY 2013-14, the California Competes tax credit was granted  
            to 30 companies (out of 390 companies that applied), including  
            11 small businesses.  According to the information submitted  
            by the companies that received the credit, approximately 6,000  
            jobs and more than $2 billion in investment across California  
            will be created as a result of the credit award.  The  
            companies represent various industries, including  
            manufacturing, biotech, agriculture, food processing, high  
            tech, etc. 
             
           3)The Advanced Strategic Aircraft Tax Credit Program  .  On July  
            10, 2014, Governor Brown signed legislation that, among other  
            things, created a CT credit program for the aerospace  
            industry.  [AB 2389 (Fox), Chapter 116, Statutes of 2014.]   
            The credit amount is equal to 17.5% of the wages paid to  
            employees of a qualified taxpayer engaged in manufacturing of  
            property for ultimate use in, or as a component of, a new  
            advanced strategic aircraft for the U.S. Air Force.  The  
            credit program includes a 15-year sunset provision, and the  
            credit is allowed only for wages paid to individuals employed  
            in California.  The annual amount of the Advanced Strategic  
            Aircraft Tax Credit is limited to $25 million for the first  
            five years, $28 million during the next five years and $31  
            million for the remaining five years, totaling $420 million  
            over the life of the program.  It appears that only two  
            parties are competing for the prime contract to manufacture  
            such aircraft - Northrop Grumman and a team comprised of  
            Boeing (as a prime contractor) and Lockheed Martin (as major  
            first-tier subcontractor). 

           4)Restoring the Funding  .  As originally drafted, the Advanced  
            Strategic Aircraft Tax Credit program would have resulted in a  
            General Fund (GF) revenue loss.  However, the Senate voted to  
            limit the GF revenue loss and reduced the funding for the  
            California Competes Tax Credit program as a way to compensate  
            for the projected loss.  It was argued that firms eligible for  
            Advanced Strategic Aircraft Tax Credit may also apply for the  








                                                                  AB 1560
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            California Competes Tax Credit, since both tax credit programs  
            seek to increase employment in the state.  Thus, the  
            California Competes Committee could have simply awarded  
            Lockheed Martin a California Competes Tax Credit, since the  
            credit was specifically meant for this type of negotiation  
            between the Governor's office and individual companies.  

          But, the author of this bill argues that in order for the state  
            to remain competitive and attract new businesses, the  
            Legislature needs to increase the amount of funding available  
            for the California Competes Tax Credit program.  According to  
            the author, the program was oversubscribed by $470 million in  
            its first year and, thus, a reduction in the program's funding  
            would have a negative impact on California's ability to  
            compete with other states for jobs.  This bill would restore  
            funding for the California Competes Tax Credit Program by  
            expressly authorizing the Director of DOF to increase the  
            annual amount of the credit available for allocation under the  
            program for every fiscal year through FY 2019, by up to $25  
            million per year.  This amount is identical to the aggregate  
            annual amount of the credit allowed under the Advanced  
            Strategic Aircraft Tax Credit program for the first five  
            calendar years.

           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          None on file

           Opposition 
           
          None on file
           
          Analysis Prepared by  :    Oksana Jaffe / REV. & TAX. / (916)  
          319-2098