BILL ANALYSIS Ó AB 1560 Page 1 Date of Hearing: August 13, 2014 ASSEMBLY COMMITTEE ON APPROPRIATIONS Mike Gatto, Chair AB 1560 (Quirk-Silva) - As Amended: August 7, 2014 Policy Committee: Revenue & Taxation Vote: 7-0 Urgency: No State Mandated Local Program: No Reimbursable: No SUMMARY This bill 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 up to $25 million for each year through 2019. The bill includes legislative intent that the Director increase the aggregate amount of California Competes Tax Credit in order to mitigate the reduction in available credit resulting from the recently-enacted tax credits to support the aerospace industry's new advanced strategic aircraft development program (Advanced Strategic Aircraft Tax Credit). FISCAL EFFECT Estimated GF revenue decreases in the low tens of millions of dollars per year through 2019. COMMENTS 1) Purpose. On July 10, 2014, the Governor signed AB 2389 (Fox), creating an aerospace industry tax credit for an "advanced strategic aircraft program" to be awarded by the US Department of Defense. That bill required the tax credit to be funded from the California Competes Tax Credit. The author contends the California Competes Tax Credit will suffer a deficit of up to $25 million per year until 2019 to fund the Advanced Strategic Aircraft Tax Credit, and that restoration of that funding is needed to ensure California remains a competitive state in which to do business. This bill authorizes DOF to increase the California Competes Tax Credit by any shortfall created by the Advanced Strategic Aircraft Tax Credit. AB 1560 Page 2 2) California Competes and Aerospace Tax Credits. The California Competes Tax Credit program was created last year as part of a broader reform effort that eliminated enterprise zones and other geographically-targeted economic development programs. Along with tax credits to facilitate the phase-out of the legacy programs, the California Competes program will provide up to $200 million in tax credits per year from FY 2015-16 through FY 2017-18 (plus certain adjustments and carry forwards). In FY 2013-14, the first year of the program, $30 million in credits were available, yet according to the author, over 390 companies applied for more than $500 million in credits. DOF allocated a total of $28.9 million to 30 companies representing diverse industries including manufacturing, biotech, agriculture, and food processing. According to information submitted by the recipient companies, approximately 6,000 jobs and more than $2 billion in investment will be created as a result of the credits awarded. $151.1 million in credits is available for allocation in FY 2014-15. The Advanced Strategic Aircraft Tax Credit provides a credit amount equal to 17.5% of the wages paid to California employees of a taxpayer engaged in manufacturing property for use in a new advanced strategic aircraft for the US Air Force. The credit amount is limited to $25 million for each of the first five years, $28 million during each of the next five years and $31 million for each of the remaining five years, totaling $420 million over the 15-year life of the program. AB 2389 was drafted to benefit Lockheed Martin, a tier one subcontractor that joined an overall bid for the project led by Boeing. SB 718, which was passed by the Assembly on Monday, August 11, will provide a similar tax credit program to benefit Northrop Grumman, the other prime contractor bidding for the project. 3) Funding Restoration or Just Additional Funding? As amended by the Senate, the Advanced Strategic Aircraft Tax Credit reduced the funding for the California Competes Tax Credit to mitigate revenue losses to the General Fund. In theory, businesses eligible for the Advanced Strategic Aircraft Tax Credit can also apply for the California Competes Tax Credit, since both programs are essentially designed to accomplish the same goal: AB 1560 Page 3 increase employment in the state. Lockheed Martin could have simply applied for a California Competes Tax Credit, and as a result the Advanced Strategic Aircraft Tax Credit was effectively treated as if it came from the same pool of overall available credits. The author of this bill argues California Competes must be compensated for the credits it was forced to sacrifice to the Advanced Strategic Aircraft Tax Credit because of the substantial excess demand for California Competes Tax Credits. In effect, however, this bill simply increases the total credits available to incentivize job creation by ensuring the Advanced Strategic Aircraft Tax Credits do not diminish the other California Competes Tax Credits. This bill does so by creating additional California Competes Tax Credits equal to the Advanced Strategic Aircraft Tax Credits issued during the first five years, effectively shifting the cost of the Advanced Strategic Aircraft Tax Credit from California Competes funding to the General Fund. Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081