BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1560
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          (  Without Reference to File  )

          ASSEMBLY THIRD READING
          AB 1560 (Quirk-Silva)
          As Amended  August 18, 2014
          Majority vote.  Tax levy

           REVENUE & TAXATION  7-0         APPROPRIATIONS      17-0        
           
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          |Ayes:|Bocanegra, Harkey, Beth   |Ayes:|Gatto, Bigelow,           |
          |     |Gaines, Gordon, Mullin,   |     |Bocanegra, Bradford, Ian  |
          |     |Nestande, Pan             |     |Calderon, Campos,         |
          |     |                          |     |Donnelly, Eggman, Gomez,  |
          |     |                          |     |Holden, Jones, Linder,    |
          |     |                          |     |Pan, Quirk,               |
          |     |                          |     |Ridley-Thomas, Wagner,    |
          |     |                          |     |Weber                     |
           ----------------------------------------------------------------- 
           
          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 FY 2017-18. 

          2)Specifies legislative intent that the Director of DOF 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  








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            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."

          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 United States (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  








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            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  :  According to the Assembly Appropriations  
          Committee, estimated General Fund revenue decreases in the low  
          tens of millions of dollars per fiscal year through FY 2017-18.

           COMMENTS  :  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) [Chapter 116, Statutes of 2014] 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.

          Assembly Revenue and Taxation Committee comments:

          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:   
          1) 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;  
          2) a temporary sales and use tax exemption on purchases of  








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          manufacturing equipment made by qualified taxpayers, capped at  
          $200 million annually per taxpayer; and 3) 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  
          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. 
             
          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  








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          manufacture such aircraft - Northrop Grumman and a team  
          comprised of Boeing (as a prime contractor) and Lockheed Martin  
          (as major first-tier subcontractor). 

          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  
          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 2017-18, 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.


           Analysis Prepared by  :    Oksana Jaffe / REV. & TAX. / (916)  
          319-2098 


                                                                FN: 0005012












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