BILL ANALYSIS Ó AB 1560 Page 1 ( 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 ----------------------------------------------------------------- |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 AB 1560 Page 2 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 AB 1560 Page 3 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 AB 1560 Page 4 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 AB 1560 Page 5 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 AB 1560 Page 6