BILL ANALYSIS Ó
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|SENATE RULES COMMITTEE | AB 2389|
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THIRD READING
Bill No: AB 2389
Author: Fox (D), et al.
Amended: 7/2/14 in Senate
Vote: 27 - Urgency
SENATE GOVERNANCE & FINANCE COMMITTEE : 4-2, 7/1/14
AYES: Wolk, DeSaulnier, Hernandez, Liu
NOES: Knight, Walters
NO VOTE RECORDED: Beall
SENATE APPROPRIATIONS COMMITTEE : Not available
ASSEMBLY FLOOR : 72-2, 6/26/14 - See last page for vote
SUBJECT : Local government: capital investment incentive
programs:
corporate tax credits: qualified wages: new
advanced strategic
aircraft program
SOURCE : Author
DIGEST : This bill modifies the current capital investment
incentive program for local governments and allows a tax credit
under the Corporation Tax Law to a qualified taxpayer in an
amount equal to 17.5% of qualified wages paid by the taxpayer
during the taxable year to qualified full-time employees, as
specified.
ANALYSIS :
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Capital Investment Incentive Program . Existing law allows
counties and cities to pay a "capital investment incentive
amount" for 15 years to attract qualified manufacturing
facilities. A proponent pays property taxes on no less than the
first $150 million of the facility's value, and then receives a
property tax rebate for the taxes paid on the facility's value
above that amount.
In return for this property tax rebate, the proponent must pay a
community service fee equal to 25% of the capital incentive
amount, up to $2 million a year. The proponent must sign a
community services agreement that spells out the fee, payment
conditions, a job creation plan, and provisions to recapture the
incentive payments if the proponent fails to run the facility as
agreed.
A city or special district may pay the county or city an amount
equal to the amount of property tax revenue that the local
government receives from the facility's property taxes paid on
the facility's value over $150 million.
To qualify for this tax rebate program, a qualified
manufacturing facility must:
Have an initial investment in real and personal property over
$150 million, certified by the Business, Transportation, and
Housing Agency.
Be within the county or city offering the capital incentive
program.
Be operated by a business within specified Standard Industrial
Classification Codes or a business that recovers minerals from
geothermal resources.
Be engaged in commercial production or manufacture of
products.
The Legislature originally passed the tax rebate program to help
Placer County officials attract an Intel plant, but they never
used the law. Legislators expanded the definition of a
qualified manufacturing facility to include CalEnergy Company's
plan to extract minerals from geothermal brine (SB 133, Kelley,
Chapter 24, Statutes of 1999.) In 2009, the Legislature
expanded the program to include manufacturers that produce of
electricity using solar, wind, biomass, hydropower, or
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geothermal resources, shifted the program to the Trade and
Commerce Agency's successor, the Business, Transportation and
Housing Agency, and chose to sunset the program entirely in 2017
(AB 904, V.M. Perez, Chapter 486, Statutes of 2009). In 2012,
the Legislature expanded the program to include research and
development facilities as defined, raised the threshold amount
to $250 million, and shifted program administration from the
now-defunct Business, Transportation, and Housing Agency to the
Governor's Office of Business and Economic Development (GO-Biz),
which successfully enticed the Samsung Corporation to expand a
facility in San Jose (SB 1006, Senate Budget and Fiscal Review
Committee). However, the bill repealed all of its changes on
June 30, 2013.
Tax Credits . Existing law allows various income tax credits,
deductions, and sales and use tax exemptions to provide
incentives to compensate taxpayers that incur certain expenses,
such as child adoption, or to influence behavior, including
business practices and decisions, such as research and
development credits. The Legislature typically enacts such tax
incentives to encourage taxpayers to do something that but for
the tax credit, they would not do. The Department of Finance is
required to annually publish a list of tax expenditures,
currently totaling around $50 billion per year.
In 1998, the Legislature enacted two tax credits which led to
some work on the Joint Strike Fighter (JSF) being performed in
California. Taxpayers that were contractors or subcontractors
that manufacture property for ultimate use in a JSF could claim:
The wage credit is equal to 50% of wages paid up to 150% of
the minimum wage, not to exceed $10,000 per year, per
employee, that are direct costs allocable to property
manufactured in this state for ultimate use in a JSF, with
certain limitations.
The property credit, equal to 10% of the cost of qualified
property used by a taxpayer primarily in qualified activities
to manufacture a product for ultimate use in a JSF, with
certain exceptions.
Taxpayers could carry forward credits for eight years, but the
credit expired in 2006. Estimates vary for number of taxpayers
claiming the credit, and its fiscal effect: The Franchise Tax
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Board (FTB) projected revenue losses between $10 million to $35
million in 2003 and 2004 from the credits, with 15 taxpayers
claiming them, but stated no credit had been claimed before
2002. However, the Department of Finance indicated a first-year
cost of $60 million for 1998.
This bill enacts two tax incentives:
1.Capital Investment Incentive Program. This bill changes the
program to:
Lower the threshold of annual property tax revenues the
taxpayer must pay to be eligible for an incentive from $150
million to $25 million,
Changes the codes for business eligible for the program
from any business within 3500 to 3899 of the Standard
Industrial Classification to companies within 3359 or 3364
of the North American Industrial Classification System
Codes,
Makes conforming changes, and provides that specified
events constitute good cause for the purpose of waiving
recapture for failure to perform,
Shifts program administration to GO-Biz, and
Repeals these changes as of January 1, 2016, but
provides that any incentive program established before that
date remains in effect for its full term.
Extends the sunset on the entire program from 2017 to 2018, and
again clarifies that any incentive program established before
that date remains in effect for its full term.
1.Wage and Property Credit . This bill enacts a tax credit equal
to 17.5% of wages paid during the taxable year to qualified
employees, on a full-time equivalent basis. To qualify,
taxpayers must be major, first-tier subcontractors awarded a
subcontract to manufacture property for ultimate use in or as
a component of advanced strategic aircraft, and pay wages to
employees:
Where at least 80% of his or her services are directly
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related to the taxpayer's subcontract work on new advanced
strategic aircraft for the United States Air Force, and
Paid for services not less than an average of 35 hours a
week, or is a salaried employee, as defined.
The credit lasts from the 2015 taxable year until the 2029
taxable year, and is subject to an annual cap for all taxpayers
set at $25 million annually for the first five years, $28
million for the five years after that, and $31 million for the
last five years. FTB must allocate the credit on a first-come,
first-served basis, and taxpayers may only claim credits on
original, timely-filed returns. Taxpayers can carry forward the
credit for seven years.
This bill reduces this aggregate amount of credits that may be
allocated to taxpayers per fiscal year by the phased aggregate
amount allowed to taxpayers pursuant to the credit proposed by
this bill with regard to the manufacture of a new advanced
strategic aircraft, as specified.
This bill prohibits taxpayers from claiming the credit unless
the taxpayer reduces the bid made to subcontract work by an
amount that reflects a good faith estimate of the credit. All
references to the credit and ultimate cost reductions must be
made available by the taxpayer to FTB upon request.
This bill sets forth provisions to determine full-time
equivalents, allows FTB to issue regulations exempt from the
Administrative Procedures Act necessary to implement the bill.
Prior Legislation
AB 32 (J. Pérez, Chapter 608, Statutes of 2013) which expands
the Community Development Financial Institution credit from $10
million to $50 million.
AB 777 (Muratsuchi, Chapter 13, Statutes of 2014) which exempts
from property tax tangible personal property having space flight
capacity.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
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According to the Senate Appropriations Committee:
The bill would lead to up to $420 million in direct costs to
the General Fund in forgone tax revenue over 15 years.
However, under the current version of the bill, the first
three years would be funded from an existing credit (up to $25
million per year). Consequently, relative to current law, the
bill would reduce revenues by up to by $345 million. Credits
claimed in the initial year could be lower than the cap due to
the pace of initial hiring.
To the extent that tax credits under this bill "crowd out" tax
credits available to other employers during the first three
years, a cost pressure of up to $75 million could result.
The FTB indicates that it would incur a one-time
implementation cost of $82,000 (General Fund), related to IT
changes.
GO-Biz indicates that it would incur minor and absorbable
administration costs.
Potential General Fund revenue (resulting from the production
of the aircraft in California and subsequent taxable economic
activity) that would not have occurred absent the enactment of
the tax credits. However, the amount is unknown, and the
extent to which the tax credits would result in economic
activity in California that would not have otherwise occurred
is unclear.
SUPPORT : (Verified 7/2/14)
California Chamber of Commerce
California Conference of Machinists and Aerospace Workers
City of Torrance
Los Angeles County Economic Development Corporation
ARGUMENTS IN SUPPORT : According to the author, "AB 2389 is an
economic incentive package that will support the aerospace
industry, specifically an "advanced strategic aircraft program."
Specifically this bill creates a tax credit program for the
aerospace industry which would total on average $25 million to
$31 million per year for 15 years. Under this bill, there are
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no unaccountable tax giveaways. The credits sunset, are subject
to annual caps, and only are provided based on jobs that will be
created to work on the advanced strategic aircraft program.
Specifically,
Credits sunset after 15 years.
Credits are capped at:
- $25 million for five years;
- $28 million for the next five years; and
- $31 million for next five years.
"Credits provided only on a qualified employee basis where that
employee is spending 80% of their time working on the advanced
strategic aircraft program.
"AB 2389 expands the ability of a local government to pay an
investment incentive, to include qualified aerospace facilities
and other specified manufacturing facilities until July 1, 2015.
Capital investment incentives are amounts up to the amount of
ad valorem property taxes paid by the qualified facility, less
25%.
"The urgency clause is needed because the Department of Defense
(DoD) is currently evaluating several programs to recapitalize
its military assets and initiatives. Proposal deadlines require
legislation to be finalized prior to the July recess."
ASSEMBLY FLOOR : 72-2, 6/26/14
AYES: Achadjian, Alejo, Allen, Ammiano, Bigelow, Bloom,
Bocanegra, Bonilla, Bonta, Bradford, Brown, Buchanan, Ian
Calderon, Campos, Chau, Chávez, Conway, Cooley, Dababneh,
Dahle, Daly, Dickinson, Donnelly, Fong, Fox, Frazier, Beth
Gaines, Garcia, Gomez, Gonzalez, Gordon, Gray, Grove, Hagman,
Hall, Harkey, Roger Hernández, Holden, Jones, Jones-Sawyer,
Levine, Linder, Lowenthal, Maienschein, Mansoor, Medina,
Melendez, Mullin, Muratsuchi, Nazarian, Nestande, Olsen, Pan,
Patterson, Perea, John A. Pérez, V. Manuel Pérez, Quirk,
Quirk-Silva, Rendon, Ridley-Thomas, Rodriguez, Salas, Skinner,
Ting, Wagner, Waldron, Weber, Wieckowski, Wilk, Williams,
Atkins
NOES: Gatto, Stone
NO VOTE RECORDED: Chesbro, Eggman, Gorell, Logue, Yamada,
Vacancy
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AB:nl 7/3/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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