BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 19 HEARING: 5/8/13
AUTHOR: Knight FISCAL: Yes
VERSION: 4/18/13 TAX LEVY: Yes
CONSULTANT: Miller
SALES AND USE TAXES: EXEMPTIONS: PROPERTY FOR USE IN SPACE
FLIGHT
Expands the current sales and use tax exemption for
property used in space flight to include property used to
construct commercial launch facilities.
Background and Existing Law
The aerospace industry in California began with a few
aircraft builders around World War I, and then vastly
expanded in the mobilization for World War II, according to
the National Aeronautical and Space Administration. After
that, the industry grew in the cold war to encompass a wide
range of activities, including military and civilian
aircraft, reconnaissance and communications satellites,
strategic missiles, and space exploration. By the 1980s
about 40 percent of the American missiles and space
business resided in southern California, as did about
one-third of the aerospace engineers, and the industry as a
whole there employed close to a half-million people
One of the region's strongest selling points for aerospace
was its environment: the clear blue skies and ample open
spaces that were ideal for testing new aircraft.
California also was home to a variety of other related
industries, particularly petroleum, as well as to top-notch
research universities and a large labor pool. Meanwhile,
the creative and dynamic aeronautical community gave rise
to innovations in other areas, space launches and flight.
In 1984, the Commercial Space Launch Act required the
Secretary of Transportation to "encourage, facilitate, and
promote commercial space launches by the private sector."
From 1989 to 2012, the Federal Aviation Administration
(FAA), which regulates commercial launches, licensed 207
commercial space launches. There are currently eight
SB 19 - 4/18/13 -- Page 2
nonfederal FAA-licensed spaceports, including two in
California: The California Spaceport at Vandenberg Air
Force Base and the Mojave Air and Space Port in Mojave, CA.
According to the FAA, commercial launches now comprise 31%
of all launches, and worldwide industry revenues totaled
$2.45 billion in 2010.
The United Launch Alliance (ULA), a Boeing-Lockheed Martin
consortium formed in 2005 and headquartered in Reston,
Virginia, currently dominates the space launch market
according to news reports. ULA launches from Vandenberg
and Cape Canaveral, Florida. However, SpaceX, formed by
PayPal founder Elon Musk and based in Hawthorne,
California, makes smaller and less expensive rockets, and
became the first privately held company to send a cargo
payload on a spacecraft to the International Space Station.
Alliant Tech Systems and Astrium also make rockets, and
firms are researching launches for space tourism.
Additionally, on April 30th, Sir Richard Branson's Virgin
Galactic's SpaceShip
Two space planes fired its rocket engines for the first
time in a test flight out of California's Mojave Air and
Spaceport. Virgin Galactic has flown 500 people or so
suborbitally so far, aims to send another 500 into space in
2014 alone, and then try for orbital travel. According to
Wikipedia, 400 people are reported to have signed up for a
flight as of early 2011, each paying $200,000 to experience
approximately six minutes of weightlessness during what
will be a two-hour end-to-end flight. Branson's the
Spaceship Company recently constructed a new
68,000-square-foot aircraft assembly plant at Mojave Air
and Space Port.
Existing law does not currently provide special tax
treatment to manufacturers or software producers for
purchases of equipment and other supplies. Business that
manufacture, perform research, produce software, and that
purchases equipment and supplies pay sales and use tax on
their purchases as anyone else in California.
The state sales and use tax rate is 7.50% as detailed
below. Cities and Counties may increase the sales and use
tax rate up to 2% for either specific or general purposes
with a vote of the people.
SB 19 - 4/18/13 -- Page 3
-------------------------------------------------------------
| | | |
| Rate | Jurisdiction | Purpose/Authority |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|3.9375%|State (General |State general purposes |
| |Fund) | |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|1.0625%|Local Revenue Fund |Realignment of local public |
| |2011 |safety services |
| | | |
| | | |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.25% |State (Fiscal |Repayment of the Economic |
| |Recovery Fund) |Recovery Bonds |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.25% |State (Education |Schools and community college |
| |Protection Account) |funding |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.50% |State (Local |Local governments to fund |
| |Revenue Fund) |health and welfare programs |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.50% |State (Local Public |Local governments to fund |
| |Safety Fund) |public safety services |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 1.00% |Local (City/County) |City and county general |
| | |operations. Dedicated to county |
| | |transportation purposes |
| |0.75% City and | |
| |County | |
| | | |
SB 19 - 4/18/13 -- Page 4
| |0.25% County | |
|-------+--------------------+--------------------------------|
| | | |
| 7.50% |Total Statewide | |
| |Rate | |
| | | |
-------------------------------------------------------------
Current law exempts from the state and local share of the
sales and use tax the sale or use of qualified property
used in space flight, including orbital space facility,
space propulsion system, space vehicles, satellites, or
space station of any kind, or any property which is placed
or used aboard any such system, including fuel adapted and
used exclusively for space flight is exempt from sales and
use tax.
Proposed Law
Senate Bill 19 expands the current sales and use tax
exemption for qualified property used in space flight to
also include equipment and materials used to construct,
reconstruct, or improve new or existing facilities designed
to launch, manufacture, fabricate, assemble, or proves
equipment that facilitates the renovation, rehabilitation,
or reconstruction of commercial space launch sites. The
measure removes a restriction in current law that
conditions the exemption on the purchaser's intention to
launch it into space, and applies the exemption to property
used to construct commercial launch site facilities.
State Revenue Impact
According to the Board of Equalization, it does not have
sufficient information to calculate a revenue effect.
Comments
1. Purpose of the bill . According to the author, "The
aerospace and defense industry has an irreplaceable impact
on America's economic and national security. It's just not
the numbers-which are impressive by themselves; it's how
SB 19 - 4/18/13 -- Page 5
the aerospace industry makes a difference in the lives of
all Americans. A strong aerospace industry is essential
for California to compete in the global marketplace,
maintain a highly skilled workforce, and provide all
Americans with the ability to travel safely and securely
anywhere in the world. In order to retain aerospace
companies and continue to expand the industry, California
must provide tax breaks to stay competitive in this
extremely price sensitive industry. Senate Bill 19 would
expand the sales tax exemption by including equipment and
materials used to construct the facilities designed to
launch a space vehicle to protect
California's aerospace industry. Large-scale industry,
such as aerospace technology, brings in high dollar jobs
and bolsters the economy in the surrounding area. Because
the cost of living and doing business in California is so
high in contrast to other states, we must be active in
retaining the space industry as it is vital to the economic
vitality in many areas of California."
2. Sure, but will it work ? Tax benefits directed at
specific industries do two things: First, they reward
behavior that would have occurred without the subsidy,
so-called "deadweight loss." Some space facility owners
and operators will expand space ports in response to
increased demand from the U.S. Government or private
operators regardless of the incentive. In these instances,
the state receives no marginal benefit, and transfers
wealth from purposes it would otherwise spend money on for
government purposes to the launch site builder. Second,
some facilities may be built or expanded because of the
exemption; the incentive will lower production costs in an
amount necessary for producers to build the site in
California instead of somewhere else. The Committee may
wish to consider how many new launch sites will be
constructed in California that would have been produced
elsewhere because of the bill versus its deadweight loss,
assuming that California wants to enter into zero-sum tax
competition with other states.
Second, allowing a new credit means that Californians must
take up front cuts in education, public safety, or other
health and human service programs that benefit the public
at large. The Committee may wish to consider whether the
foregone revenue resulting from this incentive is worth the
tradeoff of cuts in spending or taxes on other activities
SB 19 - 4/18/13 -- Page 6
that it necessitates
3. To boldly go . According to recent expert testimony
given to Congress, both states and FAA have provided
support for the development of commercial spaceports.
States have provided economic incentives to developers to
build spaceports to attract space tourism that could in
turn provide economic benefits to localities. For example,
New Mexico provided approximately $209 million to construct
Spaceport America, with approximately $133 million came
from state appropriations. The Florida Space Authority
invested over $500 million in new space industry
infrastructure development at Cecil Field Spaceport,
including upgrades to the launch pad, a new space
operations support complex, and a reusable launch vehicle
support complex. In addition, Virginia recently enacted
legislation to provide $9.5 million annually to support the
capital needs, maintenance, and operating costs of
facilities owned and operated by the Virginia Commercial
Space Flight Authority-including the Mid-Atlantic Regional
Spaceport-and has provided state tax exemptions for
companies launching payloads from the spaceport or doing
space-related business activities in Virginia.
4. Performance measures . Most bills granting tax benefits
set forth an economic indicator or series of economic
indicators that its author expects will improve as a result
of a tax credit. For example, bills heard by the Committee
exempting manufacturing equipment from the sales tax have
used:
Increased employment for manufacturing, research
and development, and associated industries,
Siting for new and expanded manufacturing and
research and development facilities in this state,
Capital investment in manufacturing equipment and
all other tangible personal property.
The now-expired Manufacturer's Investment Credit sunset in
2003 due to its failure to meet necessary levels of
employment in the manufacturing sector the Legislature
required be met for the credit to continue. However, SB 19
doesn't set forth the indicators that it expects to change
as a result of the exemption: commercial space launches,
space launch industry employment, or employment in
associated industries. Additionally, the bill doesn't
apply a sunset to its expansion of the current exemption.
SB 19 - 4/18/13 -- Page 7
The Committee may wish to consider how the state can
determine the success or failure of SB 19's exemption
without compelling any performance standards.
5. Just us . At its April 24th hearing, the Committee
approved SB 376 (Correa), which provided a general sales
tax exemption for manufacturing equipment. This measure is
limited to taxpayers or their affiliates who are building
commercial space launch facilities, and to property the
taxpayer uses more than 50% of the time for those purposes.
6. Solo mission . Some exemptions only erase the state
share of the sales and use tax, but leave the local share
intact, while others exempt purchases from sales and use
taxes imposed by both state and local agencies. SB 19
affects the former by expanding the definition of qualified
property, but as the current exemption doesn't apply to the
local share, local revenues aren't affected.
Support and Opposition (05/02/13)
Support : California Chamber of Commerce, California
Manufacturers and Technology Association, City of
Lancaster, BOE Member George Runner, Northrop Grumman.
Opposition : California Professional Firefighters;
California Teachers Association.