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  




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          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. 






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                   ------------------------------------------------------------- 
                  |       |                    |                                |
                  | 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  





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          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  





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          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.   





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          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.