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.