BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 412 HEARING: 5/8/13
AUTHOR: Knight FISCAL: Yes
VERSION: 4/18/13 TAX LEVY: Yes
CONSULTANT: Miller
SALES AND USE TAXES: EXEMPTION: AEROSPACE PRODUCT
MANUFACTURING: RESEARCH AND DEVELOPMENT
Enacts a sales and use tax exemption for equipment used to
manufacture aerospace products.
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, ac-cording
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% 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 air-craft.
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.
However, in 1985, defense spending peaked at $557 billion
(in constant fiscal 2009 dollars) and then began a downward
trend. When the Soviet Union collapsed in December 1991,
the Cold War came to an end, accelerating the decline of
U.S. defense budgets, and causing significant change in the
aerospace industry: in the next decade, more than 50 major
defense companies consolidated into only six. According to
the Employment Development Department's Labor Market
Information Division, employment in Aerospace Product and
SB 412 - 4/18/13 -- Page 2
Manufacturing declined almost by half from 139,300 in 1993
to 70,800 in 2013, although almost all of the decline
occurred before 2004. Additionally, defense spending is
expected due to fall due to the implementation of the
"sequester."
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, 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.
-----------------------------------------------------------
| | | |
| 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 |
SB 412 - 4/18/13 -- Page 3
| | | |
|------+--------------------+-------------------------------|
| | | |
|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 | |
| | | |
| |0.25% County | |
|------+--------------------+-------------------------------|
| | | |
|7.50% |Total Statewide | |
| |Rate | |
| | | |
-----------------------------------------------------------
Most items which are exempt from the state share of the
sales and use tax (prescription drugs, food, poultry
litter), are also exempt from the local share; however,
some are state exempt, but not local, including farm
equipment and machinery, diesel fuel used for farming and
food processing, teleproduction and postproduction
equipment, timber harvesting equipment and machinery, and
racehorse breeding stock.
Proposed Law
Senate Bill 412 exempts from the sales and use tax
qualified tangible personal property used in manufacturing,
research and development, including contactors, among
others, so long as the taxpayer is engaged in the business
of aerospace products and parts manufacturing, and he or
she uses the property more than 50% of the time for those
purposes. The bill applies to affiliates within a
SB 412 - 4/18/13 -- Page 4
taxpayer's combined report for Corporation Tax purposes.
Taxpayers must furnish an exemption certificate issued by
BOE to claim the exemption, and must repay any sales tax
exempted if he or she moves the property out of California
within one year of purchase, or upon other enumerated
events. The measure excludes:
Consumables with less than a one year useful life,
Furniture, inventory, equipment used in the
extraction process or equipment used to store finished
products that have completed the manufacturing
process, and
Tangible personal property primarily used in
administration, general management, or marketing.
SB 412 does not exempt property from local sales taxes, and
sunsets on January 1, 2019. Additionally, the measure
defines many of its terms, including "fabricating,"
"manufacturing," "primarily," "process," "qualified
person," and "qualified tangible personal property."
State Revenue Impact
According to BOE, SB 412 results in revenue losses of $12.5
million in 2013-14, $25.9 million in 2014-15, and $27.5
million in 2015-16.
Comments
1. Purpose of the bill . According to the author,
"California's sales tax rate is the highest among states
with a significant share of national aerospace employment.
Seeing the disadvantageous business climate, aerospace
companies are relocating, subsequently those jobs are
leaving California. According to the Deloitte Aerospace and
Defense Industry report about 4,000 employees lost their
jobs from 2005 to 2010. Those jobs employ highly skilled
and dedicated workers we should be fighting to keep in our
state. California must strengthen the competitiveness of
its aerospace industry and its ability to retain and
attract aerospace activities by creating more favorable
business conditions for the industry. To increase the
competitiveness of the aerospace industry in California, I
have authored Senate Bill 412, which creates sales and use
tax exemptions for the aerospace industry in California.
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The measure would strengthen the competitiveness of the
aerospace industry and the state's ability to retain and
attract aerospace activities by creating more favorable
business conditions for the industry. SB 412 creates an
incentive for aerospace industries to continue to conduct
manufacturing and research and development work, promoting
workforce retention and attraction while increasing
California's competitive advantage in the aerospace field."
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 aerospace product
manufacturers won't change behavior because of the tax
benefit, instead increasing returns to capital in amount
equal to the amount of tax exempted. 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 manufacturer. Second, the bill
may compel additional production and employment that
wouldn't have happened but for the credit; the incentive
will lower production costs at the margin in an amount
necessary for producers to choose to make products in
California instead of somewhere else. However, given the
existing footprint for space launches in California, and
the large investments already made by highly sophisticated
firms and individuals here, is SB 412's benefit really
going to alter decision-making in a significant way? The
Committee may wish to consider how much additional
production and employment SB 412 will spur versus its
deadweight loss, assuming that California wants to enter
into zero-sum tax competition with other states.
Second, enacting a new exemption requires cuts in state
spending in education, public safety, or other health and
human service programs that benefit the public at large,
that match the foregone revenue due to SB 412. The
Committee may wish to consider whether the foregone revenue
resulting from this manufacturing incentive is worth the
tradeoff of cuts in spending or taxes on other activities
that it necessitates.
3. 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
SB 412 - 4/18/13 -- Page 6
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
412 doesn't set forth the indicators that it expects to
change as a result of the credit: aerospace product
manufacturing employment or employment in associated
industries. The Committee may wish to consider how the
state can determine the success or failure of SB 412's
exemption without compelling any performance standards.
4. 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 engaged in
the business of aerospace products and parts manufacturing,
and to property the taxpayer uses more than 50% of the time
for those purposes.
5. 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, City of Palmdale, Northrop Grumman.
Opposition : None received.
SB 412 - 4/18/13 -- Page 7