BILL ANALYSIS Ó
SB 718
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Date of Hearing: August 11, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 718 (Roth and Knight) - As Amended: August 7, 2014
2/3 vote. Urgency. Fiscal committee.
SENATE VOTE : Not relevant
SUBJECT : Corporation tax law: credit: local government:
capital investment incentive program
SUMMARY : Expands the definition of a "proponent" eligible for
financial incentives under a local government capital investment
incentive program (CIIP) and modifies the current aerospace tax
credit by, among other things, including a prime contractor
within the definition of a qualified taxpayer eligible for the
credit. Specifically, this bill :
1)Expands the definition of a "proponent" eligible for financial
incentives under a local government CIIP to include specified
lessees or occupants of a "qualified manufacturing facility"
(instead of only facility owners per current law).
Specifically expands the definition to include lessees or
occupants under a government-owned contractor operator
enhanced use lease agreement.
2)Modifies the definition of a "capital investment incentive
amount" payable to a proponent under a local government CIIP.
Specifically excludes from the calculation revenue transfers
required by Revenue and Taxation Code (R&TC) Sections 97.2 and
97.3.
3)Modifies the definition of a "qualified taxpayer" under the
aerospace tax credit program to include, in addition to a
first-tier subcontractor, a taxpayer that is a prime
contractor awarded a prime contract to manufacture property
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for ultimate use in, or as a component of, a new advanced
strategic aircraft for the United States Air Force (USAF). A
"prime contractor" is defined as a contractor that was awarded
a prime contract for the manufacturing of a new advanced
strategic aircraft for the USAF.
4)Modifies the definition of "New Advanced Strategic Aircraft
Program" under the aerospace tax credit program to exclude a
contract awarded by the USAF prior to August 1, 2014, and to
exclude a program to upgrade, modernize, sustain, or otherwise
modify a current USAF bomber program, including, but not
limited to, the B-52, B-1, or B-2 programs.
5)Modifies the method of calculating the tax credit under the
aerospace tax credit program for qualified wages paid by
deleting the "annual full-time equivalent ratio" formula and
instead provides that the aggregate number of total annual
full-time equivalents of all qualified taxpayers with respect
to which a credit amount may be allowed for a calendar year
may not exceed 1,100.
6)Defines "total annual full-time equivalents" under the
aerospace tax credit program as the number of a qualified
taxpayer's qualified full-time employees computed on an annual
full-time equivalent basis for the taxable year.
7)Provides that the Franchise Tax Board (FTB) shall allocate the
aerospace tax credit to qualified taxpayers on a
first-come-first-served basis, determined by the date the
qualified taxpayer's timely filed original tax return is
received by the FTB. If the returns of two or more qualified
taxpayers are received on the same day and the amount of
credit remaining to be allocated is insufficient to be
allocated fully to each, the credit remaining shall be
allocated to those qualified taxpayers on a pro-rata basis.
8)Provides that the date a return is received shall be
determined by the FTB, and that the determination may not be
reviewed in any administrative or judicial proceeding.
9)Provides that a disallowance of the aerospace tax credit shall
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be treated as a mathematical error appearing on the return,
and any amount of tax resulting from that disallowance may be
assessed by the FTB in the same manner as provided by R&TC
Section 19051.
10)Takes immediate effect as an urgency measure.
EXISTING LAW :
1)Authorizes the governing body of a county, city and county, or
city, by means of an ordinance or resolution, to establish a
CIIP. Specifically authorizes the payment of a "capital
investment incentive amount" to the "proponent" of a
"qualified manufacturing facility" for up to 15 consecutive
fiscal years.
2)Provides that the consecutive fiscal years during which a
"capital investment incentive amount" is to be paid shall
begin with the first fiscal year commencing after the date
upon which the "qualified manufacturing facility" is certified
for occupancy, as specified.
3)Provides that the annual payment to a "proponent" of each
"capital investment incentive amount" shall be contingent upon
the "proponent's" payment of a "community services fee."
4)Defines a "capital investment incentive amount" as an amount
up to the amount of ad valorem property tax revenue derived by
the participating local agency from the taxation of that
portion of the total assessed value of the facility's real and
personal property that exceeds $25 million.
5)Defines a "proponent" as a party that meets specified
criteria, including that the party will be the fee owner of
the "qualified manufacturing facility" upon the facility's
completion.
6)Defines a "qualified manufacturing facility" as a proposed
manufacturing facility that meets all of the following
criteria:
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a) The "proponent's" initial investment in that facility,
as specified, exceeds $150 million.
b) The facility is to be located within the jurisdiction of
the electing county, city and county, or city.
c) The facility is operated by any of the following:
i) A business described within Code 3359<1> or 3364<2>
of the 2012 North American Industry Classification System
(NAICS) Manual;
ii) A business engaged in the recovery of minerals from
geothermal resources, as specified; or,
iii) A business engaged in the manufacturing of parts or
components related to the production of electricity using
solar, wind, biomass, hydropower, or geothermal
resources, as specified.
d) The "proponent" is currently engaged in any of the
following:
i) Commercial production;
ii) The perfection of the manufacturing process; or,
iii) The perfection of a product intended to be
manufactured.
7)Allows various tax credits under both the Personal Income Tax
Law and the Corporation Tax (CT) Law. These credits are
generally designed to provide relief to taxpayers who incur
specified expenses or to encourage socially beneficial
behavior.
---------------------------
<1> This industry group comprises establishments manufacturing
electrical equipment and components (except electric lighting
equipment, household-type appliances, transformers, switchgear,
relays, motors, and generators).
<2> This industry group comprises establishments engaged in
aerospace products and parts manufacturing.
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8)Allows an aerospace tax credit under the CT Law. Specifically
allows, for taxable years beginning on or after January 1,
2015, and before January 1, 2030, a first-tier aerospace
subcontractor a credit equal to 17.5% of qualified wages paid
to qualified full-time employees multiplied by an "annual
full-time equivalent ratio."
FISCAL EFFECT : Unknown
COMMENTS :
1)The author notes the following in support of this bill:
The aerospace industry in Southern California began roughly
100 years ago. Over the last century, early aviation
pioneers in the region transitioned from small workshops to
large factories that produced bombers and fighters and
employed tens of thousands of Southern Californians.
However, with the end of the Cold War in the late 1980s
came defense budget cuts and military base closures. In
response, the industry's largest firms contracted in a wave
of consolidations and, as a result, many smaller, second
and third tier contractors were forced to close their
doors.
This bill has the potential to be of significant benefit to
California. The size of this incentive program, $25
million to $31 million per year for 15 years, and its focus
on aerospace is seen as an opportunity to position
California once again as a national leader in supporting
the aerospace industry by growing the industry by
approximately 1,100 direct jobs, [and] 5,500 indirect and
induced jobs.
2)Proponents of this bill note the following:
As you know, the aerospace industry has a long and rich
history in Southern California. This extremely diversified
industry is comprised of small, medium and large
enterprises that manufacture aircraft (civil and military),
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missiles, satellites and other space vehicles, as well as
the businesses that manufacture and distribute parts and
components. The state's aerospace industry directly
supports about 140,000 high-paying, high-skill jobs. More
than 88,000 of those jobs are located in Southern
California.
However, we must always remember that in today's global
economy, location is not permanent, but by choice.
Companies - especially those that would avail themselves of
the economic incentives offered in AB 2389 and now with SB
718- have many opportunities to locate outside of
California. We have to be ready as a state to make that
choice easier for them to locate, innovate, produce, and
expand here. And while we fully understand that one
program is in no way a panacea to save an industry, it is a
small step in the right direction to help us attract new
companies as well as grow next-generation aerospace
businesses.
3)Committee Staff Comments:
a) The capital investment incentive program : Current law
authorizes counties and cities to establish a CIIP, whereby
a "capital investment incentive amount" is paid to the
proponent of a qualified manufacturing facility for up to
15 consecutive fiscal years. This statutory authority is
designed to provide local governments with a tool for
attracting large manufacturing facilities and related
investments.
On July 10, 2014, Governor Brown signed legislation that,
among other things, modified the definition of a "qualified
manufacturing facility" to apply to businesses described
within Code 3359 or 3364 of the 2012 NAICS Manual. [AB
2389 (Fox), Chapter 116, Statutes of 2014.] These code
sections, in turn, refer to establishments manufacturing
electrical equipment and components, and establishments
engaged in aerospace product and parts manufacturing. AB
2389 also temporarily modified the definition of a "capital
investment incentive amount." Specifically, AB 2389
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authorized local governments to provide more generous
incentives by rebating property taxes paid on a facility's
assessed value above $25 million (instead of $150 million
under prior law). AB 2389 did not, however, amend the
definition of a "proponent" under a CIIP. Thus, current
law defines a proponent as a party that meets specified
criteria, including that the party will be the "fee owner"
of the qualified manufacturing facility upon the facility's
completion.
This bill, in turn, expands the definition of a "proponent"
to include specified lessees or occupants of a qualified
manufacturing facility (instead of only facility owners per
current law). Specifically, this bill expands the
definition to include lessees or occupants under a
"government-owned contractor operator enhanced use lease
agreement."<3> This modification is apparently needed to
place Northrop Grumman on a level playing field with
Lockheed Martin in their competition to secure
manufacturing work for a new advanced strategic aircraft
for the USAF. Specifically, Committee staff is informed
that, should Northrop Grumman secure the prime contract for
the aircraft, it would construct or expand manufacturing
facilities on property owned by the federal government.
Given that Northrop Grumman would not own the facility or
facilities outright, it would be ineligible to receive CIIP
incentives from a local government under current law. This
bill would ostensibly remedy that problem by including
specified lessees within the CIIP definition of a
"proponent" eligible for local government incentive
payments.
It is not entirely clear to Committee staff, however, how a
capital investment incentive amount would be calculated for
Northrop Grumman in such a case. Specifically, the statute
defines a capital investment incentive amount as an amount
up to the amount of ad valorem property tax revenue from
the taxation of that portion of the total assessed value of
the facility's real and personal property that exceeds $25
million. While Northrop Grumman could owe property taxes
-------------------------
<3> This term is not defined in the language of the bill.
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on facility equipment (i.e., personal property taxes), it
is unclear how Northrop Grumman would owe property taxes in
connection with real property owned by the federal
government. This is because public land is exempt from
property tax. Moreover, while private real property
interests held in connection with public land may be taxed
as "possessory interests", for such an interest to be found
the possession must generally be "independent", "durable",
and "exclusive" of rights held by others in the property.
It is unclear that Northrop Grumman's interest as a lessee
would satisfy these criteria. Thus, any capital investment
incentive amount may be limited to the amount of revenue
from the taxation of that portion of the total assessed
value of the facility personal property that exceeds $25
million.
b) The aerospace credit : In addition to modifying the law
authorizing CIIPs, AB 2389 also enacted a new aerospace tax
credit for taxable years beginning on or after January 1,
2015, and before January 1, 2030. The credit is equal to
17.5% of qualified wages paid by a qualified taxpayer to
qualified full-time employees, multiplied by an "annual
full-time equivalent ratio." A "qualified taxpayer", in
turn, is defined as a major first-tier subcontractor
awarded a subcontract to manufacture property for a new
advanced strategic aircraft for the USAF. The annual
amount of the credit is limited to $25 million for the
first five years, $28 million during the next five years
and $31 million for the remaining five years. The credit
is allowed only for wages paid to individuals employed in
California. Unlike a true "hiring credit", which seeks to
encourage taxpayers to hire new employees, the aerospace
tax credit operates more as a state subsidy for wages paid
by a qualified aerospace taxpayer.
c) How did we get here ? The USAF is currently in the
process of selecting a prime contractor to manufacture a
new advanced strategic aircraft. By all accounts, there
appear to be two parties competing for the prime contract -
Northrop Grumman and a team comprised of Boeing (as prime
contractor) and Lockheed Martin (as major first-tier
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subcontractor). Lockheed Martin reportedly approached the
Governor's Office of Business and Economic Development and
argued that, for it to obtain the contract (through Boeing)
and perform its subcontract work here in California, it
would require a set of state subsidies. This gave rise to
the aerospace tax credit and related CIIP modifications
enacted in AB 2389.
Northrop Grumman, in turn, argues that it had all along
intended to build the new strategic aircraft here in
California without state tax subsidies. This assertion may
or may not be contradicted by media reports that Northrop
Grumman is planning to perform at least part of the
contract work in Brevard County, Florida. Nevertheless,
Northrop Grumman now argues that the present bill, which
extends the aerospace tax credit to prime contractors, is
necessary to "level the playing field." Without this bill,
Northrop Grumman argues that it faces an untenable
competitive disadvantage vis-à-vis Boeing and Lockheed
Martin. Moreover, Northrop Grumman representatives contend
that if their firm is awarded the prime contract, it will
result in significantly more California-based jobs than if
Lockheed Martin emerges as part of the successful bidding
team. Finally, as prime contractor, Northrop Grumman will
also be responsible for servicing the new fleet of aircraft
- likely at the production facility built here in
California. If Boeing, on the other hand, were to win the
prime contract, it is unclear where this long-term service
work would be performed.
d) Modifying the aerospace tax credit : This bill expands
the definition of a qualified taxpayer to include prime
contractors awarded a prime contract to manufacture a new
advanced strategic aircraft for the USAF. This
modification allows both Northrop Grumman (as prime
contractor) and Lockheed Martin (as subcontractor) to bid
on the New Advanced Strategic Aircraft Program without
disadvantaging either firm. This bill also modifies the
existing method of calculating the tax credit for qualified
wages paid by eliminating the "annual full-time equivalent
ratio" formula. Instead, this bill provides that the
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aggregate number of total annual full-time equivalents may
not exceed 1,100. It appears that the 1,100 cap is meant
to ensure average employee salaries of around $130,000 per
year. However, it is unclear how effective this provision
will be. Finally, this bill allows the sharing of tax
credits among multiple qualified taxpayers.
e) Sharing tax credits : Current law ostensibly allows the
aerospace tax credit to a single first-tier subcontractor.
This bill modifies existing law by allowing two or more
qualified taxpayers to share the tax credits on a pro-rata
basis, provided they claim the credits on the same day.
Conceivably, this provision would allow Northrop Grumman,
if it were to be awarded the contract by the USAF, to share
part of the tax credits with Lockheed Martin if Lockheed
Martin were to come on as a subcontractor. However,
Northrop Grumman representatives claim that such an
arrangement would not occur because Lockheed Martin, under
existing law, must be awarded at least 35% of the New
Advanced Strategic Aircraft Program in order to take
advantage of the aerospace tax credit. Therefore, the tax
credit sharing provision appears to be targeted at Lockheed
Martin and Boeing since the companies have formed a
partnership to bid on the New Advanced Strategic Aircraft
Program.
f) Additional economic benefit ? A defense project's scope
and budget are determined by the federal government.
Personnel hiring decisions, capital investments, and
additional activities a contractor must undertake to
complete the project are all dependent on the parameters
specified by the federal program. State subsidies are
unlikely to change these investment decisions. Therefore,
a state subsidy's primary purpose is to encourage
manufacturing and other activities in a particular
location, and while providing a state subsidy may increase
economic activity in a particular state, the subsidy does
little, if anything, to increase overall national economic
activity.
Of course, this bill's financial incentives will only
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increase economic activity in California to the extent one
assumes the bomber manufacturing would not occur in this
state absent a tax subsidy. It is possible, based on
information provided to Committee staff, that this is not
the case. As explained earlier, the introduction of this
bill is a direct result of Northrop Grumman's need to level
the playing field. Had the original legislation favoring
Lockheed Martin not been introduced, Northrop Grumman could
have arguably won the bid and performed the manufacturing
of the new aircraft in California without any state
subsidy.
REGISTERED SUPPORT / OPPOSITION :
Support
Antelope Valley Board of Trade
Azusa Chamber of Commerce
City of El Segundo
City of Lancaster
City of Palmdale
City of Redondo Beach
CONNECT
El Segundo Chamber of Commerce
Irwindale Chamber of Commerce
Lancaster Chamber of Commerce
Los Angeles Area Chamber of Commerce
Los Angeles County Economic Development Corporation
Manhattan Beach Chamber of Commerce
North San Diego Business Chamber
Northrop Grumman
Redondo Beach Chamber of Commerce and Visitors Bureau
San Diego Regional Chamber of Commerce
San Diego Regional Economic Development Corporation
San Gabriel Valley Economic Partnership
South Bay Association of Chambers of Commerce
Valley Industry and Commerce Association
West Valley-Warner Center Chamber of Commerce
Yuba-Sutter Chamber of Commerce
Opposition
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None on file
Analysis Prepared by : M. David Ruff and Carlos Anguiano / REV.
& TAX. / (916) 319-2098