BILL ANALYSIS Ó AB 88 Page A Date of Hearing: May 18, 2015 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Philip Ting, Chair AB 88 (Gomez) - As Amended April 6, 2015 SUSPENSE Majority vote. Fiscal committee. Tax levy. SUBJECT: Sales and use taxes: exemption: energy or water efficient home appliances. SUBJECT: Sales and use taxes: exemption: energy or water efficient home appliances. SUMMARY: Establishes a sales and use tax (SUT) exemption for any "energy or water efficient home appliance" purchased by a "public utility" that is provided at no cost to a "low-income participant" in a federal, state, or ratepayer-funded energy efficiency program for use by that "low-income participant" in the energy efficiency program. Specifically, this bill: AB 88 Page B 1)Provides that any amounts that would have been paid as sales tax reimbursement or use tax by the "public utility" but for the exemption must be used by the public utility to purchase additional "energy or water efficient home appliances" to be provided at no cost to "low-income participants" in the energy efficiency program. 2)Defines an "energy or water efficient home appliance" as a refrigerator, dishwasher, washer, dryer, or other appliance that meets performance requirements under the ENERGY STAR program, established pursuant to Section 6294a of Title 42 of the United States Code. 3)Defines a "public utility" as an entity defined in Public Utilities Code (PUC) Section 216 or 224.3. 4)Defines a "low-income participant" as any person who is, or who is residing in a home with a person who is: a) A recipient of Medi-Cal, CalFresh, CalWORKs, Supplemental Security Income, Special Supplemental Nutrition Program for Women, Infants, and Children, Low-Income Home Energy Assistance Program, State Utility Assistance Supplement, or some other state or federal means tested program; or, b) Able to certify that their gross income, not including any amount of food assistance, is less than 200% of the federal poverty guidelines. 5)Provides that, notwithstanding Revenue and Taxation Code AB 88 Page C Section 2230, the state shall not reimburse any local agency for any SUT revenues lost as a result of this exemption. 6)Takes immediate effect as a tax levy. EXISTING FEDERAL LAW establishes ENERGY STAR as a voluntary program within the Department of Energy and the Environmental Protection Agency to identify and promote energy-efficient products and buildings in order to reduce energy consumption, improve energy security, and reduce pollution. (42 United States Code Section 6294a.) EXISTING STATE LAW: 1)Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state. 2)Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the State Board of Equalization (BOE). 3)Defines a "public utility" to include every common carrier, toll bridge corporation, pipeline corporation, gas corporation, electrical corporation, telephone corporation, telegraph corporation, water corporation, sewer system corporation, and heat corporation, where the service is performed for, or the commodity is delivered to, the public or any portion thereof. (PUC Section 216.) AB 88 Page D 4)Defines a "local publicly owned electric utility" as a municipality or municipal corporation operating as a "public utility" furnishing electric service as provided in PUC Section 10001, a municipal utility district furnishing electric service formed pursuant to PUC Section 11501 et seq., a public utility district furnishing electric services formed pursuant to the Public Utility District Act, an irrigation district furnishing electric services formed pursuant to the Irrigation District Law, or a joint powers authority that includes one or more of these agencies and that owns generation or transmission facilities, or furnishes electric services over its own or its member's electric distribution system. (PUC Section 224.3.) FISCAL EFFECT: The BOE estimates that this bill would reduce state and local revenues by $12.8 million annually.<1> COMMENTS: 1)The author has provided the following statement in support of this bill: AB 88 seeks to provide a sales and use tax exemption for energy or water efficient appliances provided free of cost to eligible low-income utility consumers. This bill helps further California's environmental and energy efficiency goals by reducing energy and water consumption, while reducing costs for a greater number of low-income Californians. ------------------------- <1> The BOE has provided the following qualifying remarks in connection with this fiscal estimate: "The revenue estimate is based on expenditure data of the four major IOUs and two major POUs. At the time of this estimate, data was unavailable for other public utilities' appliance expenditures that may be exempted under this bill's provisions. To that extent, this estimate may be understated." AB 88 Page E 2)Proponents of this bill note the following: A Board of Equalization (BOE) audit completed in July of 2014 discovered that there is no specific tax exemption for an energy or water efficient appliance that is purchased by a public utility and provided, at no cost, to a qualified low-income customer participating in the energy efficiency program. The BOE has established that a sales tax, of approximately $54 for a $600 refrigerator, must now be levied on appliances distributed for free through these local programs. AB 88 would exempt the new tax when the energy efficient appliance replacement programs target low-income customers. Appliance replacement programs already serve too few of those who qualify and the programs do not have the funds to come up with additional taxes that will now be required by the BOE. Meanwhile, reduction of greenhouse gasses and water conservation are goals that all Californians wish to, in fact need to, participate in. 3)This bill is opposed by the California State Association of Counties, which notes: While we appreciate the intent of this bill and the recent amendments to provide greater specificity to the program, CSAC opposes AB 88 as currently written because of the negative impact to counties. After the past thirty years of changes to sales and use tax allocations, counties now receive almost half of sales and use tax revenues. About two-thirds of that revenue is constitutionally dedicated to providing local public safety services and federal and state programs, including social services, incarceration, AB 88 Page F and rehabilitation. Therefore, we respectfully request that the local portions of sales and use tax be untouched by AB 88 and vital dollars continue to flow to critical service needs. We have no concern with the state's portion being used for this program in an effort to further statewide energy conservation goals. 4)The BOE notes the following in its staff analysis of this bill: a) Bill should define "home appliance" : "Most recognize common household appliances as refrigerators, dishwashers, clothes washers, etc., however, the term can also mean any instrument, apparatus, or device for a particular purpose or use (see Dictionary.com). Many utility companies make no-cost energy improvements to qualified low-income homes that include things like compact fluorescent lights, in-ground pool pumps, attic insulation, and showerheads. It appears that under the broader 'appliance' definition, these items could be included within the exemption's scope, since many of these items are qualified ENERGY STAR products. A definition should be added to eliminate any ambiguity and avoid any unanticipated revenue loss." b) The bill provides no lead time : "The proposed exemption takes effect immediately, which provides the BOE with no lead time to notify retailers. In order for retailers to properly claim a sales tax exemption under this bill, retailers must accept in good faith an exemption certificate from a utility company that certifies that the utility company's purchase qualifies for the exemption. The bill should provide adequate lead time to allow the BOE to notify and educate retailers of their sales tax AB 88 Page G responsibilities associated with this new exemption." 5)Committee Staff Comments a) What is a "tax expenditure" ? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, U.S. Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). b) How is a tax expenditure different from a direct expenditure ? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. While this affords taxpayers greater financial predictability, it can also result in tax expenditures remaining a part of the tax code without demonstrating any public benefit. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote. c) The Energy Savings Assistance Program : The Energy Savings Assistance Program (ESAP) provides no-cost weatherization services to low-income households meeting AB 88 Page H specified income guidelines. For example, the income eligibility upper limit for a household of four is currently $47,700. Services provided include attic insulation, weather-stripping, caulking, and door and building envelope repairs to reduce air infiltration. Qualified ESAP customers may also be eligible to receive energy-efficient replacement appliances. For example, Pacific Gas & Electric (PG&E) notes that energy-saving measures through ESAP can include the repair or replacement of the customer's refrigerator. In addition, furnace and water heater repair or replacement may be available to eligible customers if PG&E determines that existing natural gas units are inoperable or unsafe. The author notes that ESAP helps to reduce energy and water consumption, while at the same time reducing gas and electricity costs for low-income customers. In addition, the author states: ESAP leads to the safe recycling of old inefficient appliances[,] which helps to reduce illegal dumping and ensures that hazardous components and materials including PCB-containing capacitors, CFC/HFC/HCFC refrigerants, polyurethane foam insulation, and recyclable materials such as ferrous and nonferrous metals, plastics, and glass are properly handled. According to the California Public Utilities Commission, preliminary 2014 ESAP expenditures for the four largest investor-owned utilities amount to $230 million. This total reflects expenditures for a broad range of appliances and devices, including clothes washers, refrigerators, microwaves, central air conditioners, evaporative coolers, and compact fluorescent lights, among other items. It should be noted that these expenditures also include exempt installation costs. d) The ENERGY STAR program : This bill defines an eligible AB 88 Page I "energy or water efficient home appliance" as a refrigerator, dishwasher, washer, dryer, or other appliance that meets performance requirements under the ENERGY STAR program. The ENERGY STAR program, in turn, is a voluntary federal program designed to identify and promote energy-efficient products and buildings in order to reduce energy consumption, improve energy security, and reduce pollution through voluntary labeling of products and buildings that meet the highest energy conservation standards. ENERGY STAR has grown to include products in more than 70 different categories, with more than 4.8 billion products sold since 1992. Transitioning to ENERGY STAR-certified appliances has many advantages. By way of example, there are an estimated 170 million refrigerators and refrigerator-freezers currently in use in the United States. More than 60 million refrigerators are over 10 years old, costing consumers $4.7 billion per year in energy costs. ENERGY STAR-certified refrigerators, in turn, are roughly 9 to 10% more energy efficient than models meeting the federal minimum energy efficiency standard. By properly recycling an old refrigerator and replacing it with a new ENERGY STAR-certified model, the average consumer could save between $35 and $300 on energy costs over the lifetime of the appliance. Cumulatively, if all refrigerators sold in the United States were ENERGY STAR-certified, the energy cost savings would grow to more than $400 million each year and eight billion pounds of annual greenhouse gas emissions would be prevented. This is equivalent to the emissions from 750,000 vehicles. e) Everything's great until you get audited : The author notes that, in the summer of 2014, a BOE audit determined AB 88 Page J that there is no specific exemption for an energy- or water-efficient appliance purchased by a public utility and provided at no cost to a qualified low-income customer. The author notes that, without a statutory exemption, fewer financial resources will be available to serve low-income families. To this end, the author states, "The goal of AB 88 is to make sure that the maximum number of families are served in a federal, state, or ratepayer-funded energy efficiency program." f) Absence of a sunset date : In its current form, this bill's proposed tax expenditure lacks an automatic sunset provision. This Committee has a longstanding policy favoring the inclusion of sunset dates to allow the Legislature periodically to review the efficacy and cost of such programs. The author may wish to consider the addition of appropriate sunset provisions. g) Getting specific : This bill defines an "energy or water efficient home appliance" as a refrigerator, dishwasher, washer, dryer, or other appliance that meets performance requirements under the ENERGY STAR program (emphasis added). As the BOE notes in its staff analysis, the generic term "appliance" could be read to include a sweeping array of devices and provides little administrative guidance. To ease administration of this exemption and prevent potential disputes, the author may wish to provide a detailed but limited enumeration of appliances qualifying for the exemption. The very term "energy or water efficient home appliance" raises another issue. The term would seem to suggest that this bill's exemption is designed to achieve both energy and water conservation goals. While some ENERGY STAR appliances, such as front-loading washing machines, may achieve ancillary water efficiency goals, the ENERGY STAR AB 88 Page K program is concerned first and foremost with the conservation of energy. The United States Environmental Protection Agency does administer a similar program, "WaterSense", for water conservation purposes. While beyond the purview of this Committee's expertise, the author may wish to consider a reference to this or a similar program in the bill's definition of qualifying appliances. Finally, this bill includes a rather detailed definition of a "low-income participant". Committee staff questions whether it might be administratively easier to simply define such individuals by reference to the ESAP program itself. h) Related legislation : AB 816 (Hall), of the 2013-14 Legislative Session, would have provided a SUT exemption for energy- or water-efficient home appliances purchased by a public utility and provided at no cost to a participant in a federal, state, or ratepayer-funded energy efficiency program. AB 816 originally related to alcoholic beverages, was gutted and amended with the SUT exemption, and was withdrawn from the Senate Government Organization Committee to Senate Rules. REGISTERED SUPPORT / OPPOSITION: Support Appliance Recycling Centers of America AB 88 Page L BOE Member Jerome E. Horton California Apartment Association California Building Industry Association California Contract Cities Association California League of Conservation Voters Californians Against Waste California Retailers Association California Rural Legal Assistance Foundation Center on Race, Poverty & the Environment City of Oakland Coalition for Humane Immigrant Rights of Los Angeles La Cooperativa Campesina de California Los Angeles Area Chamber of Commerce AB 88 Page M Los Angeles Mayor Eric Garcetti Los Angeles County Supervisor Michael D. Antonovich Sierra Club California State Board of Equalization Western Center on Law and Poverty Opposition California State Association of Counties California Tax Reform Association Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098 AB 88 Page N