BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      AB 1269


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          ASSEMBLY THIRD READING


          AB  
          1269 (Dababneh)


          As Introduced  February 27, 2015


          2/3 vote


           ------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                 |Noes                 |
          |                |      |                     |                     |
          |                |      |                     |                     |
          |----------------+------+---------------------+---------------------|
          |Revenue &       |9-0   |Ting, Brough,        |                     |
          |Taxation        |      |Dababneh, Gipson,    |                     |
          |                |      |Roger Hernández,     |                     |
          |                |      |Mullin, Patterson,   |                     |
          |                |      |Quirk, Wagner        |                     |
          |                |      |                     |                     |
          |----------------+------+---------------------+---------------------|
          |Appropriations  |17-0  |Gomez, Bigelow,      |                     |
          |                |      |Bonta, Calderon,     |                     |
          |                |      |Chang, Daly, Eggman, |                     |
          |                |      |Gallagher,           |                     |
          |                |      |                     |                     |
          |                |      |                     |                     |
          |                |      |Eduardo Garcia,      |                     |
          |                |      |Gordon, Holden,      |                     |
          |                |      |Jones, Quirk,        |                     |
          |                |      |Rendon, Wagner,      |                     |
          |                |      |Weber, Wood          |                     |
          |                |      |                     |                     |
          |                |      |                     |                     |
           ------------------------------------------------------------------- 








                                                                      AB 1269


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          SUMMARY:  Extends the authority of the California Alternative  
          Energy and Advanced Transportation Financing Authority (CAEATFA)  
          to grant financial assistance in the form of a sales and use tax  
          (SUT) exclusion for projects that promote the use of advanced  
          manufacturing until January 1, 2021.


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee, expected decreases in General Fund revenue of  
          approximately $15-20 million per fiscal year.


          Existing law limits the aggregate allowable sales and use tax  
          exclusions for all projects approved by CAEAFTA to $100 million  
          per calendar year.  According to data provided by the Treasurer's  
          office, from November 2010 to March 1, 2015, approximately $290  
          million in sales and use tax exclusions were approved by CAEATFA,  
          and approximately $82 million in exclusions have been claimed, or  
          approximately $19 million in claimed exclusions on an annualized  
          rate.


          COMMENTS:  


          1)Author's Statement:  The author states that "[t]he [sales and  
            use tax exclusion] program for advanced manufacturing under  
            CAEATFA is critical for attracting and retaining cutting edge  
            high tech jobs and companies in California.  To date the program  
            has created an estimated 1,356 jobs and generated a net benefit  
            to the state of $168,022,862.  Extending the sunset date of this  
            successful program will allow business to plan investments and  
            help further grow the state's high tech manufacturing industry."


          2)Arguments in Support:  The Large-Scale Solar Association states  
            that "[t]he Advanced Manufacturing Sales and Use Tax exemption  








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            program administered by [CAEATFA] promotes the creation of  
            California-based manufacturing and California-based jobs.  The  
            program has approved financial assistance for solar photovoltaic  
            manufacturing, biogas capture and production, electric vehicle  
            and battery manufacturing, landfill gas capture and production,  
            biomass process and fuel production and for conventional  
            manufacturing in the state."


          3)Arguments in Opposition:  None submitted.


          4)CAEATFA Background:  The California Alternative Energy Source  
            Financing Authority was established in 1980 with an  
            authorization of $200 million in revenue bonds to finance  
            projects utilizing alternative or renewable energy sources, such  
            as wind, solar, cogeneration and geothermal.  In 1994, the  
            authority was renamed "CAEATFA" and its charge was expanded to  
            include the financing of "advanced transportation" technologies.  
             During the energy crisis of 2001, CAEATFA's authority was  
            expanded again to provide financial assistance to public power  
            entities, independent generators, and others for new and  
            renewable energy sources, and to develop clean distributed  
            generation.  The CAEATFA board consists of five members:  the  
            Treasurer, Controller, Director of Finance, Chairperson of the  
            Energy Commission, and President of the Public Utilities  
            Commission.


            CAEATFA may provide financial assistance to approved projects  
            via the issuance of bonds, loans, loan guarantees and credit  
            enhancements.  CAEATFA may authorize up to $1 billion in revenue  
            or prepayment bonds to fund projects.  Over the last few years,  
            CAEATFA has provided financial assistance through various  
            programs, including qualified energy conservation bonds for  
            projects that promote the use of alternative energy and energy  
            efficiency in state, local and tribal government facilities, as  
            well as clean renewable energy bonds for renewable energy  
            projects.  In addition, with the passage of SB 71 (Padilla),  








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            Chapter 10, Statutes of 2010, CAEATFA is allowed to grant a SUT  
            exemption to provide financial assistance for the purchase of  
            equipment that is used for the design, manufacture, production,  
            or assembly of "advanced transportation technologies" or  
            "alternative source" products, components, or systems (SB 71  
            Program).  Alternative source products include cogeneration  
            technology, energy conservation, solar, biomass, wind,  
            geothermal, specified hydro-electric, or any other energy  
            efficient technologies that reduce the use of fossil and nuclear  
            fuels.  Alternative sources also include advanced electric  
            distributive generation technology and energy storage  
            technology.  The SB 71 Program will sunset on January 1, 2021.


            In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012,  
            expanded the SUT exclusion program to include advanced  
            manufacturing projects.  Under the SUT exclusion program,  
            CAEATFA evaluates all applicants to determine whether the  
            benefits received by the state will outweigh forgone SUT  
            revenue.  Specifically, the net benefits test established within  
            the SUT exclusion program is primarily designed to evaluate the  
            fiscal and environmental benefits of the project will produce  
            for the state.  According to CAEATFA's annual report, CAEATFA  
            board began receiving applications for advanced manufacturing  
            projects in October of 2013, and approved two advanced  
            manufacturing projects as its December 2013 meeting.  


          5)Partial Sales and Use Tax Exemption:  The passage of AB 93  
            (Budget Committee), Chapter 69, Statutes of 2013, and SB 90  
            (Galgiani), Chapter 70, Statutes of 2013, created California's  
            first effort to grant a partial SUT exemption for taxpayers  
            performing manufacturing or research and development in the  
            state.  The rationale for providing a SUT exemption on business  
            inputs, even if partial, is to reduce the imposition of a tax on  
            a tax, otherwise known as "pyramiding".  The SUT is paid when a  
            business is considered to be the final consumer of tangible  
            item.  The tax paid on tangible personal items is then  
            incorporated into the cost of a consumer product, leading to  








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            double taxation.  As noted by Joseph Henchman, "Ideally, a sales  
            tax should be levied on all goods and services sold at retail,  
            and to prevent distortions and hidden taxes, it should be levied  
            only once on each good or service sold at retail."  (Joseph  
            Henchman, States Should Avoid Sales Taxes on Nonprofit Hospital  
            Purchases, Tax Foundation, April 2008.)  Ideally, taxes should  
            only be levied once because pyramiding may cause consumers to  
            favor goods and services that are provided by a single company  
            instead of those that require multiple production steps.  (Id.)


          6)Differences:  There are a few differences between CAEATFA's SUT  
            exclusion and the state's partial SUT exemption.  The partial  
            exemption rate is currently 4.1875%.  The partial exemption  
            provides that sales of the qualifying property sold to a  
            qualified person be taxed at a rate of 3.3125% (7.50% current  
            statewide tax rate - 4.1875% partial exemption) plus any  
            applicable district taxes.  Under CAEATFA, an approved project  
            does not pay any SUT tax, including local and district taxes.   
            Additionally, the state's SUT exemption is much broader and more  
            easily available.  So long as a business meets all requirements,  
            a qualifying manufacturer can receive a partial SUT exemption.   
            CAEATFA, however, is a much lengthier process, requiring an  
            application and approval process before the exclusion can apply.  
             Furthermore, the programs appear to accomplish different goals.  
             Both programs reduce the economic distortions related to taxing  
            business inputs, but CAEATFA appears to also be concerned with  
            encouraging projects that provide a greater return on investment  
            for the state.  As noted above, the anticipated project  
            benefits, measured by the fiscal and environmental benefit to  
            the state, must exceed the cost of forgone SUT.  No such  
            analysis is needed for the partial SUT exemption.  


          7)No Chance of Double Dipping:  Assuming a manufacturer qualifies  
            under both the state's partial SUT exemption and CAEATFA's SUT  
            exclusion, the taxpayer can, at most, take the full exclusion  
            from SUT, and only after successfully completing the application  
            process.  However, a qualifying manufacturer may take a partial  








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            SUT exemption on qualifying purchases if those purchases meet  
            all requirements under the partial SUT exemption are not part of  
            an approved project under CAEATFA.  




          Analysis Prepared by:                                               
                          Carlos Anguiano / REV. & TAX. / (916) 319-2098   
          FN: 0000651