BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON APPROPRIATIONS
                             Senator Ricardo Lara, Chair
                            2015 - 2016  Regular  Session

          AB 1269 (Dababneh) - Alternative energy.
          
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          |Version: February 27, 2015      |Policy Vote: GOV. & F. 5 - 0    |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 17, 2015   |Consultant: Marie Liu           |
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          This bill meets the criteria for referral to the Suspense File. 


          Bill  
          Summary:  AB 1269 would extend the eligibility of advanced  
          manufacturing projects to receive state and local sales and use  
          tax exemptions by the California Alternative Energy and Advanced  
          Transportation Financing Authority until January 1, 2021.


          Fiscal  
          Impact:  
           Increased likelihood that up to $100 million from the General  
            Fund will be lost through sales and use tax exemptions.
           Unknown costs to the General Fund for CAEATFA's administrative  
            costs that are not recovered through application and  
            administrative fees.


          Background:  The California Alternative Energy and Advanced Transportation  
          Financing Authority (CAEATFA) was established in 1980 as a means  
          to encourage the use of equipment using alternative or renewable  
          energy sources. CAEATFA's authority has since been expanded  







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          several times including to include the financing of advanced  
          transportation technologies. Financial assistance can occur  
          through the issuance of revenue bonds, loan guarantees, loan  
          loss reserves, and insurance. 
          As a result of the passage of SB 71 (Padilla) Chapter 10,  
          Statutes of 2010, CAEATFA was authorized to provide projects  
          financial assistance in the form of a sales and use tax  
          exemption on property (such as manufacturing equipment) used for  
          the design, manufacture, production, or assembly of advanced  
          transportation technologies or alternative energy products,  
          components, or systems. The program was expanded in 2012 by SB  
          1128 (Padilla) Chapter 677, Statutes of 2012 to include advanced  
          manufacturing projects. This program is referred to as the Sales  
          and Use Tax Exclusion (STE) Program. 


          For all project types under the STE Program, existing law  
          requires CAEATFA to evaluate project applications for  
          eligibility based upon certain criteria that encourages  
          manufacturing facilities and jobs located in California and the  
          reduction of greenhouse gases beyond the reduction required by  
          federal or state law or regulation. Projects must meet the "net  
          benefits test" by showing that the new project will create jobs  
          in the state. No more than $100 million in tax exemptions may be  
          approved by CAEATFA in any calendar year. 


          CAEATFA's authority to offer these tax exemptions for advanced  
          manufacturing sunsets on July 1, 2016 while the entire STE  
          Program sunsets on January 1, 2021. 




          Proposed Law:  
            This bill would extend the sunset on the CAEATFA advanced  
          manufacturing program until January 1, 2021, thereby aligning  
          the sunset date for all project types under the STE Program. 


          Staff  
          Comments:   This bill will increase the odds that the maximum tax  
          exemptions are issued:  Since CAEATFA has been considering  
          advanced manufacturing applications in December 2013 in the STE  








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          Program, it has approved $104 million in tax exemptions, with  
          another $6.7 million in exemptions pending approval at the  
          August and September 2015 CAEATFA board meetings. Advanced  
          manufacturing projects have represented 64% of the approved  
          projects in the STE program since December 2013. Since advanced  
          manufacturing projects have represented a majority of project  
          types under the STE Program, extending the eligibility for  
          advanced manufacturing projects greatly increases the likelihood  
          that the $100 million in tax exemptions will be reached each  
          year. 
           Granting more tax exemptions may assist in the recovery of  
          administrative costs:  CAEATFA incurs administrative costs to  
          administer the STE program. These costs are supposed to be  
          covered by an application and administrative fee. However,  
          historically the fee revenues have not been sufficient to cover  
          the administrative costs. According to the Treasurer's office,  
          fee revenues have fallen short because the fee schedule was  
          based on $100 million in award per year and that the majority of  
          the applicants would move forward with their projects. However,  
          the program has only reached its $100 million limit once and  
          fewer awarded projects have moved forward than anticipated.  
          CAEATFA staff is currently working with the Treasurer's office  
          to improve outreach and participation program. Since advanced  
          manufacturing has been a major project type under the program,  
          extending its eligibility might make it more likely that the  
          CAEATFA recovers sufficient project applications to offset its  
          administrative costs. 


          Staff notes that CAEATFA may have difficulties in increasing  
          participation in the STE program, even if this bill does become  
          law. Related to the 2013-14 approved budget, AB 93 (Committee on  
          Budget) Chapter 69, Statutes of 2013 created a state-only sales  
          and use tax exemption on purchases of manufacturing equipment  
          for specific industries through 2022. Projects eligible for the  
          STE program are generally also eligible for the AB 93 tax  
          exemption, which is easier to obtain as there is no required  
          net-benefits test. While the STE program offers the benefit of  
          offering both a state and local tax exemption, the ease of  
          obtaining an AB 93 tax exemption will likely make it difficult  
          for CAEATFA to increase participation despite its increased  
          outreach efforts, and thereby less likely to recover its  
          administrative costs.  Staff notes  that there may be better ways  
          for CAEATFA to recover its administrative costs than to rely on  








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          greater participation in the program.


           Granting more tax exemptions may (ironically?) assist in the  
          repayment of loans made to the program for startup costs  : When  
          the STE program was first enacted, CAEATFA received a $2.4  
          million loan to cover initial program development costs.  
          CAEATFA's ability to repay back this loan is dependent on  
          participation in the program (i.e. there must be applicants on  
          which a fee can be assessed) and the amount of the fee. To the  
          extent that this bill increases participation in the program,  
          this increased participation can help ensure the repayment of  
          the loan. To date, no loan repayments have been made. 


          As part of this year's budget, the Treasurer's office received a  
          three-year extension on the loan payments. Three annual payments  
          of $804,000 are now due on June 30, 2017, 2018, and 2019. The  
          BCP requesting the extension did not discuss the need to extent  
          the advanced manufacturing portion of the program.  


          Tax exemptions are not necessarily offset by increased revenues  
          to the state:  As discussed above, the STE program only has  
          authority to grant tax exemptions to projects that are estimated  
          to have benefits to the state that equal or exceed the  
          exemption. The advanced manufacturing projects approved to date  
          are estimated to lead to over $196 million in fiscal benefits  
          over the lifespan of the programs. Should this estimation be  
          correct, the short term General Fund costs will more than be  
          offset by increased revenues. However, as noted by the  
          Treasurer's office, the nascent nature of many of the new  
          technologies means that not all approved projects move forward  
          or last as long as hoped. In these cases, it is possible that  
          the fiscal benefits of the program are not fully realized and  
          therefore may not fully offset lost tax revenues. A hearing held  
          by the Committees on Governance and Finance and Energy,  
          Utilities, and Communication on October 11, 2011 found that the  
          program had not yet resulted in net economic benefits. Though  
          there have been program changes, including changes to the  
          net-benefits text since that hearing.


           This bill creates a Proposition 26 tax:  Because the  








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          participation of advanced manufacturing projects in the STE  
          program can prevent the participation of other project types  
          under the STE program should the program become oversubscribed,  
          Legislative Counsel has determined that the measure can increase  
          a tax on a taxpayer for the purposes of Section three of Article  
          XIIIA of the California Constitution. As such, this measure  
          requires a 2/3 vote. 







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