BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 1269 (Dababneh) - Alternative energy. ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: February 27, 2015 |Policy Vote: GOV. & F. 5 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 17, 2015 |Consultant: Marie Liu | | | | ----------------------------------------------------------------- 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 AB 1269 (Dababneh) Page 1 of ? 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 AB 1269 (Dababneh) Page 2 of ? 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 AB 1269 (Dababneh) Page 3 of ? 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 AB 1269 (Dababneh) Page 4 of ? 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. -- END --