BILL ANALYSIS Ó
AB 1683
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 1683
(Eggman) - As Amended March 8, 2016
SUSPENSE
Fiscal committee. Majority vote. Tax levy.
SUBJECT: Alternative energy financing
SUMMARY: Increases the annual sales and use tax (SUT) exclusion
amount available for allocation by the California Alternative
Energy and Advanced Transportation Financing Authority (CAEATFA)
from $100 million to $200 million. Specifically, this bill:
1)Increases the amount of SUT exclusion available for allocation
by CAEATFA in a calendar year from $100 million to $200
million.
2)Provides that, if less than $200 million is granted in a
calendar year, the unallocated SUT exclusion amount may roll
over to the following calendar year.
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3)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Authorizes CAEATFA to provide financial assistance to certain
facilities that use alternative energy sources and
technologies, develop advanced manufacturing, process recycled
feedstock, or develop and commercialize advanced
transportation technologies that conserve energy, reduce air
pollution, and promote economic development and jobs.
2)Allows CAEATFA to provide eligible projects financial
assistance in the form of a SUT exclusion on property used to
process recycled feedstock or used for the "design,
manufacture, production, or assembly" of advanced
manufacturing, advanced transportation technologies, or
alternative energy source products, components or system, as
defined.
3)Requires a project to demonstrate that the benefits to the
state from the project equals or exceeds the projected benefit
to the participating party from the SUT exclusion.
4)Requires CAEATFA to provide 20-day notice to the Legislature,
once the value of SUT exemptions approved by CAEATFA exceeds
$100 million. The notification must be provided prior to
granting additional approvals.
5)Repeals the CAEATFA's expanded authority to promote the use of
advanced manufacturing and recycled feedstock as of January 1,
2021.
6)Imposes a sales tax on a retailer's gross receipts from the
retail sale of tangible personal property (TPP) in this state,
unless the sale is specifically exempt from taxation. It is
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presumed that gross receipts from a particular sale of TPP are
subject to tax, unless the seller can establish either that
the sale was not a retail transaction or that the sale is
subject to an exemption.
FISCAL EFFECT: Unknown.
COMMENTS:
1)The Author's Statement . The author has provided the following
statement in support of this bill:
"The consequences of climate change can no longer be ignored.
We need to look at all tools at our disposal not only to make
sure that we are doing everything possible to mitigate climate
change's effect on California, but also to ensure the state
and its residents remain at the forefront of environmental
entrepreneurship and stewardship. It is time to expand this
proven program that promotes economic development and a
greener economy."
2)CAEATFA Program: 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, and cogeneration and geothermal.
In 1994, the authority was renamed the "California
Alternative Energy and Advanced Transportation Financing
Authority" 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.
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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.
Generally, CAEATFA is authorized to 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.
3)CAEATFA's SUT Exclusion Program . CAEATFA is also allowed to
provide a SUT exclusion for certain specified projects. The
first SUT exclusion was granted to Tesla in 2009. Shortly
thereafter, SB 71 (Padilla), Chapter 10, Statutes of 2010,
expanded the SUT exclusion to apply to purchases of equipment
used for the design, manufacture, production, or assembly of
"advanced transportation technologies" and "alternative
source" products, components, or systems. Alternative source
products include cogeneration technology; energy conservation;
and solar, biomass, wind, geothermal, specified
hydro-electric, or any other energy efficient technologies
that reduce the use of fossil and nuclear fuels. In 2012, SB
1128 (Padilla), Chapter 677, Statutes of 2012, added "advanced
manufacturing" to the list of eligible projects.
Consequently, the SUT exclusion program was enlarged to
include "advanced manufacturing" projects. SB 1128 also
placed a $100 million cap on the amount of the SUT exclusion
that may be awarded in a calendar year. Finally, in 2015, AB
199 (Eggman), Chapter 768, Statutes of 2015, further modified
the SUT exclusion program to include manufacturing projects
that either process or utilize "recycled feedstock." The
expanded program is due to sunset on January 1, 2021.
4)CAEATFA's Application Process for SUT Exclusion . California
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provides several tax incentives designed to encourage socially
beneficial behavior, such as an increase in low-income
housing, research and development activity, and overall
economic activity. A major policy concern when enacting a tax
incentive program is the possibility of rewarding behavior
that would have occurred in the absence of the subsidy, known
as "deadweight loss". The possibility of rewarding, instead
of incentivizing, behavior has become an accepted reality for
almost all tax incentive programs. The Legislature has
attempted to address this problem by creating tax incentives
programs that require potential beneficiaries to undergo a
rigorous application process to ensure, on a case-by-case
basis, that the state receives the desired benefit.
One of the prime examples of such programs is the SUT exclusion
administered by the CAEATFA. The CAEATFA has established a
lengthy application process to ensure the efficient use of
state resources by requiring each applicant to demonstrate a
benefit to the state before an award may be granted. Before a
SUT exclusion may be awarded, CAEATFA is required to determine
the eligibility of an individual project based on a number of
factors relating to the reduction in greenhouse gases and the
creation of manufacturing jobs. Specifically, when evaluating
an application, CAEATFA must consider the extent to which the
project develops manufacturing facilities located in
California; the extent to which the project will create new,
permanent jobs in California; the extent to which the project
results in a reduction of greenhouse gases; the unemployment
rate in the area in which the project will be located; and any
other factors that CAEATFA deems appropriate in accordance
with this program, among other criteria. Most important among
the factors is the requirement that applicants demonstrate a
"net benefit" to the state. Known as the "net benefits" test,
this test quantifies the fiscal and environmental benefits of
the proposed project to ensure that the state receives a
benefit beyond the cost of the SUT exclusion and is one of the
most important factors that CAEATFA considers when awarding
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the exclusion. In this manner, the test attempts to address
the "dead-weight" problem found within every subsidy.
Projects approved for the exclusion receive a full exemption
from the state and local portions of the SUT. The full SUT
rate ranges from 7.5% to 10%, with a statewide average of
8.42%.
Once the exclusion has been granted, applicants are allowed
three years to use the award but can request extensions from
the CAEATFA Board. Amounts awarded in previous years, but not
yet utilized, may not be recaptured by the CAEATFA. In
November 2015, CAEATFA suspended acceptance of new
applications due to the proposed program revisions and the
development of the regulations to implement AB 199.
Currently, $25 million of the 2016 annual amount remains
unallocated.
5)What is the Problem ? According to the author's office, last
year CAETFA had a high number of applications requesting an
allocation of the SUT exclusion. The existing cap of $100
million was quickly reached. In addition, with the expansion
of the CAETFA program to include projects that process or
utilize recycled feedstock, CAETFA estimates a higher demand
for the SUT exclusion grants.
During this Committee's informational hearing on February 22,
2016, the Executive Director of CAEFTA testified that the
increased demand for the funds may be due to continued
economic recovery, newly added categories of eligible projects
and a number of applications requesting large SUT exclusion
amounts. For example, large projects with more than $20
million in SUT exclusions include the ones by Tesla, Atieva,
Lockheed, Space X, and Solyndra. Historically, small projects
requesting less than $2.1 million in SUT exclusions comprised
almost 75% of approved applications. However, according to
CAEFTA, the current applications involving large projects may
utilize a considerable portion of the allowable $100 million
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cap, leaving no funds for smaller projects.
According to CAEATFA, a very diverse group of applicants are
applying for the same funds. However, existing law does not
impose a cap on the amount that a company may request in SUT
exclusions, nor does existing law prioritize certain types of
projects. Furthermore, the CAEFTA does not have the authority
to utilize the unclaimed awards. Finally, CAEFTA may not
award any amounts that remain unallocated in a particular
calendar year in the following years. In other words, the
un-awarded SUT exclusion amounts simply disappear.
6)Proposed Solution . The author believes that allowing a
rollover of unallocated funds to the following calendar year
and doubling the annual SUT exclusion cap would help mitigate
climate changes' effect on California, promote economic
development and green economy, and ensure that California
remains at the forefront of environmental entrepreneurship.
While this bill does not expressly specify the calendar years
to which the increased allocation would apply, it appears that
it will be available beginning with the 2016 calendar year.
7)Partial SUT Exemption for Purchases of Manufacturing and R&D
Equipment. In 2013, Governor Brown signed AB 93 (Committee
on Budget) Chapter 69, Statutes of 2013, which reformed
California's economic development policies. The new law
eliminated enterprise zones and other geographically targeted
economic development areas and, instead, created three new tax
benefits: (a) a temporary tax credit for wages paid by
taxpayers to qualified employees within former enterprise
zones, and other areas that suffer from high levels of poverty
and unemployment; (b) a temporary SUT exemption on purchases
of manufacturing equipment made by qualified taxpayers, capped
at $200 million annually per taxpayer; and, (c) the California
Competes Tax Credit program. Existing law limits the total
annual amount of these three tax incentives to $750 million.
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With the passage of AB 93, sales and leases of certain
manufacturing and R&D equipment may now qualify for the
temporary SUT partial exemption. The partial exemption rate
is currently set at 4.1875%, which means that sales of
qualifying property sold to a qualified person are taxed at a
rate of 3.3125% (7.5% current statewide tax rate minus 4.1875%
partial exemption rate), plus any applicable district taxes.
The exemption is available for purchases made until July 1,
2022. The program is generally self-certified, with little
oversight from the State Board of Equalization (BOE). The
program was created in such a way as to allow the partial SUT
exemption to be taken immediately, without complicated forms
and procedures.
Unlike CAEATFA's SUT exclusion, the partial SUT exemption does
not necessarily attempt to encourage or incentivize beneficial
behavior. Instead, the partial SUT exemption attempts to
reduce the distortion from the imposition of a tax on a tax,
otherwise known as "pyramiding". When manufacturers pay a SUT
on tangible personal property, the tax is incorporated into
the cost of a consumer product, often leading to double
taxation. Ideally, taxes should only be levied once because
pyramiding may cause consumers to favor goods and services
provided by a single company instead of those that require
multiple production steps.
8)The Interaction of the Partial SUT Exemption and the CAEFTA
SUT Exclusion . To a large degree, the CAEATFA SUT program
overlaps with the partial SUT exemption for manufacturing and
R&D equipment. Thus, unless a project includes a purchase of
manufacturing or R&D equipment worth more than $200 million,
the purchase may qualify for the partial SUT exemption, which
requires no application or allocation. However, as noted
above, the partial SUT exemption provides tax relief only for
the state portion of the SUT. When the partial SUT exemption
was enacted, the BOE estimated that General Fund revenue would
decrease annually by more than $600 million ($637 million in
fiscal year (FY) 2014-15 and $681 million in FY 2015-16).
However, the most recent data demonstrates that the exemption
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is currently underutilized. The total exemption amount
claimed in FY 2014-15 was $91.2 million; in the first four
months of FY 2015-16, the amount was only $77.2 million. The
underutilization problem may be due to complexities of the
program and/or may be attributed to the conditional nature of
the SUT exemption, where only a certain type of property and
purchasers qualify for the exemption. It may be argued that
the partial nature of the exemption, where some amount of SUT
still needs to be collected by the vendor, also contributes to
the underutilization problem.
Meanwhile, the CAEATFA exclusion program has been
oversubscribed. Although the program has no per purchaser
limit, it is subject to the overall annual cap of $100 million
and most likely will be oversubscribed in 2016 and 2017. In
the absence of legislative intent, it is unclear which types
of projects should receive priority.
The CAEATFA program had been in place for many years prior to
the enactment of the partial SUT exemption. It is unknown
whether the underutilization of one program has contributed to
the oversubscription for the other program or whether there is
any connection between the two programs. However, in light of
the underutilization of the partial SUT exemption and
oversubscription of the CAEATFA program, the Committee may
consider restructuring the CAEATFA program to prioritize
certain projects, in addition to allowing the recapture of
allocated funds and rollover of unallocated funds.
Furthermore, as an alternative to the proposed increase in the
$100 million cap, the Committee may also consider authorizing
CAEATFA to exempt only the local portion of the SUT in the
case of projects that otherwise meet the eligibility
requirements for the partial SUT exemption.
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9)Related Legislation . AB 2334 (Mullin) is similar to this
bill. AB 2334, among other things, would increase the annual
amount of SUT exclusions available for allocation to $475
million in the 2016 calendar year and to $250 million in the
2017 calendar year and each year thereafter.
REGISTERED SUPPORT / OPPOSITION:
Support
California Compost Coalition
California Refuse Recycling Council
California Manufacturers & Technology Association
Californians Against Waste
CR&R Incorporated
Sanitation Districts of Los Angeles County
Opposition
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None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098