BILL ANALYSIS                                                                                                                                                                                                    Ó



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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