BILL ANALYSIS Ó AB 1710 Page 1 Date of Hearing: April 18, 2016 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Sebastian Ridley-Thomas, Chair AB 1710 (Calderon) - As Amended April 5, 2016 Majority vote. Fiscal committee. SUBJECT: Vehicular air pollution: zero-emission and near-zero-emission vehicles SUMMARY: Requires the State Air Resources Board (ARB), on or before January 1, 2019, to develop and implement a comprehensive program comprised of a portfolio of incentives to promote zero-emission and near-zero-emission vehicle deployment in the state. Specifically, the tax-related provisions of this bill: 1)Provide, on or after January 1, 2017, an exemption under the Sales and Use Tax (SUT) Law, for the portion of the cost of a new or used near-zero or zero-emission vehicle purchased by a "low-income purchaser" that does not exceed $40,000. For purposes of the SUT exemption, this bill: a) Defines a "near-zero-emission vehicle" as a vehicle that utilizes zero-emission technologies, enables technologies that provide a pathway to zero-emission operations, or incorporates other technologies that significantly reduce AB 1710 Page 2 criteria pollutants, toxic air contaminants, and greenhouse gas emissions, as defined by the ARB in consultation with the State Energy Resources Conservation and Development Commission consistent with meeting the state's mid-and long-term air quality standards and climate goals. b) Defines a "zero-emission vehicle" as a vehicle that produces no emissions of criteria pollutants, toxic air contaminants, and greenhouse gases when stationary or operating, as determined by the ARB. c) Defines a "low-income purchaser" as an individual or individuals whose household income does not exceed 80% of the median income of the county in which they reside as determined by the United States Department of Housing and Urban Development. d) Provides that, notwithstanding any provision of the Bradley-Burns Uniform Local SUT Law or the Transactions and Use Tax Law, the exemption shall not apply with respect to any tax levied by a county, city, or district pursuant to either of those laws. 2)Allow a Personal Income Tax (PIT) credit to a "qualified taxpayer" equal to $2,500. For purposes of the PIT credit, this bill: a) Specifies that the credit shall be available for taxable years beginning on or after January 1, 2017, and before January 1, 2026. b) Defines a "qualified taxpayer" as an individual or individuals who meet the income eligibility requirements AB 1710 Page 3 specified by the ARB under Health and Safety Code Section 44258.4(c)(3)(B) and who purchased a near-zero or zero-emission vehicle during the taxable year. c) Defines a "near-zero-emission vehicle" as a vehicle that utilizes zero-emission technologies, enables technologies that provide a pathway to zero-emissions operations, or incorporates other technologies that significantly reduce criteria pollutants, toxic air contaminants, and greenhouse gas emissions, as defined by the ARB in consultation with the State Energy Resources Conservation and Development Commission consistent with meeting the state's mid- and long-term air quality standards and climate goals. d) Defines a "zero-emission vehicle" as a vehicle that produces no emissions of criteria pollutants, toxic air contaminants, and greenhouse gases when stationary or operating, as determined by the ARB. e) Provides that, in cases where the credit amount exceeds the taxpayer's tax liability, the excess credit amount may be carried over in the following year, and succeeding six years if necessary, until the credit is exhausted. f) States that it is the Legislature's intent to enact legislation providing that the credit shall be refundable, upon appropriation by the Legislature. g) Requires the qualified taxpayer to make an irrevocable election to claim the credit in lieu of the deduction allowed by this bill. h) Repeals the credit provisions on December 1, 2026. AB 1710 Page 4 3)Allow a PIT deduction of $2,500 to a "qualified taxpayer" who, during the taxable year, purchased a near-zero or zero-emission vehicle. For purposes of the PIT deduction, this bill: a) Specifies that the deduction shall be available for taxable years beginning on or after January 1, 2017, and before January 1, 2026. b) Provides that the deduction shall be allowed in determining adjusted gross income. c) Defines a "qualified taxpayer" as an individual or individuals who meet the income eligibility requirements specified by the ARB pursuant to Health and Safety Code Section 44258.4(c)(3)(B). d) Defines a "near-zero-emission vehicle" as a vehicle that utilizes zero-emission technologies, enables technologies that provide a pathway to zero-emissions operations, or incorporates other technologies that significantly reduce criteria pollutants, toxic air contaminants, and greenhouse gas emissions, as defined by the ARB in consultation with the State Energy Resources Conservation and Development Commission consistent with meeting the state's mid- and long-term air quality standards and climate goals. e) Defines a "zero-emission vehicle" as a vehicle that produces no emissions of criteria pollutants, toxic air contaminants, and greenhouse gases when stationary or operating, as determined by the ARB. AB 1710 Page 5 f) Requires the qualified taxpayer to make an irrevocable election to claim the deduction in lieu of the credit allowed by this bill. g) Repeals the deduction provisions on December 1, 2026. 4)Provide that, in accordance with Revenue and Taxation Code (R&TC) Section 41, on or before January 1, 2018, and each January 1 thereafter until January 1, 2027, the Franchise Tax Board (FTB), in consultation with the State Board of Equalization (BOE), shall annually prepare a written report to the Legislature regarding the efficacy of the SUT exemption, PIT credit, and PIT deduction. This report shall be submitted in compliance with Government Code Section 9795. EXISTING LAW: 1)Establishes the Air Quality Improvement Program that is administered by the ARB for the purposes of funding projects related to, among other things, reduction of criteria air pollutants and improvement of air quality. Pursuant to the Air Quality Improvement Program, the ARB has established the Clean Vehicle Rebate Project to promote the production and use of zero-emission vehicles.2)Imposes a sales tax on retailers for the privilege of selling tangible personal property (TPP), absent a specific exemption. The tax is based upon the retailer's gross receipts from TPP sales in this state. 3)Imposes a complimentary use tax on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser; and AB 1710 Page 6 unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the BOE. 4)Allows various tax credits under the PIT Law. These credits are generally designed to encourage socially beneficial behavior or to provide relief to taxpayers who incur specified expenses. 5)Requires any bill authorizing a new credit to contain all of the following: a) Specific goals, purposes, and objectives that the tax credit will achieve; b) Detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives stated in the bill; and, c) Data collection requirements to enable the Legislature to determine whether the tax credit is meeting, failing to meet, or exceeding those specific goals, purposes, and objectives. The requirements shall include the specific data and baseline measurements to be collected and remitted in each year the credit is in effect, for the Legislature to measure the change in performance indicators, and the specific taxpayers, state agencies, or other entities required to collect and remit data. (R&TC Section 41.) FISCAL EFFECT: Unknown. Fiscal estimates from both the BOE and the FTB are currently pending. Based on preliminary estimates, however, it appears that the PIT provisions would result in AB 1710 Page 7 reduced General Fund (GF) revenues of $60 million in fiscal year (FY) 2016-17, $130 million in FY 2017-18, and $170 million in FY 2018-19. COMMENTS: 1)The author has provided the following statement in support of this bill: In California, the transportation sector constitutes the greatest source of pollution, accounting for 40% percent of the state's greenhouse gas emissions. If the state is to meet its climate change goals, it must do more to incentivize the purchase of zero and near-zero emission vehicles. While the existing incentive program, the Clean Vehicle Rebate Project program, has been successful in providing over 137,000 rebates for zero and near-zero emission vehicles, including electric, plug-in hybrid electric, and fuel cell vehicles, the growing consensus is that the current program needs modification to ensure its long-term sustainability and to attract additional customer classes, specifically, low to moderate income families. AB 1710 would achieve this by offering multiple incentives to buy zero and near-zero emission vehicles, including: sales tax exemption for qualified new and used cars, a tax credit and deduction for qualified purchasers and a more targeted program that will help advance the clean vehicle market and reach the state's zero-emission vehicle requirement. 2)Committee staff comments: AB 1710 Page 8 a) What is a "tax expenditure" ? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, U.S. Treasury officials began arguing that these features of the tax law should be referred to as "expenditures" since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). b) How is a tax expenditure different from a direct expenditure ? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy or cost, without a supermajority vote. c) This bill's SUT exemption : i) An overview of the SUT Law : California's SUT Law imposes a sales tax on retailers for the privilege of selling TPP, absent a specific exemption. The tax is based upon a retailer's gross receipts from TPP sales in California. The SUT Law also imposes a mirror "use tax" on the storage, use, or other consumption of TPP purchased out-of-state and brought into California. The use tax is imposed on the purchaser, and unless the purchaser pays the use tax to an out-of-state retailer registered to collect California's use tax, the purchaser AB 1710 Page 9 remains liable for the tax. The use tax is set at the same rate as the state's sales tax and must generally be remitted to the BOE. The SUT represents the state's second largest source of GF revenues. Nevertheless, the past 60 years have seen a dramatic reduction in the state's reliance on the SUT and a corresponding increase in its reliance on PIT revenues. In FY 2014-15, SUT revenues were estimated to comprise 23% of the state's GF revenues, down from nearly 60% in FY 1950-51. ii) What accounts for the state's reduced reliance on SUT revenues ? The SUT Law was enacted in a very different era. In the 1930s, California's economy was largely dominated by manufacturing, and residents mostly bought and sold tangible goods. Thus, in establishing the base for a new consumption tax, it made sense to impose the tax on sales of TPP, defined as personal property that may be "seen, weighed, measured, felt, or touched." Over the past 80 years, however, California's economy has seen dramatic growth in the service and information sectors, resulting in a significant erosion of the SUT base. For example, the Commission on the 21st Century Economy noted that spending on taxable goods represented 34.6% of personal income in 2008, down from 55.4% in 1980. As a result, tax experts and economists from across the political spectrum argue that California should expand its SUT base. It could be argued that, while well-intentioned, additional SUT exemptions further erode an already shrinking SUT base. This, in turn, increases fiscal pressures to maintain or even increase California's relatively high SUT rate. High rates arguably promote non-compliance and encourage out-of-state purchases, AB 1710 Page 10 placing California retailers at a competitive disadvantage. High rates also risk impacting consumer decision-making, which runs counter to widely accepted principles of sound tax policy. iii) Potential questions concerning this bill's SUT exemption : As noted above, this bill provides a SUT exemption for the portion of the cost of a new or used near-zero or zero-emission vehicle purchased by a "low-income purchaser" that does not exceed $40,000. Thus, the exemption would only be available when a qualifying vehicle is purchased by a person whose household income does not exceed 80% of the median income of the county in which the purchaser resides. The U.S. Census Bureau notes that in Marin County the median household income for the period of 2010-14 was $91,529 in 2014 dollars. Thus, assuming these figures correspond with those maintained by the U.S. Department of Housing and Urban Development, a Marin resident with a household income of up to $73,223.20 would be able to obtain this exemption. Of course, this raises the question of how a qualifying vehicle dealer would verify a purchaser's income. The author may wish to provide specific direction for how this income data will be verified. In addition, this bill provides that the SUT exemption shall become operative on January 1, 2017. Typically, SUT exemption bills provide for a delayed operative date, depending on the effective date of the implementing legislation. This ensures that the BOE, as the administering agency, will have sufficient time to inform impacted retailers and accommodate the change in law. As such, the author may wish to consider the inclusion of delayed operative language. AB 1710 Page 11 iv) Absence of a sunset date : In its current form, this bill's SUT exemption lacks an automatic sunset provision. This Committee has a longstanding policy favoring the inclusion of sunset dates to allow the Legislature periodically to review the efficacy and cost of such programs. The author may wish to consider the addition of an appropriate sunset provision. d) The PIT Provisions : i) This bill's provisions : This bill allows a PIT credit to a "qualified taxpayer" equal to $2,500. A "qualified taxpayer", in turn, is defined as an individual or individuals who meet the income eligibility requirements specified by the ARB under Health and Safety Code Section 44258.4(c)(3)(B) and who purchased a near-zero or zero-emission vehicle during the taxable year. Committee staff has identified the following potential concerns with the current credit provisions: (1) While this bill contains language stating legislative's intent to make this credit refundable, this bill currently provides for a non-refundable tax credit. In other words, the credit will only benefit those with a tax liability to offset. To the extent low-income purchasers do not have such liability, the credit, in its current form, may be of limited utility. (2) This bill would allow the credit irrespective of the vehicle's purchase price. Thus, a qualified taxpayer could purchase a used vehicle for less than $2,500 and still receive the full credit amount. If AB 1710 Page 12 this is contrary to the author's intent, clarifying amendments should be taken. (3) Typically, credits involving areas for which the FTB lacks expertise are certified by another agency or agencies possessing the relevant expertise. The certification language would specify the responsibilities of both the certifying agency and the taxpayer. The author may wish to consider including certification requirements in connection with this credit. (4) Finally, this bill's credit provisions lack certain details necessary for proper implementation and administration of the credit. For example, would the vehicle need to be purchased in California to qualify for the credit? Would the credit be available for both new and used vehicles? How long would the purchaser have to retain title to the vehicle? Could the credit be claimed more than one time for the same vehicle? Would the credit need to be taken on an original return, or would a taxpayer unaware of the credit be allowed to file an amended return later to claim the credit? Committee staff is available to work with the author's office on addressing these and other administrative issues subsequently identified. ii) R&TC Section 41 : On September 29, 2014, Governor Brown signed SB 1335 (Leno), Chapter 845, Statutes of 2014, which added R&TC Section 41. SB 1335 recognized that the Legislature should apply the same level of review used for government spending programs to tax preference programs, including tax credits. Thus, R&TC Section 41 requires any bill introduced on or after January 1, 2015 that allows a new income tax credit to contain specific goals, purposes, and objectives that the AB 1710 Page 13 tax credit will achieve. In addition, Section 41 requires detailed performance indicators for the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives so-identified. e) Suggested technical amendments : Committee staff suggests adoption of the following technical amendments: i) On page 4, in line 20, strike the first "near-zero" and insert "near-zero-emission vehicle"; ii) On page 5, in line 20, strike "near-zero" and insert "near-zero-emission vehicle"; and, iii) On page 6, in line 29, strike "near-zero" and insert "near-zero-emission vehicle". REGISTERED SUPPORT / OPPOSITION: Support Global Automakers Opposition AB 1710 Page 14 None on file Analysis Prepared by:M. David Ruff / REV. & TAX. / (916) 319-2098