BILL ANALYSIS                                                                                                                                                                                                    



                                                                    AB 1710


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          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  








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               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  








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               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.  








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          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.









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             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  








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            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  








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          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:  










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              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  








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                 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,  








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                 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.








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                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  








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                    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  








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                 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










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          None on file




          Analysis Prepared by:M. David Ruff / REV. & TAX. / (916)  
          319-2098