BILL ANALYSIS Ó AB 1851 Page 1 Date of Hearing: April 18, 2016 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Sebastian Ridley-Thomas, Chair AB 1851 (Gray) - As Amended April 13, 2016 Majority vote. Fiscal committee. SUBJECT: Vehicular air pollution: reduction incentives SUMMARY: Creates and expands a broad array of incentive programs to increase the sales and use of certain clean air vehicles, funded by the Greenhouse Gas Reduction Fund (GGRF), including increasing rebates offered by the Clean Vehicle Rebate Project (CVRP), issuing rebates for the purchase and installation of electric vehicle (EV) charging stations, removing the cap on green high-occupancy vehicle (HOV) lane stickers, and providing a partial Sales and Use Tax (SUT) exclusion for the purchase of a qualified motor vehicle (QMV). Specifically, the tax-related provisions of this bill: 1)Exclude, from the sales price or gross receipts on which SUT is imposed, the value of a motor vehicle traded in for a QMV. 2)Specify that the value of the trade-in motor vehicle must be AB 1851 Page 2 separately stated on the QMV invoice, bill of sale, or similar document in order for the SUT exclusion to apply. 3)Define a QMV as a motor vehicle that meets either of the following: a) California's super ultra-low emission vehicle standard for exhaust emissions and the federal inherently low-emission vehicle evaporative emission standard, as defined in Part 88 of Title 40 of the Code of Federal Regulations as that part read on January 1, 2016; or, b) California's enhanced advanced technology partial zero-emission vehicle standard or transitional zero-emission vehicle standard. 4)Provide that moneys from the GGRF, upon appropriation of the Legislature, are available to reimburse counties and cities for any SUT revenue losses resulting from the SUT exclusion. 5)Provide that the SUT exclusion will remain in effect until January 1, 2026, and is repealed as of that date. EXISTING LAW: 1)Imposes a SUT on the sale of, or the storage, use, or other consumption of, tangible personal property (TPP), unless specifically exempted. 2)Provides that the SUT must be computed based on the sales price or gross receipts of the TPP, unless specifically AB 1851 Page 3 excluded. 3)Specifies that a portion of the SUT fund city and county government, and authorizes cities and counties to impose additional Transactions and Use Taxes (TUTs). 4)Grants the California Air Resources Board (CARB) authority for monitoring and regulating sources emitting greenhouse gases (GHGs), including the use of market-based compliance mechanisms (cap-and-trade). 5)Requires all moneys, except for fines and penalties, collected by CARB from cap-and-trade, be deposited into the GGRF to be available upon appropriation by the Legislature. 6)Establishes the Air Quality Improvement Program (AQIP) administered by CARB for funding projects related to the reduction of air pollutants and improvement of air quality. Pursuant to the AQIP, CARB established the CVRP to promote the production and use of zero-emission vehicles (ZEVs) and the Hybrid and Zero-Emission Truck and Bus Voucher Incentive Project to help California fleets purchase hybrid and zero-emission trucks and buses. 7)Specifies goals, pursuant to the Charge Ahead California Initiative administered by CARB, to place in service at least one million ZEVs and near-zero-emission vehicles by January 1, 2023. FISCAL EFFECT: The State Board of Equalization's (BOE) fiscal estimate for this bill is currently pending. AB 1851 Page 4 COMMENTS: 1)Author's Statement : The author has provided the following statement in support of this bill: California is at the forefront of battling climate change and reducing greenhouse gas emissions. To achieve the desired greenhouse gas emission reductions that policy makers are striving to reach, a massive increase in zero emission vehicles (ZEVs) sold by California's new car dealers must also take place. Unfortunately California's consumers are not purchasing ZEVs at a rate that will meet the California Air Resources Board's ZEV mandate of 15.4 percent of new vehicles delivered for sale by 2025. In 2015, California's new car dealers sold more than two million new vehicles with a combined 3.1 percent of those sales comprising ZEVs and plug-in hybrid vehicles. The market share for these vehicles dropped from 3.2 percent in 2015. We estimate that 308,000 ZEVs must be delivered for sale in California by 2025; in just nine years this represents 25 percent of all vehicles other than SUVs, pickups and vans. This would be an unprecedented adoption rate for new technology in automotive history. Nations throughout Europe provide massive incentives up to 50 percent of the vehicle's MSRP. In these countries the adoption rate for alternative fueled vehicles is much more favorable than in the US, including California. 2)Arguments in Support : Proponents of this bill state that "the best way to break through to grab a customer's attention is to address the vehicle's price" and that "incentives in the automotive industry always work best when a customer sees the AB 1851 Page 5 rebate applied to the purchase or lease of their vehicle at the dealership." As a result, this bill would "accelerate customer demand" and "help make ZEVs more affordable." 3)Scope of This Bill : This bill provides a partial SUT exclusion for QMVs, and defines "QMVs" generally as vehicles that qualify for either the white or green HOV lane stickers (battery electric, hydrogen fuel cell, and certified compressed natural gas vehicles, or plug-in hybrid electric vehicles, respectively). Some car models considered QMVs include the Tesla Model S, BMW i3, Nissan Leaf, and the Chevrolet Volt. According to the author's office, the intent of this bill is to only provide a SUT exclusion on the sale or lease of new QMVs. 4)SUT Exclusion for QMVs : This bill provides a partial SUT exclusion if a consumer trades in an older vehicle at the time of purchasing a QMV. The exclusion is calculated by subtracting the trade-in value of the older vehicle from the purchase price of the QMV. For example, the Tesla Model S has a manufacturer's suggested retail price (MSRP) of $70,000. If a consumer trades in their old BMW and receives $15,000 for the car, then $15,000 would be excluded for SUT purposes. The consumer would only pay SUT on the differential value, in this case $55,000. Under the 7.5% SUT rate in California, assuming the Tesla Model S is purchased in a local jurisdiction where additional local TUT is not imposed, the consumer would pay $4,125 instead of $5,250 in SUT, a savings of $1,125. 5)What Is a "Tax Expenditure" ? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States 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 AB 1851 Page 6 of forgone revenues). This bill would enact a new tax expenditure program in the form of a partial SUT exclusion for QMVs. 6)Tax Expenditure vs. 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. This can offer taxpayers greater certainty, but it can also result in tax expenditures remaining part of the tax code without demonstrating any public benefit. 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 bill includes a sunset date of January 1, 2026 for both the non-tax related rebate portions of the bill and the SUT exclusion. However, this Committee typically recommends a five-year sunset date on tax expenditures to evaluate whether the benefits outweigh the costs. With regard to ZEVs, gas price increases and technological efficiencies that improve vehicle performance and reduce MSRP may naturally stimulate more demand without need for a long-term tax expenditure. The Committee may wish to consider whether to shorten the sunset date for the SUT exclusion. 7)One More Incentive : Federal, state, and local governments provide a myriad of subsidies for alternative fuel vehicles. There is a federal tax credit of $2,500 to $7,500 for the purchase of an EV depending on its battery capacity. Under the CVRP, ZEV hydrogen fuel cell vehicles qualify for a $5,000 rebate; ZEV battery electric vehicles qualify for a $2,500 rebate; and plug-in hybrid electric vehicles qualify for a $1,500 rebate. Non-cash incentives such as unrestricted AB 1851 Page 7 access to California HOV lanes, reduced reliance on gas, and free parking and recharging at businesses and workplaces also motivate alternative fuel vehicle consumers. In addition to the SUT exclusion, this bill expands on existing rebate and HOV lane incentives, and creates a new incentive for installation of EV charging stations to help alleviate range anxiety, a commonly cited concern deterring more widespread adoption of ZEVs. Although it is unclear what the marginal benefit may be in creating one more incentive for purchasing a ZEV, making the SUT exclusion contingent on trading in an older vehicle may at least help take conventional vehicles associated with high GHG emissions off the road. Similar to how the value of existing tax credit and rebate programs increases with the environmental benefits of the vehicle, the Committee may wish to consider limiting application of the SUT exclusion to transactions in which the traded-in vehicle emits above-average GHG pollutants. 8)Appropriation from the GGRF : The GGRF provides funding for a multitude of state policy priorities including CVRP, energy and water efficiency projects, affordable housing, and mass transit. This bill proposes to add reimbursement of city and county revenue losses resulting from the SUT exclusion to the list, in addition to funding this bill's other provisions. Under existing law, SUT is collected on a 7.5% statewide base rate with a state allocation and a local allocation for cities and counties, with some cities and counties levying additional TUT on top of the base rate. In reducing the sales price of a ZEV, this bill would otherwise cause cities and counties to get a cut of a smaller revenue pool. Although the SUT exclusion would also result in state General Fund revenue loss, this bill does not propose state reimbursement from the GGRF. The California New Car Dealers Association estimates that AB 1851 Page 8 annual expenditures for all the provisions of this bill could range from $750 to $2 billion annually. It is important to note that the Governor's proposed fiscal year (FY) 2016-2017 budget includes a $3.1 billion cap-and-trade plan, $1.2 billion of which is already subject to continuous appropriation. Since expenditures from the GGRF for this bill alone may exceed the account's capacity, the Committee may wish to consider whether alternative or additional funding sources should be identified for the tax expenditure proposed in this bill. 9)Double Referral : This bill was double-referred to the Assembly Committee on Transportation, which passed this bill on April 11, 2016, with a vote of 10-5. For additional discussion of the Clean Vehicle Rebate Program, rebates for EV charging stations, and HOV lane stickers related to this bill, please refer to the analysis prepared by the Assembly Committee on Transportation. 10)Related Legislation : AB 1710 (Calderon) would provide a partial SUT exclusion and a Personal Income Tax credit and deduction for purchasing near-zero or ZEVs. AB 1710 is scheduled to be heard by this Committee today. AB 945 (Ting) would have provided a partial SUT exemption for specified QMVs. This bill was held by the Assembly Committee on Appropriations. REGISTERED SUPPORT / OPPOSITION: Support AB 1851 Page 9 Alliance of Automobile Manufacturers California New Car Dealers Association Opposition None on file Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098