BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                    AB 1851


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          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  








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            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  








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            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.  










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          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  








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            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  








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            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  








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            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  








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            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









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          Alliance of Automobile Manufacturers 


          California New Car Dealers Association




          Opposition


          None on file




          Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098