BILL ANALYSIS Ó AB 2055 Page A Date of Hearing: May 9, 2016 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Sebastian Ridley-Thomas, Chair AB 2055 (Gipson) - As Amended April 26, 2016 Majority vote. Tax levy. Fiscal committee. SUBJECT: Income taxation: credits: California competes SUMMARY: Requires that 25% of the California Competes Tax Credit (CCTC) allocation be reserved for taxpayers that make qualified sustainable freight investments, as defined. Specifically, this bill: 1)Requires that each fiscal year (FY), beginning with the 2018-19 FY, 25% of the aggregate amount of the CCTC that may be allocated under the Personal Income Tax (PIT) and the Corporation Tax (CT) laws be reserved for taxpayers that make qualified sustainable freight investments. 2)Defines "qualified sustainable freight investment" as the purchase or installation of zero-emission and near-zero-emission equipment and support infrastructure in a trade corridor. AB 2055 Page B 3)Defines "trade corridor" as a trade corridor that would have been eligible for allocation from the Trade Corridors Improvement Fund pursuant to Section 8879.23(c)(1)(A) of the Government Code. 4)Defines "zero-emission" and "near-zero-emission," consistent with Section 39719.2 of the Health and Safety Code, as vehicles, fuels, and related technologies that reduce greenhouse gas emissions and improve air quality when compared with conventional or fully commercialized alternatives, as defined. "Zero- and near-zero emission" may include, but is not limited to, zero-emission technology, enabling technologies that provide a pathway to emissions reductions, advanced or alternative fuel engines for long-haul trucks, and hybrid or alternative fuel technologies for trucks and off-road equipment. 5)Requires the Franchise Tax Board (FTB) to review the books and records of the taxpayer allocated the credit amount for a qualified sustainable freight investment, as specified, and notify Governor's Office of Business and Economic Development (GO-Biz) of a possible breach of the written agreement, as provided. 6)Requires Go-Biz to use the existing applicable criteria when allocating this credit and to create equivalent criteria for jobs a taxpayer will create or retain under a collective bargaining agreement. 7)Contain legislative findings and declarations regarding California's trade infrastructure needs and incentives for the adoption of zero-emission and near-zero-emission technology at California's public seaports and trade corridors. AB 2055 Page C 8)Takes effect immediately as a tax levy. EXISTING LAW: 1)Allows a credit against the taxes imposed under the CT Law and the PIT Law for each taxable year beginning on or after January 1, 2014, and before January 1, 2025, in an amount as provided in a written agreement between GO- Biz and the taxpayer, based on certain specified factors, including the number of jobs the taxpayer will create or retain in the state and the amount of investment in the state by the taxpayer. The credit is generally referred to as the "California Competes Tax Credit." 2)Authorizes GO-Biz to allocate the California Competes Tax Credit with respect to the FY 2013-14 and each FY thereafter, through and including FY 2017-18. 3)Limits the aggregate amount of the California Competes Tax Credit that may be allocated to taxpayers under both the CT and PIT laws to a certain specified sum per fiscal year. 4)Authorizes the Director of Finance to increase the aggregate amount of the economic development credits that may be allocated to taxpayers each fiscal year by $25 million per FY through the 2017-18 FY, as specified. FISCAL EFFECT: Unknown COMMENTS: AB 2055 Page D 1)The Author's Statement . The author has provided the following statement in support of this bill: "AB 2055 seeks to ensure [that] California has viable options for reducing greenhouse gas emissions in our effort to support the Governor's plan for long-term, environmental sustainability. Governor Brown issued Executive Order B-32-15 in 2015, which directed the creation of a sustainable freight plan with the express goals of transitioning the freight economy to zero-emissions and near-zero-emissions equipment and infrastructure. The Administration has identified the replacement of 100,000 pieces of conventional freight equipment or vehicles with zero-emissions technology as a primary goal of the state. This bill works within the current framework of California Competes Tax Credit, while seeking to serve as a key tool for California's ports to meet the state's environmental objectives." 2)Arguments in Support . The proponents state that investments in California's public ports "will improve our state's economy, grow jobs, improve standards of living, increase state and local tax revenues, and result in a cleaner environment." They assert that, within California's established Trade Corridors, the business community of California, including marine terminal operators and ocean carriers, have made multi-billion dollar investments in environmental improvements and have achieved tremendous successes in reducing air quality impacts at our Seaports. The proponents argue that AB 2055 can help create "win-win investments in our trade corridors, create cost savings, improve our competitiveness, and help grow cargo and jobs while also investing in the environment." 3)The "California Competes" Tax Credit Program . In 2014, AB 2055 Page E Governor Brown signed legislation that reformed California's economic development policies. [AB 93 (Committee on Budget) Chapter 69, Statutes of 2014.] 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 sales and use tax 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 - the wage credit, the sales and use tax exemption, and the California Competes Tax Credit - to $750 million. Existing law also requires that each fiscal year at least 25% of the aggregate credit amount be reserved for small businesses, i.e., a business with $2 million or less in gross receipts, minus returns and allowances. While the CCTC program is scheduled to sunset on January 1, 2025, GO-Biz is only authorized to award this credit to qualified taxpayers until FY 2018-19, up to an annually capped amount. The amount equals $30 million for the FY 2013-14, $150 million for the FY 2014-15, and $200 million for the FY 2015-16, FY 2016-17, and FY 2017-18, plus certain statutorily prescribed adjustments. Out of the $30 million available for allocation in FY 2013-14, $28.9 million was awarded. The CCTC was granted to 30 companies (out of 390 companies that applied), including 11 small businesses. According to the information submitted by the companies that received the credit, approximately 6,000 jobs and more than $2 billion in investment across California will be created as a result of the credit award. The companies represent various industries, including manufacturing, biotech, agriculture, food AB 2055 Page F processing, high tech, etc. In FY 2014-15, the aggregate allocation amount was $151.1 million, of which a total of over $142 million (after adjusting for S-corporation tax law)<1> has been awarded to various companies, including Northrop Grumman, Macy's.com, Inc., Alibaba.com, and Honeywell International, Inc. Finally, as of November 10, 2015, the CCTC Committee has approved, for the FY 2015-16, over $43 million in CCTC awards (as adjusted for S-corporation tax law) to companies such as, for example, IBM Corporation, NerdWallet, Inc., and Pacific Steel Group. 4)A Different Kind of Credit. The CCTC program was designed to retain businesses in California, as well as to encourage businesses to move to California or expand their current in-state operations. Unlike many other existing tax credits, the CCTC is targeted, capped and allocated. In many respects, it is similar to a grant program. GO-Biz is required to allocate and certify the credit, up to a certain prescribed amount every FY. The credit is non- refundable and may be recaptured if the taxpayer fails to satisfy the terms and conditions of a written agreement with Go-Biz. Taxpayers must commit to create a certain number of jobs, make a specified investment in California, and enter into a Tax Credit Agreement with the GO-Biz. The award and the agreement must be approved by the California Competes Tax Credit Committee. The agreement to award credits takes into consideration the number of jobs created, the compensation paid to employees, amount of investment by the taxpayer in California, the amount of unemployment or poverty in the area according to the U.S. census, the overall economic impact of the project, and the extent to which state benefits exceed state costs, among other --------------------------- <1> One-third of the California Competes Tax Credit may be utilized by an S-Corporation to offset the tax on net income at the S-Corporation level (R&TC §23803(a)(1)). The remaining two-thirds is disregarded and may not be used as a carryover for the S-Corporation (R&TC §23803(a)(2)(A)). However, the full amount of the California Competes Tax Credit is also passed through to the S-Corporation's shareholders (R&TC §23803(a)(2)(F)). AB 2055 Page G criteria. In the event that a taxpayer fails to perform under the written agreement, the credit is recaptured. The original legislation that created the CCTC program requires GO-Biz to provide information to FTB regarding the terms and conditions of the written agreements and of any recapture, in whole or in part, of a previously allocated credit. In turn, the FTB must provide to the Joint Legislative Budget Committee, no later than March 1, a report of the total dollar amount of the credits claimed with respect to the relevant fiscal year. This exchange of information is needed to facilitate the implementation of the CCTC program as well as to evaluate its effectiveness. 5)California Global Warming Solutions Act . In 2006, Governor Schwarzenegger signed into law AB 32 (Nunez), Chapter 488, Statutes of 2006, which established an air quality improvement program to help California achieve reductions in greenhouse gas emissions by 2020 that equal the state's emissions levels in 1990. Relative to this goal, in 2015, Governor Brown issued Executive Order B-32-15, which directed the creation of a sustainable freight plan with the express goals of transitioning the freight economy to zero-emissions and near-zero-emissions equipment and infrastructure. Governor Brown directed various state agencies to initiate work on corridor-level freight pilot projects with the State's primary trade corridors that integrate advanced technologies, alternative fuels, freight and fuel infrastructure, and local economic development opportunities. The Administration has identified the replacement of 100,000 pieces of conventional freight equipment or vehicles with zero-emissions technology as a primary goal of the state. 6)California's Ports and International Trade: What is the Problem ? California is a major trade gateway on the Pacific Rim and is home to three of the world's 50 largest ports. Local economies surrounding the ports depend on California's ability to attract and grow its cargo volumes. According to the author's office, California's major seaports in Long AB 2055 Page H Beach, Los Angeles, Oakland, Port Hueneme, Richmond, and San Diego are either "trust grant" ports, i.e., operating on state-owned property, or special districts set up under the California Harbors and Navigation Code. The real property at these ports is publicly owned; however, the ports are operated as enterprises with private revenue streams. The primary form of infrastructure funding comes from revenue bonds secured against future operations or lease revenues. The author states that California's maritime industry has made significant improvements of port infrastructure, upgrading all ships, trucks, cranes, trains, tugs and cargo handling equipment to ensure that they are amongst the cleanest in the word. As a result, the air quality has improved markedly around California's ports. However, their environmental efforts have not been replicated by the competitors in other ports across North America. Many argue that California's ports and their partners are losing cargo because of higher costs, which negatively affects the industry's profits needed to reinvest in newer air quality improvement projects. Some believe that California can further reduce environmental impacts and address the ports' competitiveness by helping our seaports to transition from its more conventional equipment to the next generation of zero-emissions and near-zero-emissions infrastructure and equipment, and consequently, improve ports' emissions profile. 7)What Does This Bill Do ? This bill proposes to reserve 25% of the aggregate annual amount of CCTC allocation to taxpayers that make qualified sustainable freight investments, beginning with the FY 2018-19, and requires the FTB to review the books and records of those taxpayers to ensure compliance. This bill would apply prospectively only and would not impact any of the existing amounts available for allocation through FY 2017-18. 8)Special Treatment ? Taxpayers who would be advantaged by this bill are already able to compete for the CCTC awards. This bill would simply prioritize their applications to ensure AB 2055 Page I adequate CCTC allocations. The author and the industry believe that the proposed set aside is critical in meeting the goal of sustainable freight plan, given the Governor's overall goal for GHG emission reductions. Although existing law already reserves 25% of the CCTC allocation to small businesses, it does so on the basis of the size of the business rather than its main activity. While cognizant of the need for the large-scale sustainable freight investments, Committee staff notes that this bill would favor one industry over another, thereby establishing a precedent for reserving a large amount of CCTC funds to one group of taxpayers the state wishes to subsidize. 9)Related Legislation . AB 961 (Gallagher) would have temporarily increased the aggregate amount of the California Competes Tax Credit that may be allocated to taxpayers by $50 million per fiscal year. AB 961 was held on this Committee's Suspense File. REGISTERED SUPPORT / OPPOSITION: Support Pacific Merchant and Shipping Association (Sponsor) Opposition None on file AB 2055 Page J Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098