BILL ANALYSIS                                                                                                                                                                                                    






                                                                    AB 2055


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          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. 











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          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.











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          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:  











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           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,  











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            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  











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            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)).










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            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  











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            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  











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            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













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          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098