BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1338 |Hearing |4/27/16 |
| | |Date: | |
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|Author: |Lara |Tax Levy: |Yes |
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|Version: |4/4/16 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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Sales and use taxes: exemption: zero-emission and
near-zero-emission equipment
Provides a partial sales and use tax exemption for zero and near
zero-emission port equipment.
Background
California law allows various income tax credits, deductions,
and sales and use tax exemptions to provide incentives to
compensate taxpayers that incur certain expenses, such as child
adoption, or to influence behavior, including business practices
and decisions, such as research and development credits. The
Legislature typically enacts such tax incentives to encourage
taxpayers to do something that but for the tax credit, they
would not do. The Department of Finance is required to annually
publish a list of tax expenditures.
State law imposes a sales and use tax (SUT) on the sale,
storage, or use of tangible personal property unless exempted by
state law. Cities and Counties may increase the SUT rate up to
2% as a transactions and use tax for either specific or general
purposes with a vote of the people.
The current state SUT is 7.5%, but beginning January 1, 2017,
the state SUT rate on tangible personal property will be 7.25%
and imposed as follows:
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| | | |
| Rate | Jurisdiction | Purpose/Authority |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|3.9375%|State (General |State general purposes |
| |Fund) | |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|1.0625%|Local Revenue Fund |Realignment of local public |
| |2011 |safety services |
| | | |
| | | |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.50% |State (Local |Local governments to fund |
| |Revenue Fund) |health and welfare programs |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.50% |State (Local Public |Local governments to fund |
| |Safety Fund) |public safety services |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 1.25% |Local (City/County) | |
| | | |
| | | |
| |1.00% City and |City and county general |
| |County |operations. |
| | | |
| |0.25% County | |
| | |Dedicated to county |
| | |transportation purposes |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 7.25% |Total Statewide | |
| |Rate | |
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| | | |
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State law fully exempts many items from SUT (prescription drugs,
food, poultry litter), while other items are exempted from the
state sales tax, but not the local share, such as farm equipment
and machinery, diesel fuel used for farming and food processing,
teleproduction and postproduction equipment, timber harvesting
equipment and machinery, and racehorse breeding stock.
Proposed Law
Senate Bill 1338 provides a partial sales and use exemption for
zero and near zero-emission port equipment. Specifically this
bill:
Provides a General Fund (3.9375%) sales and use tax
exemption for "qualified tangible personal property"
purchased by a "qualified person" to be used "primarily"
in, at, or on a marine terminal of a California public port
for carriage, handling, or movement of freight, cargo, and
goods.
Defines "qualified tangible personal property" as any of
the following:
o Zero-emission or near-zero-emission equipment
used in conjunction with the movement of goods or
freight, including computers, data-processing
equipment, and computer software required to operate,
control, regulate, or maintain the qualified
equipment.
o Parts used for the repair and replacement of
qualified equipment with a useful life of one or more
years.
o Special purpose buildings and foundations used
as an integral part of the utilization process of
zero-emission or near-zero-emission equipment.
o Leases of qualified tangible personal
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property.
Defines "primarily" as 50 percent or more of the time.
Defines "qualified person" as a stevedore, marine
terminal operator, operator of a port or freight yard, or
any other person that is engaged in cargo and freight
loading, delivery, movement, storage, and conveyance at or
within a California public seaport.
Defines "Zero-emission or near-zero-emission equipment"
means equipment, vehicles, and related technologies used at
a California public seaport that reduces or eliminates
greenhouse gas emissions and improves air quality as
identified by the State Air Resources Board in consultation
with the State Energy Resources Conservation and
Development Commission. Additionally, "zero-emission and
near-zero-emission equipment" may include advanced or
alternative fuel engines and hybrid or alternative fuel
technologies for seaport equipment.
The exemption will not apply if, within one year from the date
of purchase, the qualified person (1) uses the qualified
property in a manner not qualifying for the exemption, (2)
converts the qualified property from an exempt use to a
non-qualifying use, or (3) removes the qualified property from
California.
The bill contains reporting requirements and makes Legislative
findings.
SB 1338 applies to taxable years beginning January 1, 2017, and
until January 1, 2030.
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State Revenue Impact
According to the Board of Equalization (BOE), SB 1338 results in
yearly revenue losses of $4.6 million.
Comments
1. Purpose of the bill. According to the author, "The
California economy is largely dependent on international trade
and commerce. The state is home to three of the largest ports in
the nation, located in Los Angeles, Long Beach, and Oakland, and
eight smaller public-owned ports situated from Humboldt Bay and
south to San Diego. More than 40% of containerized cargo
arriving in the United States enters through the state's 11
seaports. The Southern California region allows for the
quickest, direct shipping routes to the Pacific Rim. 75% of
total container volume coming through the Ports of Los Angeles
and Long Beach come from East Asia alone. However, greenhouse
gas emissions from the transportation sector continue to impact
public health throughout the state. According the American Lung
Association's State of the Air 2016 report, the Los Angeles
region leaders the nation in harmful ozone pollution. Simply
put, air quality degradation, congestion, and additional
infrastructure impacts cripple not only the economic viability
of a region, but also the health and quality of life for those
living in communities situated in high volume transportation
corridors. Capital expenses associated with the procurement of
the latest zero-emission or near-zero emission cargo handling
equipment is in the tens of billions of dollars. Replacing
current equipment at the ports of Los Angeles, Long Beach, and
Oakland is estimated to cost $23 billion. Smart investments to
offset and eliminate negative environmental impacts from freight
transport positions the state to work towards achieving clean
energy and climate goals established by landmark legislation
such as AB 32 (Nunez, Chaptered 2006) and SB 350 (De Leon,
Chaptered 2015). To that end, the state has a critical role in
assisting California ports transition from the more conventional
to next generation infrastructure to improve the public health
of communities in and around our goods movement sector."
2. A new tax expenditure. Existing law provides various
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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). This bill would create new tax expenditure, costing
the general fund almost $4.6 million dollars in foregone revenue
each year. The tradeoff for providing new tax expenditure,
resulting in revenue losses, is higher taxes or reductions to
other services or programs.
3. How is 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. This can offer taxpayers greater certainty,
but it can also result in tax expenditures remaining a 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, 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, without a supermajority vote.
4. Incentive? Generally, tax expenditures are enacted to
encourage socially beneficial behavior that would not take place
without a financial incentive. This bill instead provides a
sales and use tax exemption for behavior that is outlined in
Executive Order B-32-15. In July of 2015, Governor Brown issued
the Executive Order B-32-15 directing the California State
Transportation Agency, the California Environmental Protection
Agency, and the Natural Resources Agency to lead other relevant
state departments, including the California Air Resources Board,
the California Department of Transportation, the California
Energy Commission, and the Governor's Office of Business and
Economic Development, to develop an integrated action plan by
July 2016. The plan must establish clear targets to improve
freight efficiency, transition to zero-emission technologies,
and increase competitiveness of California's freight system,
which includes California's seaports. Given that California is
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moving towards requiring zero and near zero-emission vehicles
and equipment, it is unclear whether the tax incentive
ultimately encourages new behavior or rewards behavior that was
going to occur anyway.
5. Moving in the right direction. The ports of Los Angeles and
Long Beach are the busiest in the nation and generate more air
pollution than any other facility in the Los Angeles Basin. In
2006, the ports of Long Beach and Los Angeles together adopted
the landmark Clean Air Action Plan (CAAP). The CAAP focuses on
strategies to reduce health risks to communities surrounding the
ports by reducing air pollutants. Both the ports of Los Angeles
and Long Beach have each reduced diesel particulates by over 80
percent, but more needs to be done. According to the Air
Resources Board, despite substantial progress over the last
decade, the remaining localized risks of cancer and other
adverse effects near major freight hubs must be significantly
reduced. Infants and children are 1.5 to three times more
sensitive to the harmful effects of exposure to air toxics, like
those emitted from freight equipment, than previously
understood, which heightens the need for further risk reduction.
6. Administrative burden. Currently, most sales and use tax
exemptions are applied to the total applicable sales and use
tax. However, several partial exemptions exist in which only
the state tax portion of the sales and use tax rate is exempted,
such as the farm equipment and teleproduction equipment
exemptions. These partial exemptions are difficult for both
retailers and BOE, and complicate return preparation and
processing. Moreover, errors attributable to these partial
exemptions occur frequently, resulting in additional return
processing workload for BOE.
7. Let's get clear. Several terms in the bill may need to be
clarified. For example, a "qualified person" includes
stevedores, marine terminal operators, operators of a port or
freight yard, or any other person engaged in cargo and freight
loading, delivery, movement, storage, and conveyance at a
California public seaport. Since a freight yard may include a
rail yard, is the proposed exemption intended to apply to any
freight yards located in California that receive cargo from a
California public seaport? Would the freight yard have to be
contained within the boundaries of the California port or
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operate as an intermodal rail yard? The Committee may wish to
consider amending the bill to reduce potential disagreements
between taxpayers and BOE.
Support and
Opposition (4/21/16)
Support : Bay Area Air Quality Management District; Breathe
California; California Electronic Transportation Coalition;
California League of Conservation Voters; Coalition for Clean
Air; Environment California; Environmental Defense Fund; Move
LA; Natural Resources Defense Council; Pacific Merchant Shipping
Association.
Opposition : Unknown.
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