BILL ANALYSIS
AB 2687
Page 1
Date of Hearing: April 19, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2687 (Bradford) - As Introduced: February 19, 2010
Majority vote. Fiscal committee.
SUBJECT : Trade infrastructure investment credit: cargo
transportation tax credit: port facility use and improvement.
SUMMARY : Allows, for taxable years beginning on and after
January 1, 2011, and before January 1, 2021, a trade
infrastructure investment (TII) tax credit and an import-export
cargo (IEC) tax credit to corporate taxpayers that invest in,
and use, public port facilities in California. Specifically,
this bill :
1)Allows a TII tax credit against "tax," as defined in Revenue
and Taxation Code (R&TC) Section 23036, for an amount equal to
no more than 5% of the total capital costs of each qualifying
project.
2)Provides that the TII tax credit shall be earned at the time
the total capital costs are identified by an investing
taxpayer in a qualified project. No tax credit may be earned
for capital costs expended prior to January 1, 2011, and may
not be applied against a tax liability until the project
receives certification from the Franchise Tax Board (FTB).
3)Prohibits FTB from certifying the project as a qualified
project unless FTB determines that there will be sufficient
revenue received by the state as a result of improved economic
activity caused by the project to offset the cost to the state
of providing the tax credit.
4)Delays the allowance of the TII tax credit until the FTB has
given notification of the amount that may be claimed by the
taxpayer, which may not exceed 5% of the total project capital
costs, for the current taxable year.
5)Specifies that the amount available to be applied to a project
shall be equal to the project's share of the total cost of the
credit, as determined by the Legislature, based on each
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project's percentage of the total amount of project capital
costs certified by the FTB as of July 1 of each taxable year.
6)Requires the FTB to make all required notifications within 90
days of an appropriation by the Legislature for the purpose of
funding the tax credit, or, if no appropriation is made,
within 90 days of the adoption of a state budget.
7)Authorizes FTB to audit a qualifying project and inspect the
construction site of the qualifying project.
8)States that, if the FTB finds that funds for which an
investing company received the TII tax credit are not invested
in and expended with respect to the capital costs of a
qualifying investment, the investing company's tax for that
taxable year shall be increased by an amount necessary for the
recapture of credit provided by this bill.
9)Defines "capital costs" as all costs and expenses incurred by
one or more investing taxpayers in connection with the
acquisition, construction, installation, and equipping of a
qualifying project, including an environmental mitigation
undertaken specifically to reduce the impacts of a qualifying
project, during the period commencing with the date on which
the acquisition, construction, installation, and equipping and
ending on the date on which the qualifying project is placed
in service.
10)Defines "export" as any breakbulk or containerized cargo
which is shipped in interstate or foreign commerce from the
State of California to a foreign country or a domestic
noncontiguous state or territory via oceangoing vessel.
11)Defines "import" as any breakbulk or containerized cargo
which is shipped in interstate or foreign commerce to the
State of California from a foreign country or from a domestic
noncontiguous state or territory via oceangoing vessel.
12)Define "investing taxpayer" as a taxpayer corporation,
partnership, limited liability company, proprietorship, trust,
or other business entity, regardless of form, making a
qualified investment.
13)Defines "qualifying project" as a project to be undertaken by
one or more investing taxpayers that has a capital cost of not
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less than $5 million and at which the predominant trade or
business conducted will constitute industrial, warehousing, or
port and harbor operations and cargo handling, including any
port or port and harbor activity, and which certified by FTB.
14)Provides definitions of "breakbulk cargo," containerized
cargo," "oceangoing vessel," "port or port and harbor
activity," "project," "public port," and "qualifying
investment."
15)Requires an investing taxpayer seeking certification of a
qualifying project to submit an application to the FTB, as
prescribed, and pay a fee to the FTB to cover FTB's costs of
reviewing and evaluating the project application.
16)Requires FTB to submit a notice of its certification of a
project to the Department of Finance, the Joint Legislative
Budget Committee, and the Legislative Analyst Office (LAO).
17)Requires LAO to prepare an evaluation of the effectiveness of
the TII tax credit, as prescribed.
18)Allows an IEC tax credit against the "tax," as defined by
R&TC Section 23036, of an amount equal to no more than the
product of $5 and the taxpayer's number of tons of additional
qualified cargo.
19)Provides that the project may not be certified unless the FTB
determines that there will be sufficient revenues received by
the state as a result of the economic impacts from the project
to offset the cost to the state of providing the tax credit.
20)Requires a qualified business entity seeking certification of
a qualified cargo to submit an application to the FTB, as
prescribed, and pay a fee to the FTB to cover the costs of the
FTB's review and evaluation of the project application.
21)Requires FTB to notify a qualifying business entity with
additional qualified cargo applications submitted prior to
July 1 of each taxable year within 90 days of an appropriation
by the Legislature for the purposes of funding the tax credit,
or, if no appropriation is made, within 90 days of the
adoption of a state budget.
22)Specifies that, in cases where the TII or IEC credit allowed
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by this section exceeds the "tax," the excess may be carried
over to reduce the "tax" in the following year, and the 10
succeeding years if necessary, until the credit is exhausted.
23)Provides that, if the FTB find that any claims regarding
additional cargo for which a qualified business entity
received credits according to the provisions of this section
were inaccurate, the qualified business entity's tax for that
taxable period shall be increased by an amount necessary for
the recapture of credit provided by this bill.
24)Defines "additional cargo" as the amount of qualified cargo
moved in the current taxable year over and above the cargo
moved in the previous taxable year.
25)Defines "qualified business entity" as a taxpayer
corporation, partnership, limited liability company, or other
commercial entity, whose activities involve the import or
export of breakbulk or containerized cargo to or from cargo
facilities located within California.
26)Defines "qualified cargo" as any break-bulk or containerized
cargo which is imported or exported to or from a
manufacturing, fabrication, assembly, distribution,
processing, or warehouse facility located in California and
which is transported by an oceangoing vessel berthed at a
public port facility in California.
27)Defines "ton" as a net ton of 2,000 pounds and in the case of
containerized cargo it shall exclude the weight of the
container.
28)Requires FTB to develop a dynamic revenue anticipation model
designed to estimate the following economic impacts from the
completion of a qualifying project and additional qualifying
cargo:
a) The total state tax revenues generated by the project.
b) The total local and user fee revenues generated by the
project.
c) The total jobs created by the project and
project-related economic activity, including the impact of
project on the employment of California residents.
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d) The impact of the qualifying project on the overall
economy of the state.
29)Allows a taxpayer to use a TII and an IEC tax credit to
offset the taxpayer's tentative minimum tax.
30)Is repealed on December 1, 2021.
EXISTING LAW:
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices and decisions.
2)Allows a depreciation deduction for the obsolescence or wear
and tear of property used in the production of income or
property used in a trade or business. The amount of the
deduction is determined, in part, by the cost (or basis) of
the property.
3)Includes in the definition of "depreciable property"
equipment, machinery, vehicles, and buildings, but excludes
land.
FISCAL EFFECT : FTB staff estimates that the cost of developing
and operating the dynamic revenue model will result in a revenue
loss of $157,000 for fiscal year (FY) 2010-11 and $85,000 yearly
thereafter. FTB staff estimates a revenue loss of $32 million
in FY 2010-11, $130 million in FY 2011-12, and $180 million in
FY 2012-13. These fiscal estimates do not consider the possible
change in employment, personal income, or gross state product
that could result from this bill. Specifically, this analysis
does not take into account the additional tax revenue that might
be generated by qualified private capital expenditures on public
port facilities, or the import-export cargo.
COMMENTS :
1)Author's Statement . The author states, "What California needs
now more than ever is steady growth in the creation of new
high-wage, blue collar jobs. AB 2687 will help create new
incentives for the creation of these jobs, and in the process
build the infrastructure and environmental improvement
projects necessary to compete in the global trade marketplace.
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In addition to investing in infrastructure and mitigating
environmental impacts, these projects will also grow our
State's general fund through the tax revenues created by the
economic impacts from shipping and goods movement. This bill
will improve the economic well-being of our citizens and our
state itself. With AB 2687, we can be fiscally responsible -
as the State's general fund is protected - and provide
incentives to create job. Other states and countries are
trying to steal jobs, investment and cargo from California. I
introduced AB 2687 to create at least one set of tools to
fight back against this drain on California's workforce. I
will continue to look for win-win situations where we can
fight for jobs and opportunities for our working families,
continue to improve our environment, and help alleviate the
State's challenging budget situation."
2)Arguments in Support . Proponents of this bill state that AB
2687 is critical to incentivizing development in new port and
harbor infrastructure for California's ports. Ports are a
vital part of California's economy, allowing department
stores, supermarkets, drug stores, mass merchandise and
convenience stores the ability to properly run their
businesses. The proponents also argue that, in addition to
helping business, California receives environmental benefits
from this bill. Specifically, there are environmental
benefits linked to the creation of newer, more efficient
terminal and port facilities along with the direct
environmental improvements. This bill will help reduce
emissions at the ports while also creating jobs that will
improve California's competitiveness. Finally, the proponents
assert that the TII and IEC tax credits will be awarded only
if California's General Fund receipts are increased as a
result of the program.
3)Arguments in Opposition . Opponents of this bill state that a
tax credit for capital investments is unnecessary because
California has the ability to issue revenue bonds for a port
development. If these other methods of financing are
inadequate, California may wish to find funding by eliminating
other tax expenditures to pay for a potential loss to the
General Fund.
4)Background: AB 2687 creates two unique programs. The TII tax
credit incentivizes private investment in California's public
port infrastructure and the IEC tax credit is designed to
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encourage cargo growth originating in, or destined to,
California. These measures are not traditional tax
expenditures in the sense that they would be subject to
multiple fiscal accountability controls. These incentive
programs have been proposed in response to the state's severe
unemployment rate, the declining international cargo volumes
in California's public ports, environmental challenges, and
trade competitiveness with other states and around the world.
a) Cargo Volume Decline. California's major public ports
saw trade peak in 2006, then decline in 2007 while the
economy as a whole continued to grow. In 2007, of the
world's 50 largest container ports only two failed to post
positive growth numbers - Los Angeles and Oakland.
California is a major trade gateway on the Pacific Rim and
is home to three of the world's 50 largest ports. The
local economies surrounding the ports depend on
California's ability to attract and grow its cargo volumes.
In 2009, the port moved about 2.5 million fewer containers
than in the year before, the equivalent of shutting down
the country's fourth busiest seaport - Savannah, Georgia -
for the entire year. Though some of the decline in volume
is due to the overall economy, California seaports will
soon have to face increased competition on the Pacific Rim
and around the world.
b) Competition. Some of the decline in volume is due to
the economy, but one cannot ignore the growing competition
around the world. On the West Coast, Canada is
aggressively marketing its mega port in Vancouver and new
port facilities in Prince Rupert, specifically highlighting
the economic and time advantages over Southern California
ports. Mexico is also beginning to compete against
American ports. With rail connections in the near future
to the United States (U.S.) and partnerships with Texas
ports, Mexico presents a viable alternative. The biggest
competition, however, may come from improvements to the
Panama Canal. In 2014, a $5.25 billion expansion of the
Panama Canal will be completed. The new expansion will
allow larger ships to move through the canal, allowing for
a bigger share of Asian container freight directly through
to the eastern U.S. The improvement will allow companies
to bypass the California ports by moving a bigger share of
Asian container freights directly through to the eastern
U.S. Currently, large ships are offloaded in California
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and then trucked or railed to its destination. California
ports will likely see a decline in cargo volume because of
growing competition from West Coast ports (Canada and
Mexico) and new improvements to the Panama Canal that may
render a portion of services by California ports
unnecessary.
c) Capital Investments . Ports on the East Coast and in the
Gulf of Mexico have already devoted billions in
anticipation of the Panama Canal improvements.
i) $600 million to expand and upgrade New York and New
Jersey's port rail system, allowing trains to move 1.5
million containers a year when completed in 2012.
ii) $2.2 billion in order to develop a Marine Terminal
with cargo capacity for an additional 2.5 million
twenty-foot equivalent units (TEU).
iii) $80 million by the South Carolina Port Authority to
projects that will help increase the capacity of its port
facilities, most of which are located in Charleston.
iv) $21.7 million was given to the Port of Savanna by
the federal government in order to expand and maintain
its harbor in 2009.
v) $300 million was spent in 2008 by the Port of Mobile
on opening its second container terminal. It is also
working on $75 million intermodal facility.
vi) Jacksonville Port officials recently completed
building two new container terminals that will
accommodate up to an additional two million TEU's.
vii) The State of Louisiana passed a tax credit
investment plan that would finance port and trade related
investments through a new public-private partnership in
2009.
5)Louisiana Investment Credit. AB 2687 is largely modeled after
the Louisiana Investment Credit. Louisiana provides for a $5
per ton cargo credit as well as a tax credit for private
port-related projects of up to 5% of the total capital costs
per year. The Louisiana tax credit is designed to finance
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port and trade related investments through new public-private
partnerships. Under Louisiana law, the state tax credit is
issued only if it is reasonably demonstrated that the project
will generate enough revenue to offset the cost of the tax
credit. Tax credits provide an alternative to direct
investments and are awarded only if project investments create
a positive return on investment to the general fund.
6)Dynamic Revenue Model. Under this bill, no project is
eligible for the TII tax credit unless and until the FTB
certifies the project as "qualifying." No project will be
certified unless the FTB determines that the proposed project
will generate sufficient revenue for the state to offset the
cost of tax credits provided, i.e. the amount of foregone tax
revenues. FTB is charged with developing a dynamic revenue
anticipation model designed to estimate total state tax
revenues, total local tax and user fee revenues, total job
growth, and the impact on the overall economy that the project
will generate. It is unclear, however, how or if job growth
and the overall impact on the economy will be considered by
FTB in estimating revenues to the state generated from a
qualifying project. For example, capital improvements may
increase port efficiency by reducing the number of workers.
Thus, increased cargo volume due to greater efficiency may
generate more state revenue despite lack of job growth.
7)Lag Time. This bill does not specify how quickly the revenues
have to be generated by a project. For instance, a project
may cost the state $5 million during year one, but the state
may not see the offsetting revenues until year seven.
Committee staff suggests that this bill be amended to clarify
the "turn around" time, if any, for the receipt of these
increased revenues.
8)No Guarantee for Estimates . Estimates are never perfect. FTB
cannot guarantee that a tax credit under this bill will
generate enough revenue to offset the cost to the state for
providing a tax credit. It is important to note that this
bill has the potential of awarding a tax credit for a
qualified project that may not, in reality, increase revenues
to the state.
9)Oversight of a Qualifying Project - Protecting Public Revenue.
This bill does not provide a procedure to identify or correct
errors in FTB's revenue estimates after a tax credit has been
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awarded. The dynamic revenue model only estimates values
based on certain assumptions. The assumptions and factors are
not holistic. It would be impossible to truly consider all of
the many factors necessary to adequately predict future
revenues from California port improvements. Imperfections
leave open the possibility that a company may receive a tax
credit even if the state loses money. This bill, however,
gives no procedure for identifying or correcting such an
error. The purpose of this bill and the dynamic revenue model
is to assure that investments in California ports will
generate enough revenue to offset a tax credit. Without
periodically assessing a project, FTB has no way of ensuring
that its estimates and the projects are improving the overall
economy of California.
10)Appropriation for a Tax Credit. It appears that both the TII
and IEC tax credits are intended to be structured as
"allocated tax credits" subject to legislative oversight. As
written, however, this bill provides for an appropriation of a
tax credit. By definition, a tax expenditure does not fall
within the category of an item of appropriation. An
appropriation is a statute giving a state officer authority to
expend an ascertainable sum of money for a particular purpose,
whereas a tax expenditure is a benefit granted to a taxpayer
by means of a reduction in the amount of taxes the taxpayer
otherwise owes to the state.
If the author wishes to award grants to certain qualifying
projects by appropriating funds on a yearly basis, the "tax
credit" language should be eliminated in order to reduce
confusion. If the author wishes to provide a tax credit, the
"appropriation" language should be eliminated because a tax
credit is not an appropriation. Alternatively, if the author
wishes to provide "an allocated" tax credit, the author may
wish to amend this bill to clarify the methods by which the
Legislature will limit the aggregate amount of the TII and IEC
tax credits allowed for a particular year.
11)Which Taxpayers Qualify for TII and EIC Tax Credits? This
bill allows a tax credit against the "tax" as defined in R&TC
Section 23036. Thus, by definition, only corporate taxpayers,
i.e. "C" or "S" corporations, are eligible to apply for the
credit. However, one of this bill's provisions defines an
"investing taxpayer" as a corporation, partnership, limited
liability company, proprietorship, trust, or other business
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entity, regardless of form, making a qualified investment. If
the author intends to allow TII and EIC tax credits to
taxpayers other than corporations, Committee staff recommends
amending this bill to clarify the author's intent and
eliminate any confusion.
12)Litigation. This bill gives a lot of discretion to FTB,
allowing it to determine the cost associated with a qualified
project, the design of the dynamic revenue model, and the
pertinent factors in deciding whether the tax credit should be
awarded. At the same time, this bill does not provide a clear
guidance on the factors to be used by FTB in its evaluation
process of a project prior to awarding a tax credit. The
uncertainty and lack of guidance may lead to litigation
between FTB and private investors who have been denied a tax
credit.
13)FTB Implementation Concerns:
a) Timing of the Tax Credit. It is unclear as to when the
tax credit would actually be allowed. It appears that the
tax credit could be allowed before expenditures are
actually paid or incurred. It is also unclear whether the
taxpayer would receive the entire tax credit in one year or
multiple years without regard to when the expenses are
incurred.
b) Dynamic Revenue Anticipation Model. The dynamic revenue
model is a complex computer model used by economists. This
bill is silent regarding where the state government model
would be created and where it would reside. Staff would
need to be trained in the specific skills to evaluate the
model and its results. This model would not be a
traditional dynamic revenue model because it would ignore
consideration of other economic impacts and would only
consider the four economic impacts as specified. Thus, the
model would not accurately measure the magnitude of each of
the responses to tax changes as they propagate throughout
the economy.
c) Job Growth. Assessing the employment impacts would be
beyond the scope of FTB's expertise. The Employment
Development Department possesses the relevant expertise
appropriate to the subject.
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d) Multiple Claims. Under this bill, multiple taxpayers
would be able to claim the TII tax credit for the same
qualifying project, limited only by the total aggregate
capital costs of that project. California would be
providing a 100% tax credit, which is unprecedented for a
project owned by investors.
REGISTERED SUPPORT / OPPOSITION :
Support
Industrial Environmental Association
Matson Navigation Company
Pacific Merchant Shipping Association
California Retailers Association
California Association of Port Authorities
Opposition
California Tax Reform Association
Analysis Prepared by : Carlos Anguiano / Oksana Jaffe / REV. &
TAX. / (916) 319-2098