BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 445 - Ashburn
Introduced: February 26, 2009
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Enacts an Tax Credit of 6% of the Cost of
Qualified
Property
EXISTING LAW provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
California allowed a Manufacturers' Investment Credit
(MIC) equal to 6% of the amount paid or incurred for
qualified property put in service in the State (SB 671,
Alquist, 1994). Taxpayers engaged in enumerated industries
could claim the credit and could only take the credit for
costs incurred purchasing specified property. Part of the
enabling statute enacted targets for California
manufacturing jobs that must be met for the MIC to
continue; however, the number of manufacturing jobs fell
short of the targets, and the MIC was repealed in 2004.
THIS BILL allows a tax credit of 6% of the cost of
qualified property placed in service in this state. The
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tax credit is based on costs paid for constructing,
renovating, or acquiring property on or after January 1,
2009, must be properly chargeable to the taxpayer's capital
account, including sales and use taxes paid as a separately
stated contract amount, provisions very similar to the MIC.
Qualified taxpayers include businesses described in
Codes 2011 to 3999, inclusive, of the North American
Industrial Classification Manual, 2007 edition. Taxpayers
may take the credit for purchases of qualified property,
which is:
1. Defined by the Internal Revenue Code as
subject to Section 167 depreciation, and must
also be used:
In manufacturing, processing,
refining, fabricating, or recycling of property
at some point in the manufacturing process.
In research and development
To maintain, repair, test, or measure
any Section 167 eligible property
As pollution control that meets or
exceeds standards established by state or local
agencies.
In Recycling
2. Computers and computer peripheral
equipment primarily used to develop or manufacture
prepackaged or custom software.
3. Value of capitalized labor costs subject
to specified requirements
4. In the case of a biotech manufacturer,
activities related to biotechnology establishment,
activities related to space vehicles and parts, and
activities related to space satellites and
communication satellites,
Special purpose buildings and
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foundations constructed for use by the
qualified taxpayer in a manufacturing,
processing, refining, or fabricating process
or as a research and storage facility,
Capitalized labor costs for these
special purpose buildings and foundations,
subject to specific restrictions.
THIS BILL provides that computer software primarily
used in manufacturing, processing, refining, fabricating,
or recycling of property, or used to develop or manufacture
prepackaged or custom software are also eligible for the
credit. The bill excludes furniture, facilities used in
warehouses, inventory, equipment used in the extractive
process, equipment used to store finished products, and any
tangible personal property used in administrative,
marketing, or management.
THIS BILL also allows the credit for qualified
property acquired by or subject to lease by a qualified
taxpayer. The lessor must provide a statement to the
lessee that includes the lessor's original cost for the
qualified property and the amount of the cost of sales and
use tax paid, and make the statement available to FTB. FTB
may disallow the credit if the qualified property is
subsequently leased to another taxpayer.
THIS BILL provides the credit may be carried over for
seven years, or in the case of a small business, nine
years. A small business must have less than $50 million in
gross receipts, $50 million in assets, less than $1 million
in credits, or is engaged in biopharmaceutical activities
and the U.S. Food and Drug Administration has not yet
approved one of its products.
THIS BILL provides that if the property is removed
from the state, disposed of to an unrelated party by the
taxpayer, or used for any purpose contrary to the
requirements of the bill, no credit is allowed, and the FTB
will add the amount of the already claimed credit to tax.
THIS BILL provides that any determination of whether a
pass-through entity is a qualified taxpayer be made at the
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entity level.
THIS BILL provides definitions of its terms, and
grants Franchise Tax Board (FTB) the authority to proscribe
regulations to implement the measure.
FISCAL EFFECT:
According to FTB, SB 445 results in revenue losses of
$285 million in 2009-10, $425 million in 2010-11, $455
million in 2011-12, and $495 million in 2012-13.
COMMENTS:
A. Purpose of the Bill
According to the Author, "this bill would reinstate
the Manufacturing Investment Tax Incentive which expired in
2004. Given the condition of our economy we must do
everything we can to improve California's business
environment and keep jobs and revenues in the State. The
MIC provides a 6% tax benefit for the purchase of equipment
used primarily in manufacturing and research and
development. Such purchases are essential to the growth of
businesses and the creation of new jobs. This legislation
was advised by "Aerospace: States' Incentives to Attract
the Industry", a report by the California Research Bureau.
The bill applies to all industries.
The reinstatement of a manufacturing investment tax
incentive will advance the competitiveness of California's
business environment. Previous state law allowed qualified
taxpayers a Manufacturers' Investment Credit (MIC) equal to
six percent of qualified costs. These costs included
equipment used primarily in manufacturing, refining,
processing, or recycling, as well as equipment used for
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research and development, maintenance and repair. The
credit expired in January 2004.
The MIC will help to increase investment in California
by reducing the net cost of new investment. The credit will
also help California to compete with incentives offered by
other states (most states provide a manufacturing
investment or similar tax credit).
The aerospace industry contributes significantly to
the economy of the state. The industry provides a number of
well-paid jobs and is a spring board of innovation for
other sectors. Historically, California has had a
significant share of the U.S. American aerospace industry.
While California still has the largest share of U.S.
aerospace employment, that share has been steadily
declining.
California has been losing aerospace jobs to other
states. In the 1990s, the state lost about 166,300
aerospace jobs. By 1999, California employment in the
aerospace industry was less than half of what it was in
1986. In 1986 California had almost one third of U.S.
aerospace jobs, in 1990 it was 29 percent, reducing to 22
percent by 1998. In 2006 this share was 19 percent, but
still above the California's share of U.S. average
manufacturing employment (11 percent).
Between 1998 and 2006, the aerospace industry in the
rest of the country lost 12 percent of its workforce, but
California lost more than twice this amount. Most of the
losses took place in aircraft and components manufacturing.
During this period, Washington State's share of U.S.
aerospace employment also decreased, while the number of
U.S. aerospace workers increased for Texas, Arizona,
Georgia, Ohio, and Illinois.
It is evident that California must do more to attract
and keep businesses given the increasingly competitive
domestic market. The business impediments faced by the
aerospace industry have similarly been felt by the broad
array of California's Manufacturing industries. The
reinstatement of the MIC incentive is an important step to
helping California to stop the exodus of important industry
and remain the golden state for the businesses of today and
tomorrow."
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B. Tax Expenditures
California foregoes nearly $50 billion in revenue each
year due to tax expenditures. While some are as American
as apple pie, such as the exclusion from income for pension
contributions and social security benefits, others are
subsidies for other types of economic behavior deemed
preferable by the Legislature, such as the mortgage
interest deduction to spur homeownership, the research and
development credit to stimulate high-paying jobs and new
exciting consumer products and services, and Geographically
Targeted Economic Development Area credits to help
hard-to-hire employees and businesses in economically
distressed areas. Tax expenditures evoke passionate and
complicated debates, chiefly regarding whether state
legislative action to forego tax revenues from specified
taxpayers provides superior benefits than commensurate
direct spending programs or general tax reductions. One
of America's top state and local tax scholars, Richard
Pomp, suggests evaluating tax expenditures as such,
stating:
"A tax expenditure can be viewed as if the taxpayer
actually paid the full amount of tax owed in the
absence of the special provision and simultaneously
had received a grant equal to the savings provided by
the special provision ? a tax expenditure is just one
of a number of ways of providing governmental
assistance and should be reexamined periodically using
traditional budgetary and funding criteria"<1>
SB 445 seeks to lower the cost of capital goods for
California firms involved in manufacturing, research and
development, and computer software development, among
others. Quite different from direct spending measures, the
Legislature may only limit, reduce, or eliminate tax
credits by 2/3 vote of each house of the Legislature, the
Committee may wish to consider a sunset provision for SB
508 should the measure advance from the Committee's
------------------------
<1> Pomp, Richard D. "Rethinking State Tax Expenditure
Budgets," in Public Budgeting and Financial Management
5(2), 337-351 (1993).
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suspense file.
C. Rinse and Repeat
Tax incentives to aid manufacturing and research and
development evoke heated debates. Many argue that tax
credits lower the cost of capital, thereby leading to
increased investments in the state in people and productive
infrastructure. Critics assert that investment credits
reward investments that would've occurred anyway, and drain
the state budget at a time of fiscal calamity. Tax credits
for manufacturing equipment reduce taxes for businesses
that purchase more advanced machinery, which increases
productivity and likely profitability. However,
productivity increases are a double-edged sword: by making
firms more productive with better machinery, businesses
need fewer and fewer people to do the work now done by
machines. California's MIC expired after falling short in
2003 of its statutorily required target, that California
exceed by 100,000 jobs in each year the number of jobs the
total employment in California in 1994. Perhaps failure to
meet the target was enhanced productivity, but could also
be attributable to larger changes in manufacturing job
trends that show manufacturing jobs leaving higher-cost,
higher-tax jurisdictions for areas with much lower labor
costs and substantial capital grants.
Given that California's previous experiment with the
MIC failed to yield increased jobs despite its significant
fiscal cost (generally between $300 and $450 million per
year), why should the Legislature reenact the MIC? What is
different about today's economy that will cause a MIC to
have a more significant impact that the last go-around.
Additionally, given the numerous tax incentives granted by
the Legislature in the last seven months, including credit
sharing, net operating cost carrybacks, homebuyer and
motion picture production tax credits, and sales-factory
only apportionment, what is the marginal impact a MIC would
make to a company's citing or hiring decisions?
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Support and Opposition
Support:Lockheed Martin Corporation
California Taxpayers' Association
BIOCOM
Oppose:California School Employees Association
California Tax Reform Association
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Consultant: Colin Grinnell