BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 464 - Strickland
Introduced: February 26, 2009
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Enacts a Tax Credit for Purchasing Equipment to
Meet Off-Road Diesel Regulations
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.
EXISTING LAW authorizes the California Air Resources
Board (CARB) to regulate emissions of criteria pollutants
and generally protect air quality and public health. As
part of this effort, CARB enacted regulations limiting
emissions from off-road diesel engines of 25 horsepower or
greater, often used in the construction, agricultural, and
goods movement industries. To comply with the regulations,
many business owners must purchase verified diesel emission
control strategies (VDECS).
THIS BILL enacts a tax credit equal to 5% of the
amount paid or incurred to purchase qualified property used
to meet the CARB off-road diesel equipment regulations, not
to exceed $10,000. The taxpayer must obtain and retain a
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letter from CARB certifying that the qualified property
assists in meeting the regulations, and provide that letter
to the Franchise Tax Board (FTB) upon request. The tax
credit may be carried over to subsequent years, but sunsets
on January 1, 2019.
FISCAL EFFECT:
According to FTB, SB 464 has no revenue impact in
2009-10 and 2010-11, but results in revenue losses of $7.5
million in 2011-12. The delayed revenue effect is
attributable to modified CARB regulation compliance
deadlines (See Comment B below).
COMMENTS:
A. Purpose of the Bill
According to the Author, "In 2000, the California Air
Resources Board (CARB) adopted a comprehensive Diesel Risk
Reduction Plan to reduce diesel emissions from new and
existing diesel-fueled engines and vehicles. Regulations
were adopted by the CARB on July 26, 2007 to reduce diesel
particulate matter (PM) and nitrogen oxide (NOx) emissions
from engines used in off-road equipment. These regulations
became effective on June 15, 2008. The CARB plan seeks to
reduce PM emissions by approximately 90 percent for new
vehicles. Existing diesel engines and vehicles would be
required to implement retrofit technology and there would
be accelerated turnover of fleets to newer, cleaner
engines. Compliance dates for the fleets range from 2010
to 2015 depending on the size of the fleet. The largest
fleets (over 5,000 horsepower of affected vehicles) must
comply first. Compliance will be extremely difficult for
the fleet owners because there are only a few manufacturers
currently making equipment certified by the CARB. The
equipment is extremely limited and does not address the
various makes and models that require the retrofit. If the
fleet owners are not able to make the necessary changes to
the engines, then the equipment will have to be retired.
This means, equipment purchased at tens of thousands of
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dollars is sold at a loss to out of state buyers or
equipment is scrapped. Achieving cleaner engines is a
laudable goal, but we must give the operators the resources
to meet the goal. The state cannot expect compliance nor
punish noncompliance when the technology to meet the goals
is not yet available."
B. Carrots and Sticks
Responding to public health concerns and the state's
persistent non-attainment of federal ambient air quality
standards, CARB issued regulations on July 27, 2007 that
require off-road diesel engines to substantially reduce
emissions by establishing fleet average emission rates for
PM and NOx that decline over time. Each year, the
regulation requires each fleet to meet the fleet average
emission rate targets for PM or apply the highest level
VDECS to 20 percent of its horsepower. In total, the
regulation is expected to reduce 187,000 tons of NOx
emissions and 33,000 tons of PM emissions between 2009 and
2030. The regulations take effect for large fleets (5,000
hp of vehicles and above) in 2010, and apply to smaller
fleets in subsequent years.
According to CARB, emissions from off-road diesel
engines constitute up to one quarter of particulate matter
(PM) and nitrogen oxide (NOx), pollutants that cause
respiratory illness and premature death. While the
regulation will surely enhance air quality and public
health, businesses will certainly incur significant costs
for businesses to purchase and install compliant VDECS in
most cases. CARB's analysis indicates that regulation will
incur more than $3 billion in costs. If businesses do not
comply, CARB may levy civil penalties, swatting those who
do not follow the law with a stick. SB 464 seeks to offer
a carrot, instead granting a tax credit to taxpayers who to
purchase VDECs. With a tax credit, affected businesses pay
less tax if it purchases the technology; however, the
revenue foregone due to enacting the credit comes at the
expense of the rest of the state's taxpayers, who must pay
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higher or taxes or receive lower levels of service but for
the credit. Should the public benefit of better air
quality justify funding a tax credit that helps a business
that operates off road diesel engines meet its regulatory
responsibilities, or are the regulations sufficient to
accomplish the public policy goal? The Committee may wish
to consider whether granting a tax credit to firms affected
by the regulation is a commensurate response to the costs
incurred to business and the attendant public benefits of
improvement to air quality.
C. Odds and Ends
FTB and Committee Staff point out the following
implementation considerations:
SB 464 measure does not specify whether
the credit is allowed per year, per vehicle, or
per taxpayer. The credit is neither related to
the actual costs incurred by the CARB regulation
nor the firm's ability to meet those costs.
The bill does not specifically require
that the qualified property be placed in service
in the state, nor does it provide that the
qualified property be installed on an off-road
vehicle owned or leased by the taxpayer.
FTB suggests on Page 3, Line 1, to strike
out "December" and insert "January" to conform
the deadlines for the credit under the Personal
Income and Corporation Tax laws.
Support and Opposition
Support:California Dump Truck Operators Association
California Landscape Contractors Association
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Oppose:None received.
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Consultant: Colin Grinnell