BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 1074 - Ashburn
Amended: May 3, 2010
Hearing: May 12, 2010 Tax Levy Fiscal: Yes
SUMMARY: Provides a Manufacturer's Investment Credit (MIC)
of 6% of the Cost Of Qualified Property Used In
Green Technology & Renewable Energy Resources
Business
EXISTING LAW provides for various state and federal
tax credits designed to provide tax relief for taxpayers
who incur certain expenses (e.g. child adoption) or to
influence behavior, including business practices and
decisions (e.g. research and development credits or
economic development area hiring credits). These credits
generally are designed to provide incentives for taxpayers
to perform various actions or activities that they may not
otherwise undertake.
STATE LAW allowed qualified taxpayers a MIC equal to 6
percent of the qualified costs paid or incurred on or after
January 1, 1994 and before January 1, 2004, for qualified
property that was placed in service in California (SB 671,
Alquist, 1993).
For purposes of the MIC, a qualified taxpayer engaged
in manufacturing activities described in specified codes
listed in the State Industrial Classification (SIC) Manual,
1987 edition. The law defined qualified property as any of
the following:
Equipment used primarily for
SB 1074 - Ashburn
Page 5
manufacturing, refining, fabricating, processing,
or recycling property; research and development;
maintenance, repair, measurement, or testing of
otherwise qualified property; or pollution
control that meets or exceeds state or local
standard; or
Special purpose buildings and foundations
that were an integral part of specified
activities; or
The value of capitalized labor costs
directly allocable to the construction or
modification of any of the property described
above.
SB 1074 - Ashburn
Page 5
The MIC statute's provision repealed itself on January
1, 2004, as the total number of manufacturing jobs in
California did not exceed the total manufacturing jobs in
California on January 1, 1994 by 100,000 jobs.
THIS BILL would allow a credit of 6 percent of the
qualified cost paid by a qualified taxpayer for qualified
property placed in service in California, beginning January
1, 2010. The language in this bill for the proposed credit
is substantially similar to the prior MIC law.
Specifies that any credit allowable for the taxpayer's
taxable years beginning on or after January 1, 2010 and
before January 1, 2014 shall be allowed as a credit against
the "net tax" for the taxpayer's first taxable year
beginning on or after January 1, 2014. This means that
taxpayers can earn this credit starting in the 2010 tax
year, but can't claim the credit until tax years starting
in 2014.
Defines "qualified cost" as any cost that is all of the
following:
A cost paid or incurred by the qualified taxpayer
for the construction, reconstruction, or acquisition,
or lease, of qualified property on or after January 1,
2010,
An amount that the qualified taxpayer has paid
sales or use tax on, and
An amount that is properly chargeable to the
capital account of the qualified taxpayer.
Defines "qualified taxpayer" as any taxpayer that is
primarily engaged in any of the following activities:
Green technology that is either consistent with
meeting the goals and objectives of green house gas
SB 1074 - Ashburn
Page 5
emissions standards or promotes the reduction of
wasteful, inefficient, unnecessary, or uneconomic uses
of energy;
Production of products, systems, or management of
cost-effective water use efficiency practices to
curtail the waste of water and to ensure that water
use does not exceed reasonable needs;
Production of products, systems, or management of
the utilization of recycled or reusable materials in
the manufacturing process;
Production or application of cogeneration
technology, as defined;
Production of products, systems, or management of
the conservation of energy; or
Production of products, systems, management, or the
use of solar, biomass, wind, geothermal, hydroelectric
under 30 megawatts, or any other source of energy,
that would reduce the use of fossil and nuclear fuels.
SB 1074 - Ashburn
Page 5
FISCAL EFFECT:
FTB's revenue estimate for SB 1074 is pending. The
revenue loss resulting from this bill would be delayed
until 2014, when qualified taxpayers can claim 5 years of
tax credits. Therefore in fiscal year (FY) 2014-15, the
revenue loss resulting from this bill would likely be at
least $ 100 million.
COMMENTS:
A. Purpose of the Bill
The author provides the following statement for the
bill: "This bill would introduce a Manufacturing Investment
Tax Incentive for green and alternative energy industries.
The MIC provides a tax benefit for purchase of equipment
that is essential to the growth of green and alternative
energy companies and results in the creation of new jobs.
This incentive is confined to the green and alternative
energy industries as businesses in these high growth
sectors are currently in the process of selecting the best
environment in which to locate or expand. The Manufacturing
Incentive will advance California's domestic and
international competitiveness, thereby encouraging the
creation of new jobs and the preservation of existing
jobs."
B. Background
For a ten-year period ending December 31, 2003,
California law provided a partial (General Fund only) sales
and use tax exemption for purchases of equipment and
machinery by new manufacturers, and income and corporation
tax credits for existing manufacturers' investments (MIC)
in equipment. The exemption provided a state tax portion
for sales and purchases of qualifying property, and the
SB 1074 - Ashburn
Page 5
income tax credit was equal to six percent of the amount
paid for qualified property placed in service in
California.
This sales and use tax exemption and income tax credit
had a conditional sunset date. They were to sunset in any
year following a year when manufacturing employment (as
determined by the Employment Development Department) did
not exceed January 1, 1994 manufacturing employment by more
than 100,000. On January 1, 2003, manufacturing employment
(less aerospace) did not exceed the 1994 employment number
by more than 100,000 (it was less than the 1994 number by
over 10,000), and therefore the MIC and partial sales tax
exemption sunsetted at the end of 2003.
Since the expiration of the partial exemption of
manufacturing equipment, numerous bills have been
introduced to either reinstate or to expand or modify the
exemption, but have failed to pass.
SB 1074 - Ashburn
Page 5
C. Arguments For and Against the MIC
It has been argued that there is no way to directly or
even indirectly measure the effect of the MIC on jobs
because the connection is so tenuous. Also, it has been
argued that there is no way to tell whether equipment was
purchased in response to the MIC or whether it would have
been bought anyhow without the credit.
In an October 2002 report put out by the Legislative
Analyst's Office, An Overview of California's
Manufacturers' Investment Credit, the following arguments
against and in support of these tax incentives were
presented:
Arguments In Support of the MIC
Investment Incentive-The MIC effectively reduces the
price of new capital, and leads to greater investment.
Adherents of this view suggest that a firm considering a
capital investment is much more likely to undertake such
investment with the MIC in place. Proponents argue that
this marginal cost reduction can have a significant
positive impact on investment decisions.
Relocation Incentive-California has become a more
attractive place relative to other states for business
since the credit has been in place. The argument here is
that tax credits do influence corporate location
decisions and dissuade businesses from moving their
activities out of California. Manufacturing industry
representatives stated and continue to state that the MIC
plays an important role in both expansion and business
location decisions.
Efficient Job Allocator-Competition for business among
states is an efficient job allocator. This argument holds
that the nation benefits from the redistribution of jobs
that may occur due to the use of investment tax credits.
This is based on the notion that jobs are worth more in
areas with higher unemployment, and that such areas are
likely to have relatively aggressive tax credit programs.
These areas will be able to attract businesses away from
SB 1074 - Ashburn
Page 5
regions that do not value the jobs as highly.
Other Arguments. Advocates of the MIC also emphasize that
the MIC offers significant indirect benefits to the state
in terms of investment and job growth that result in
additional state revenues. They also point out the
importance of manufacturing to the overall state economy
in terms of economic stability and the high value-added
nature of the employment in this sector.
Arguments Against the MIC
Inequitable Taxation-The MIC results in giving a tax
advantage to manufacturing over other business
activities, as well as providing an advantage to capital
investment over labor. This view holds that since only
one type of industry (and production factor) benefits
from the tax credit, the remaining industries face
relatively higher costs, and are therefore at a
competitive disadvantage. Such preferential treatment can
also result in inefficient resource allocation according
to this view.
Relocation Rather Than Creation-The MIC results in few
new jobs, but rather pits states against each other in
competing for jobs. The argument here is that corporate
tax breaks are no more than a transfer of government
funds to private businesses, and in the end, the national
economy is unaffected. In this view the competition among
states in offering various tax incentives represents a
form of "prisoners' dilemma"-in which each state would be
better off if none offered such incentives. If one state
does offer them, however, it is in the interest of other
states to do the same.
Inefficient Development Policy-Tax incentives have a
negligible impact on economic growth, and any job
creation that does occur does so at a substantial cost
per job. Proponents of this view also hold that some of
the tax credits will go to companies which would have
made the same investments, regardless of the tax
SB 1074 - Ashburn
Page 5
incentive. That is, the tax credit did not induce the
investment, yet the company receives "windfall benefits"
in the form of reduced taxes.
Ineffective Development Policy-Taxes are a very small
percentage of overall business costs and thus have little
effect on business decisions. Labor, transportation,
land, and other factors typically constitute much more
significant proportions of total costs than do taxes.
Therefore, according to those who hold this view,
tinkering with this particular cost is unlikely to result
in a large shift or expansion of business compared to the
adverse fiscal effects that such measures can have on the
state.
D. Implementation Concern
FTB points out that department staff does not have
expertise in green technology and renewable energy research
and development. Typically, credits involving areas for
which the department lacks expertise are certified by
another agency or agencies that possess the relevant
expertise. For example, the State Air Resources Board
could serve as the certifying agency for research that is
"consistent with meeting the goals and objectives of
compliance with greenhouse gas emissions standards as set
forth in the Health and Safety Code.
This bill uses the following undefined terms:
"consistent," "promotes," and "provides". The absence of
definitions to clarify these terms could lead to disputes
with taxpayers and would complicate the administration of
this credit.
Support and Opposition
Support:None received.
SB 1074 - Ashburn
Page 5
Oppose:California Tax Reform Association
---------------------------------
Consultant: Meg Svoboda