BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 830 HEARING: 4/27/11
AUTHOR: Wright FISCAL: Yes
VERSION: 4/12/11 TAX LEVY: No
CONSULTANT: Grinnell
INCOME TAX CREDIT FOR INFRASTRUCTURE INVESTMENT
Enacts the Trade Infrastructure Investment Credit
Background and Existing Law
Current law allows 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 has eleven public ports, including the some of
the world's largest, which provide the state unique and
considerable economic benefits because of its geographic
position bordering the Pacific Ocean and its status as a
gateway to markets across the United States. Approximately
600,000 containers are imported and nearly 300,000
containers exported each month in the Ports of Los Angeles
and Long Beach alone, the top two ports in America and in
the top ten in the world by container volume. Terminal
operators lease property from public ports, through which
exporters and importers ship products under contract with
carriers. Ocean carriers either vertically integrate with
marine terminal operators, or contract with them to
facilitate goods movement.
Proposed Law
SB 830 enacts a trade infrastructure tax credit against the
Personal Income Tax or Corporation Tax equal to 50% of the
total capital costs of each qualifying project, as defined.
The credit may be claimed from the 2011 taxable year to
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the 2020 taxable year, but taxpayers may only claim 5% of
the total credit amount in any taxable year, although the
credit may be carried over for ten years.
To claim the credit, the taxpayer must:
First, construct a qualified project.
Second, submit an application to the Franchise Tax
Board (FTB) that includes a detailed description of
the qualified project, including the date on which it
was placed in service, and a summary of the total
actual capital costs prepared by an independent
certified public accountant.
Third, prepare a statement along with relevant
evidence or supporting documents that the proposed
project meets the requirements necessary for the
credit, along with the names of each taxpayers,
partners, members, owners, or beneficiaries of the
credit. The taxpayer must also disclose to FTB the
amount of credit sought per year.
After receiving the application, FTB must:
Issue a certification to the taxpayer when finding
that the application meets the requirements of the
credit, including a unique identifying number for the
project, the maximum and annual amount of tax credits
that the taxpayer could claim, and a statement
advising the taxpayer that no credits may be claimed
until FTB sends a notification advising the taxpayer
of the total amount or pro rata amount of credit
authorized by the Legislature.
Send a notice of its certification to the
Department of Finance, the Joint Legislative Budget
Committee, and the Legislative Analyst.
However, FTB cannot certify a project unless the public
port in which the project is located determines that the
state will receive revenue from economic impacts resulting
from the project that are sufficient to offset the state
cost of the tax credit. To make the determination, the
public port:
Must adopt a resolution estimating the economic
impacts based on estimates in a report that includes
the total state tax revenues, total tax and user fee
revenues, and total jobs created by the project and
project-related economic activity, including the
specific impact on California resident employment.
When it adopts a resolution, the public port must
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also make findings regarding the estimated
improvements to the freight transportation system of
the state. The findings must be based on four
factors, as defined: velocity, throughput,
reliability, and congestion reduction.
A public port may adopt guidelines and a
methodology for the estimates in the report that are
consistent with the bill. If so, a third-party
economist must complete the guidelines based on a
published economic impact methodology, which must be
incorporated into the findings of a peer review.
If it chooses to adopt guidelines and a
methodology, the public port must find that the
guidelines and methodology used are consistent with
the bill. The peer review of the economic impact study
must be peer reviewed and evaluated by an independent
party selected through a competitive process. The
independent party cannot be financially associated
with the third-party that completed the study, and
must evaluate the adequacy of the guidelines and make
specific recommendations regarding the methodologies
which should be incorporated into the peer review, but
a public port may rely on and utilize study
preparation guidelines developed for another port.
After the above steps are completed, the Legislature must
enact a statute specifying the total credit amount for the
preceding taxable year; if the Legislature enacts no
credit, then taxpayers cannot claim it. FTB shall notify
qualified taxpayers of the credit amount authorized by the
Legislature within 90 days of the Governor signing a bill
authorizing credits. FTB shall prorate credit amount
awards if the amount appropriated by the Legislature is
less than the total amount of credits claimed.
The credit is based on a qualified taxpayer's "capital
costs," which means all expenses incurred by the qualified
taxpayer prior to the date the project was placed in
service in connection with, including:
Costs of acquisition, construction, installation,
and equipping a qualified project, including all
obligations for labor, contractors, subcontractors,
builders, and materialmen.
Any costs of acquiring land or rights in land,
including recording feed, and for contract bonds or
insurance of any kind necessary for the project.
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Costs of architectural and engineering services,
including test borings, surveys, estimates, plans,
specifications, preliminary investigations,
environmental mitigation, and supervision of
construction, as well as for the performance of all
the duties required by or consequent upon the
acquisition, construction, and installation of the
qualified project.
Costs associated with installation of fixtures and
equipment, surveys, including archaeological and
environmental surveys, site tests and inspections,
subsurface site work, excavation, removal of
structures, roadways, and other surface obstructions,
filling, grading, paving, and provisions for drainage,
storm water retention, installation of utilities,
including water, sewerage treatment, gas, electricity,
communications, and similar facilities, and offsite
construction of utility extensions to the boundaries
of the property.
Capital costs also include any environmental mitigation
undertaken specifically to reduce the qualified project's
impacts, to the extent the costs are capital and not
ongoing, including:
Replacement, repower or retrofit of heavy-duty
diesel trucks, locomotive engines, harbor craft, and
cargo handling equipment.
Provision of onshore electric power for ocean
freight carriers calling at the state's seaports.
Mobile or portable shore side distributed power
generation projects that eliminate the need for
oceangoing vessels to use the electricity grid.
Electrification infrastructure reducing truck and
cargo handling equipment engine idling and use of
auxiliary power systems.
Installation of solar power systems, or acquisition
and installment of alternative fueling systems or
equipment.
In addition to the above, "capital costs" also include any
costs of a nature comparable to those listed, including all
costs required to be capitalized under federal income tax
law, and costs incurred by the taxpayer where the
qualifying taxpayer is the lessee under a lease that
contains a term of not less than five years and is
characterized as a capital lease for federal income tax
SB 830 (Wright) -- 04/12/11 -- Page 5
purposes.
"Capital costs" do not include:
Property owned or leased by the qualified taxpayer
or a related entity before the commencement of the
acquisition, construction, installation, or equipping
of the qualified project, unless the property was
physically located outside the state for a period of
one year prior to the date the qualified project was
placed in service.
Expenses, costs, or profits of any kind incurred by
a qualified taxpayer incurred after the date in which
the project is placed in service.
If the taxpayer claiming a credit under this bill sells,
transfers, or otherwise disposes of the qualified project
within 10 years of the first taxable year in which he or
she claims this credit, the taxpayer must add back the
claimed credit amount to his or her future tax according to
a formula specified in the bill unless the taxpayer assigns
the credit to the new owner.
The measure also requires the Legislative Analyst to
prepare an evaluation of the effectiveness of the credit by
January 1, 2020. LAO must include the overall impact of
the tax credits, the amount of credits issued, the number
of new jobs created, the amount of California payroll
created, the economic impact of the tax credits on the port
and maritime industry located in this state and regionally,
the amount of new infrastructure that has been developed in
the state, and any other factors that describe the impact
of the program.
The bill provides definitions for many of its terms, and
makes legislative findings and declarations regarding
public port infrastructure investment.
State Revenue Impact
FTB states that because SB 830 solely enacts the statutory
infrastructure for a credit, but precludes taxpayers from
claiming the credit until the Legislature enacts a statute
providing a credit amount, the measure does not have a
revenue impact.
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Comments
1. Purpose of the bill . According to the bill's sponsor,
the Pacific Merchant Shipping Association, "SB 830
creates new, unique incentives designed to increase private
investment in California's public port infrastructure and
grow cargo originating in or destined to California. These
are not traditional incentives - instead of a tax credit
that is an immediate and unaccounted for drag on general
fund revenues, the incentives created by SB 830 would be
subject to multiple fiscal accountability controls. These
include the requirement that the incentives will only be
awarded subject to an allocation by the Legislature in a
budget, that all credits must be revenue-positive with
respect to the state's general fund and that all capital
improvements be completed ahead of an award. And, before
the incentives sunset, the LAO will review and summarize
all job creation and economic impacts as a result of the
programs.
SB 830 is needed to address the state's severe
unemployment, maintain international cargo volumes, help
finance the many ongoing environmental improvements being
made at our ports, and enhance California's trade
competitiveness with other states and countries. More
infrastructure construction and more cargo will create more
jobs for California workers. As we have seen since the
2006 cargo peak, the inverse is true as well, as lower
trade volumes and less cargo has cost the state thousands
of jobs, economic development and environmental mitigation
investment opportunities, and tax revenues.
SB 830 is based on similar tax credit legislation designed
to finance port and trade-related investments through new
public-private partnerships passed in Louisiana in 2009
which was passed in anticipation of competing for
California cargo. Last year, Assemblymember Bradford
introduced AB 2687, also based on the Louisiana tax credit,
which was passed by the Assembly Revenue and Taxation
Committee unanimously. Mr. Bradford is principal co-author
of SB 830."
2. Making it float . SB 830 enacts a tax credit for
taxpayers making capital investments to improve port
infrastructure that improve the speed and reduce the cost
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of importing and exporting goods. If the credit is
successful, suppliers of port infrastructure spend less on
a project, savings which are hopefully passed along to
importers and exporters, resulting in lower prices for
consumers purchasing imports, and lower costs exports and
expanded sales of exported products in markets outside
California. Additionally, lower costs theoretically leads
to higher traffic, which will likely result in increased
employment to the extent that machinery that doesn't
replace workers, and that firms locate jobs needed to
facilitate increased traffic in California as opposed to
other places on the goods movement chain.
However, while tax credits for suppliers always result in
lower taxes paid by project investors, will SB 830 lead to
the hoped for gains for importers, exporters, and jobs?
While economic theory posits that lower supply costs lead
to higher quantity demanded, resource depletion allowances
and other tax credits for the oil industry have not
translated into lower gasoline prices because more powerful
economic forces than supply costs and taxes influence
price. Similarly, many exporters and importers cannot use
non-California ports because of geographic or business
reasons, and must pay whatever price necessary to get
products to market. In such a case, the tax credit
recipient has no incentive to lower costs for importers and
exporters, and can simply pocket the value of the tax
credit as a return to capital. Proponents counter that
exporters and importers can change supply chains to ship
through lower cost ports, which are becoming more
competitive with California's. Proponents add that
shippers are increasingly choosing other ports because of
California's more expensive prices.
Additionally, shipping demand is driven by forces largely
out of anyone's control, and is very difficult to forecast
correctly. The monthly total value of loaded inbound and
outbound containers has tracked the uncertain economy of
the last few years, plummeting from $235 billion to $150
billion in a few months in late 2008, but rebounded 10%
this year over last, fluctuations few predicted a few years
ago. Foreign exchange markets, consumer and business
credit levels, trade restrictions, and labor impasses have
a much greater impact on shipper costs than taxes ever
could. Ports can also add infrastructure as they have for
decades without a state subsidy to the extent that these
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global market forces drive demand, and can also issue
revenue bonds to pay for improvements. Suppose the bill is
enacted, and investors add infrastructure as intended, but
the credit crisis returns, again depressing shipping
volumes. Has the state then subsidized unnecessary
infrastructure? Has someone's errant business decision
come at a sunk cost to the state?
3. A nautical mile or a statute mile ? The Committee may
wish to amend SB 830 to identify the specific measurements
that will change should the bill be enacted. For example,
changes in overall container traffic, import and export
prices, and employment in port and related industries.
Without such measures, it will be impossible to judge
whether SB 830 is an appropriate use of state funds.
4. Wind in the sails . California's geographic position
and investment in port infrastructure has brought the state
significant economic benefits. According to the California
Marine and Intermodal Transportation System Advisory
Council, more than 40% of the total containerized cargo
entering the United States went through California ports in
2007; and almost 30% of the nation's exports flowed through
ports in this state. The California Association of Port
Authorities (CAPA) states that port activities employ more
than 500,000 Californians and generate $7 billion in state
and local tax revenues each year and that 2 million jobs
nationwide are linked to California's public ports. CAPA
additionally offers that port activity generates one in
every 22 jobs in Southern California, and provides some
$14.3 billion annually in regional wages and salaries.
However, proponents state that other states, Canada, and
Mexico are increasingly investing in port infrastructure in
the hopes of diverting this commerce from California.
Additionally, proponents state that the projected 2014
widening of the Panama canal will make other ports of call
more attractive than California ports, hurting the economy
and further depressing employment.
5. Dangerous seas . SB 830 allows firms a tax credit for
costs incurred to comply with environmental regulations for
the costs of compliance, creating a significant precedent
in California Tax Law which has not been used in a very
limited way to assist regulatory compliance. Proponents
argue that regulations enacted by the California Air
Resources Board (CARB) on cargo handling equipment, harbor
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craft, port cold ironing, vessel fuel switching, and
drayage trucks require the port-related operations to spend
more than $5 billion to comply, making it less competitive,
and leading shippers to use less costly options. Because
environmental improvements don't generate revenue, revenue
bonds cannot be used to fund these improvements.
Regulatory battles are not new to California. The
Legislature is considering several bills this session to
change or reform the process by which agencies adopt
regulations as legislators increasingly question the
economic tradeoffs resulting from regulations.
Additionally, government subsidies for environmental
compliance can be controversial because the costs of
compliance are shifted onto the public that otherwise
private parties must pay to advance a public purpose, such
as cleaner air and water or a safer workplace. SB 830
uniquely subsidizes environmental compliance with a tax
credit, which only benefits profitable firms because
California's taxes are calculated based on net income.
California has taken a more direct route to encourage
environmental compliance; Proposition 1B (2006) authorized
$1 billion for CARB to allocate for compliance with
environmental regulations, but only for environmental
measures above and beyond those required by law. SB 830 is
not without precedent; federal and state law allows a
credit for small gasoline refiners that make ultra-low
sulfur diesel. The Committee may wish to consider whether
the state should subsidize compliance with environmental
regulations, and if using the tax code is the best way to
do so.
Specifically, SB 830 provides a subsidy for only one
industry when all equipment owners must comply with
regulations regardless of their line of work. To the
extent that the Committee wants to ameliorate the cost
impact of environmental regulations, it may also wish to
consider whether the unique nature of the port operations
merits a benefit for a single industry.
6. Henry Grinnell's quest . The Committee Consultant's
ancestor funded several explorations to find the elusive
Northwest Passage that connects the Atlantic and Pacific
Oceans across the Arctic north. SB 830 attempts the
similarly unenviable task of enacting a tax credit as part
of the regular legislative process during times of fiscal
SB 830 (Wright) -- 04/12/11 -- Page 10
crisis. Instead of allowing all taxpayers to claim a tax
credit for undertaking a specific action as most bills of
this kind do, SB 830 tries a novel approach: First, the
taxpayer must construct the project and place it in
service, with considerable uncertainty as to whether the
state will award the tax credit. Second, the port district
must adopt a resolution supported by an economic report
stating that the economic activity resulting from the
project will offset the cost of the credit and send it to
FTB, somewhat similar to the California Alternative Energy
Financing Authority evaluation of whether the benefit to
the state of the sales tax exemptions it grants equals or
exceeds the taxpayer's benefit (SB 71, Padilla, 2010).
Next, the taxpayer submits its costs to the FTB, which
certifies the costs and awards the taxpayer a certificate
for a credit. After all of that, the Legislature must
enact a statute providing a credit amount, or the taxpayer
cannot claim the credit.
While the approach is narrowly tailored and requires the
Legislature to deliberately allocate funds in the future
for the credit, does the process not beg the question
regarding the necessity of the credit? If a taxpayer were
to incur several million dollars in expenses not knowing
whether the Legislature ever intends to fund the credit,
will the incentive actually lead to a change behavior or
simply reward the taxpayer for making an investment for
market reasons?
7. Never ask a question that you don't know the answer to .
Governor Brown's Budget proposes to repeal the state's two
state-funded, locally-administered economic development
programs: Community Redevelopment and Geographically
Targeted Economic Development Areas, such as enterprise
zones, stating that local economic development is not a
core state responsibility. Both programs have an essential
flaw: local program administrators make decisions to deploy
these program's powerful tools in their communities with
little to no skin of their own in the game; both programs
have localized benefits funded from statewide revenues.
During the recent debate, proponents of both programs have
developed economic studies extolling the benefit of both
programs to defend the benefits of these programs in their
own areas.
SB 830 places the responsibility of evaluating the benefits
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of the tax credit on local ports, which will have a strong
incentive to conclude that the economic benefits offset the
state's costs on behalf of their tenants who seek the
credits. Is it likely that the port districts will provide
the FTB an evaluation that says the credit doesn't pay for
itself, thus preventing its tenant from claiming a credit
worth at least $2.5 million? The tendency for local
agencies to defend the effectiveness of existing programs
suggests the opposite.
SB 830's economic study also suffers from an analytic
problem because it cannot use tax information that shows
the revenue effects of the credits due to confidentiality
laws. Even if the Legislature waived confidentiality laws,
attributing economic activity to one state tax change is
impossible. LAO stated at the Committee's February 16th,
2011 hearing on enterprise zones that researchers cannot
attribute changes in economic activity to tax changes with
any certainty without carefully constructed control groups
among other conditions.
8. Making the ship seaworthy . Committee staff recommends
the Committee amend SB 830 to specifically preclude the
taxpayer from taking a business or interest expense
deduction for any cost that subsequently qualifies for the
credit to prevent the same cost qualifying the taxpayer for
two tax benefits.
Committee staff further recommends that definitions be
inserted for the individual components of environmental
mitigation under the definition of capital costs.
Committee staff and FTB recommend that the measure include
a process by which a taxpayer that sells a qualified
project assign the credit to the new owner.
Committee Staff recommends the following technical
amendments (page and line references below are to Personal
Income Tax section of the bill, identical changes should
also be made to the Corporation Tax Law part too).
1. Delete definitions on Pages 3 and 4 for "breakbulk
or bulk cargo," "containerized cargo," "export,"
"import," "oceangoing vessel," "project," and
"qualifying investment," because these terms do not
appear anywhere else in the bill.
SB 830 (Wright) -- 04/12/11 -- Page 12
2. On Page 3, line 24, insert "environmental" before
"impacts" to clarify that the credit applies to costs
incurred to meet environmental mitigation
requirements, not other kinds of possible mitigations.
3. On Page 4, line 36, consolidate (VIII) and (IX) to
allow costs of acquiring or installing solar power
systems and alternative fueling systems or equipment.
4. On page 5, line 2 and page 18, line 10, "Title 26
of the United States Code" should be replaced with
"Internal Revenue Code".
5. On Page 5, line 14, delete "and profits," as it's
impossible to claim a profit, which is revenue over
costs, as a capital cost.
6. Delete "proposed" on Page 6, Line 31
7. Delete (c)(2) and (3) on Page 7 as duplicative, and
move (4) into (E). FTB can already request more
information and has general form-making authority.
8. Substitute "qualified project upon making a finding
that the terms of this section have been met" for
"qualified taxpayer that the qualified project
complies with this section" on Page 7, line 13
9. Add "of tax credits" after "amount" on Page 7, line
20.
10. In (f), make references to "report" and "economic
impact study" consistent or state that the study is
part of the report.
11. On Page 8, line 38, delete "a peer review of the
economic impact study and" as redundant.
12. On Page 9, delete (C). No need for law to spell
out the ingredients of an economic study.
13. On Page 9, line 14, replace "This paragraph shall
not prohibit a public port from relying and utilizing"
with "A public port may adopt" to clarify that one
public port may adopt the same guidelines for its
economic study adopted by another port.
14. On Page 10, delete subdivision (j) and (k). FTB
already has sufficient powers to audit taxpayers and
require recapture and interest payment for failing to
comply with the law.
15. On Page 10, amend subdivision (h) to modify the
carryover to comport with the overall annual cap of 5%
of the capital costs.
16. On Page 11, line 5, insert "trade" before
"infrastructure investment credit" to properly direct
the LAO to study this credit.
17. On Page 11, delete subdivision (m) as the credit
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allowed by that section was deleted in recent
amendments.
18. On Page 11, line 12, substitute "credit" for
"program."
Support and Opposition (04/20/11)
Support : Pacific Merchant Shippers Association; California
Chamber of Commerce
Opposition : Unknown.