BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 769 HEARING: 6/11/14
AUTHOR: Skinner FISCAL: Yes
VERSION: 5/14/14 TAX LEVY: Yes
CONSULTANT: Grinnell
SALES TAX EXEMPTION FOR EFFICIENT CLOTHES WASHERS
Enacts a one-year sales tax exemption for efficient clothes
washers.
Background and Existing Law
The state sales and use tax rate is 7.50% as detailed below
and is generally imposed on all tangible personal property
unless specifically exempt. Cities and Counties may
increase the sales and use tax rate up to 2% for either
specific or general purposes with a vote of the people.
-------------------------------------------------------------
| | | |
| Rate | Jurisdiction | Purpose/Authority |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|3.9375%|State (General |State general purposes |
| |Fund) | |
| | | |
|-------+--------------------+--------------------------------|
| | | |
|1.0625%|Local Revenue Fund |Realignment of local public |
| |2011 |safety services |
| | | |
| | | |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.25% |State (Fiscal |Repayment of the Economic |
| |Recovery Fund) |Recovery Bonds |
| | | |
|-------+--------------------+--------------------------------|
AB 769 -- 5/14/14 -- PageB
| | | |
| 0.25% |State (Education |Schools and community college |
| |Protection Account) |funding |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.50% |State (Local |Local governments to fund |
| |Revenue Fund) |health and welfare programs |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 0.50% |State (Local Public |Local governments to fund |
| |Safety Fund) |public safety services |
| | | |
|-------+--------------------+--------------------------------|
| | | |
| 1.00% |Local (City/County) |City and county general |
| | |operations. Dedicated to county |
| | |transportation purposes |
| |0.75% City and | |
| |County | |
| | | |
| |0.25% County | |
|-------+--------------------+--------------------------------|
| | | |
| 7.50% |Total Statewide | |
| |Rate | |
| | | |
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Many items are fully exempted from the sales and use tax in
this state (prescription drugs, food, poultry litter) but
only a handful are partially exempted from the sales tax at
the rate of 5.5%, such as farm equipment and machinery,
diesel fuel used for farming and food processing,
teleproduction and postproduction equipment, timber
harvesting equipment and machinery, and racehorse breeding
stock. The exemptions apply whenever the taxpayer purchases
the exempt property. Additionally, last year, the
Legislature enacted a sales and use tax exemption on
purchases of manufacturing equipment made by taxpayers
within specific North American Industrial Classification
System codes, capped at $200 million annually per taxpayer,
effective July 1, 2014, and ending July 1, 2022 (AB 93,
Committee on Budget). BOE's Publication 61 details all
sales and use tax exemptions.
AB 769 -- 5/14/14 -- PageC
Proposed Law
Assembly Bill 769 enacts a sales and use tax exemption on
the first $750 of a qualified efficient clothes washer, but
only exempts the state share of the sales and use tax. AB
769's exemption only lasts from July 1, 2014 to July 1,
2015, unless the Governor lifts the state of emergency
called on January 17, 2014 due to drought conditions is
terminated before that date, in which case the exemption
will last until midnight of the first day of the first
calendar quarter beginning more than 60 days from the date
the Governor lifts the state of emergency.
The measure defines "qualified efficient clothes washer,"
and includes legislative findings and declarations
supporting its purposes.
State Revenue Impact
According to the Board of Equalization, AB 769 results in a
revenue loss of $18.1 million in the 2014-15 fiscal year.
Comments
1. Purpose of the bill . According to the author, "In
January 2014, Governor Brown called for all Californians to
reduce water use by 20%. A family that replaces an old
washer can make considerable progress toward that goal.
Clothes washers use significant amounts of water - up to
20% of a household's indoor use. Today's ENERGY STAR
washers use 60-65% less water than units made just 10 years
ago. Annual savings for customers purchasing ENERGY STAR
washers are estimated at almost $300 per household, when
taking into account water, sewer, and energy costs."
2. Sure, but will it work ? Tax benefits directed at
specific industries and products do two things: First,
they reward behavior that would have occurred without the
subsidy, so-called "deadweight loss." Some taxpayers will
buy water-efficient clothes washers during the exemption
period without any incentive, so the bill will give these
taxpayers a windfall benefit equal to the sales tax not
paid, providing no marginal benefit. Second, the bill may
alter consumer decisions at the margin; the incentive of
AB 769 -- 5/14/14 -- PageD
not paying 5.5% in tax may spur a taxpayer to purchase a
clothes washer that reduces water consumption during a
drought. A successful tax incentive causes more economic
activity at the margin than its deadweight loss, but no tax
credit has yet conclusively demonstrated that its benefits
outweigh its costs. A third possible outcome for AB 769 is
for retailers to raise prices of efficient clothes washers
while marketing the incentive, leaving consumers no better
off, basically transferring revenue from the state to
retailers. The Committee may wish to consider how much
additional economic activity AB 769 will spur versus its
deadweight loss, and the risk of retailers increasing
prices to pocket the difference.
Customers already consider the effects of more efficient
technology on their electricity or water bills when
choosing which product to purchase; however, AB 769
proponents argue that these effects aren't the primary
factor driving consumer decisions, citing surveys showing
it as the third most important factor behind performance
and cost, respectively. Proponents additionally argue that
the difference between washers meeting the minimum
efficiency standards and AB 769 exempt washers will result
in significantly less water, sewer, and energy usage over
the washer's useful life, leading to statewide benefits.
Additionally, enacting a new tax exemption requires cuts in
spending or higher taxes to match the amount of foregone
revenue resulting from AB 769. Tax credits do not pay for
themselves: the state's last effort of "dynamic revenue
analysis" indicates that while dynamic effects are
definitely present and visible, their effects are generally
relatively modest.<1> The Committee may wish to consider
whether the benefits resulting from this manufacturing
incentive are worth the tradeoff of cuts in spending or
taxes on other activities.
3. One big holiday . Although California has never offered
a sales tax holiday, up to 22 states do, mostly for
clothing and school supplies. Florida, Georgia, Missouri,
Texas, and Virginia offer sales tax holidays for
energy-efficient appliances, including clothes washers.
Studies find that taxpayers simply shift the timing of
-------------------------
<1>
"Whatever Happened to Dynamic Revenue Analysis in
California?" John David Vasche, prepared for the
Federation of Tax Administrators, September, 2006.
AB 769 -- 5/14/14 -- PageE
purchases to take advantage of holidays without an overall
increase in sales, mislead consumers about savings, and are
costly and confusing for retailers.<2> Another study
didn't find any shifting, instead showing increased
consumption, but found that sales tax holidays only benefit
wealthier families.<3> However, these studies aren't an
"apples to apples" comparison to AB 769's tax holiday,
which applies for a longer period, and applies only to one
specific product. The measure's proponents also add that a
shift in consumption that led to consumers buying more
water-efficient clothes washers earlier would reduce water
consumption during the current drought.
4. Thirsty . During the state's electricity crisis, the
state responded forcefully, enacting two measures that
funded $408 million (ABx1 29, Kehoe, 2001) and $650 million
(SBx1 5, Sher, 2001) to fund energy efficiency and
conservation programs, which significantly reduced demand
on the troubled electric grid during the crisis. While the
state has made significant investments to address the
current drought, AB 769 resembles the state's response to
the energy crisis, as it would likely lead to tangible
reductions in water usage in the state. Proponents state
that old clothes washers use up to 60% more water than AB
769-eligible washers, and the increased demand created by
the bill's sales and use tax exemption would spur sales.
5. A little help . California's tax expenditures usually
apply to all taxpayers who engage in a specific behavior,
such as performing research and development, or purchase a
class of products, such as agricultural equipment or
prescription medication. AB 769 provides a state tax
incentive to taxpayers who purchase Energy Star washers,
meaning that the state is designating certain models within
a class of products as more preferable than others. While
the state has allowed solo drivers in fuel-efficient cars
to use the carpool lane, it hasn't yet used tax law in a
way similar to AB 769 to pick winners and losers within a
fully competitive market. Additionally, retailers will
likely use AB 769's exemption as a hook to drive sales if
it's enacted. Other states have restricted retailers from
advertising sales tax holidays. The Committee may wish to
-------------------------
<2> "Sales Tax Holidays: Politically Expedient but Poor Tax
Policy" Tax Foundation, July, 2013.
<3> "The Effect of Sales Tax Holidays on Household
Consumption Patterns." Federal Reserve Bank of Chicago,
July, 2010.
AB 769 -- 5/14/14 -- PageF
consider the merits of using tax policy to pick winners and
losers within a market, and to assist retailers to drive
sales.
6. Precedent . If enacted, AB 769 would be the state's
first experiment with sales tax holidays. While the
measure is limited to qualified clothes washers, it sets a
precedent that will invite similar proposals.
7. Alternative ? The California Public Utilities
Commission, California Energy Commission, as well as
investor-owned and municipal utilities offer rebate and
incentive programs to reduce energy and water use. Rather
than enact a sales tax holiday that will benefit consumers
with income sufficient to purchase an efficient clothes
washer, perhaps a better option would be to target rebates
and incentives to low-income persons enrolled in the
California Alternate Rates for Energy, a program that
affords income-eligible persons discounts on their energy
and natural gas rates.
Assembly Actions
Assembly Floor 72-0
Assembly Revenue and Taxation 9- 0
Support and Opposition (06/04/14)
Support : Association of Home Appliance Manufacturers;
California Retailers Association; Coin Laundry Association;
Natural Resources Defense Council; Sierra Club California;
Pacific Gas and Electric Company.
Opposition : California Tax Reform
Association.