BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 1560 HEARING: 8/29/2014
AUTHOR: Quirk Silva FISCAL: Yes
VERSION: 8/27/14 TAX LEVY: Yes
CONSULTANT: Grinnell
INCOME TAXES: CREDITS: CALIFORNIA COMPETES. (Urgency)
Allows the Director of Finance to increase the authorized
amount for the California Competes Tax Credit by $25
million.
Background and Existing Law
California law allows various income tax credits,
deductions, and sales and use tax exemptions to provide
incentives to compensate taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits. The Legislature
typically enacts such tax incentives to encourage taxpayers
to do something that but for the tax credit, they would not
do. The Department of Finance is required to annually
publish a list of tax expenditures, currently totaling
around $50 billion per year.
Last year, the Legislature enacted AB 93 (Committee on
Budget), which reformed California's economic development
policies by eliminating enterprise zones and other
geographically-targeted economic development areas, instead
allowing three new tax benefits:
Tax credits for wages paid by taxpayers to
qualified employees within former enterprise zones,
and other areas that suffer from high levels of
poverty and unemployment. The credit lasts from the
2014 taxable year until the 2019 taxable year.
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.
The California Competes Tax Credit, where taxpayers
AB 1560 - 8/18/14 -- Page 2
apply to the California Competes Tax Credit Committee,
who can then award various tax credits up to an
annually capped amount. The Committee can grant $30
million in tax credits in 2013-14, $150 million in
2014-15, and $200 million for the 2015-16, 2016-17,
and 2017-18 fiscal years, plus unallocated or
recaptured credits from previous years. The Committee
recently approved its first allocation, awarding $28.9
of the $30 million allowed.
Additionally, the Department of Finance must reduce the
amount of credits the Committee can allocate to ensure that
all of AB 93's provisions don't result in a revenue loss of
more than $750 million, which was the estimated revenue
gain from eliminating tax benefits from enterprise zones
and similar areas. DOF recently reported that no adjustment
is necessary, as the estimated fiscal loss of the new
employee hiring credit ($35 million in 2014-15, $72 million
in 2015-16), the sales and use tax exemption ($491 million
and $525 million), and California Competes ($32 million and
$83 million) added up to less than $750 million in both
fiscal years.
Last month, the Legislature enacted AB 2389 (Fox), which
allowed $450 million in corporation tax credits for firms
performing contracts for the advanced strategic aircraft
program. To ensure fiscal neutrality, AB 2389 was amended
to reduce the California Competes authorization by an
amount equal to its tax credit in each fiscal year, and
made a conforming change. The Author wants to undo those
amendments by allowing the Director of Finance to add $25
to the Committee's annual allocation amount.
Proposed Law
Assembly Bill 1560 allows the Director of Finance to
increase the amount of Personal Income and Corporation Tax
credits that the California Competes Tax Credit Committee
can allocate by $25 million each fiscal year until the
2017-18 fiscal year. The measure states the Legislature's
intent that the Director makes the increase to mitigate for
the reduction required by AB 2389.
State Revenue Impact
AB 1560 - 8/18/14 -- Page 3
Pending.
Comments
1. Purpose of the bill . According to the author, "AB 1560
authorizes the Department of Finance to increase by $25
million the amount of economic development funds available
in the California Competes Tax Credit Program under the
Governor's Office of Business and Economic Development. We
must maintain our competitive edge in order to attract
business to California and to guarantee that our small
businesses have the tools they require to succeed. As we
continue to pull ourselves out of economic crisis, it is
imperative to remember that investment in our businesses is
most important to putting our working families back to
work."
2. Second thoughts ? When the Committee heard AB 2389, the
Committee added amendments reducing the allocation
authority for the California Competes credit by an amount
equal to the aerospace credit, thereby ensuring that AB
2389 didn't result in a fiscal loss. AB 1560 undoes those
amendments by allowing the Director of Finance to increase
the authorization amount equal to AB 2389's reduction, and
declaring the Legislature's intent for the Director to do
so. While California Competes may be drawing in additional
investment and employment that wouldn't have existed
without the credit, what evidence is available only weeks
after the first allocation that merits another $25 million,
and reversing a decision made by the Legislature less than
two months ago?
3. Model citizen . The Legislature created the California
Competes in AB 93, which comprehensively reformed
California's economic development policy. Instead of
granting tax credits to any taxpayer who engaged in a
specific activity, such as investing in enterprise zones,
firms would instead apply to the Committee, which reviews
applications in two phases. In phase one, applicants
calculate the aggregate employee compensation they will pay
and investment they will make if the Committee grants the
credit, and then request a credit amount. Applicants are
then ranked according to a cost-benefit ratio that measures
the compensation and investments amounts versus the amount
of credit requested. Applicants with the best ratios move
AB 1560 - 8/18/14 -- Page 4
to phase two, where GO-Biz assesses the application based
on other factors, such as the level of unemployment and
poverty in the applicant's location, whether the applicants
can claim incentives from other jurisdictions, economic
impact, strategic importance, and other factors. As such,
the California Competes model is a much more focused and
intelligent approach to economic development. As of June
24, the Committee allocated $28 million in credits to 30
firms, including big firms such as Petco, Macy's, Amazon,
and Samsung, but also to many small businesses, with no
allocation exceeding $6 million. The Committee can
allocate $125 million in 2014-15 credits, or $150 million
should AB 1560 be enacted, and has set three hearing dates
in January, April, and June of next year.
4. More to come ? AB 2389 was the result of Lockheed
Martin negotiating with the Governor for a tax credit that
would lead it to increase employment and investment in the
state, similar to the California Competes process in which
taxpayers that can move or relocate to other states apply
to the Committee for a certain amount of tax credit in
exchange for specific increases in employment and
investment. Lockheed Martin said that it needed the tax
credit before California Competes could allocate one
through its process, and in a specified amount that
would've consumed California Competes' allocation for this
year, or it wouldn't construct the aircraft program in
California. The Committee heard AB 2389 only five days
after the bill's provisions went into print. The author of
that measure stated that the Legislature had to enact it
immediately to meet Lockheed Martin's deadline for bidding
on defense contracts. The amendments to AB 2389 that AB
1560 seeks to undo linked the two tax credits together
because they identical goal to increase economic activity
in exchange for a tax credit subsidy. Additionally, this
linkage deterred future proposals for single companies
seeking to advance tax credit bills through the Legislature
outside the usual timeline: whenever a company strikes a
deal with the Governor for tax breaks and outside the
California Competes process, any bill would be paid for by
reducing California Competes' allocation authority. Should
the Legislature approve AB 1560, it will eliminate this
deterrent, making it more likely that single companies will
seek to strike deals with the Governor outside the
California Competes process, and expect the Legislature to
quickly enact a bill to ratify the deal. The Committee may
AB 1560 - 8/18/14 -- Page 5
wish to consider whether removing the link between AB 2389
and California Competes will encourage other single-company
tax incentive bills.
5. Take a walk on the supply side . Since 2008, the
Legislature has granted significant tax incentives to
reduce employers' costs in the hopes they will deploy
revenue that would have flowed to the state in taxes to
increase employment, often referred to as "supply-side
economics." AB 1560 is another step in this direction,
despite academic research generally dispelling the
relationships between tax reductions and employment. Among
these:
Allowing corporations to share tax credits, and
taxpayers to carry forward net operating losses for 20
years, or carry them back three years with delayed
effect (AB 1452, Committee on Budget, 2008),
Elective sales-factor only apportionment (since
repealed by initiative, but an alternative may be
returning due to litigation), motion picture
production tax credits, and small business hiring
credits (ABx3 15 (Krekorian)/SBx3 15 (Calderon),
Sales and Use Tax Exclusions for renewable energy
manufacturing (SB 71, Padilla, 2010) and advanced
manufacturing (SB 1186, 2012),
Expanding the Community Development Financial
Institution credit from $10 million to $50 million (AB
32, J. P�rez, 2013).
Exempting property used in space flight from the
personal property tax (AB 777, Muratsuchi, 2014).
$450 million over 15 years in corporation tax
credits for firms performing contracts to build long
range strategic aircraft (AB 2389, Fox, and SB 718,
Roth, 2014).
AB 1560 undoes the reduction on California Competes Tax
Credit allocations that accounted for the cost of AB 2389's
credits for aerospace manufacturers. As such, the measure
presumes that California's recent shift to supply-side
economic development policy has been successful, and more
is needed. However, what evidence exists that these
measures grew the economy or increased employment in an
amount that offset its fiscal costs?
6. Striking the balance . When the Legislature enacts a
capped and allocated tax benefit, it doesn't put money into
AB 1560 - 8/18/14 -- Page 6
an account to fund tax credits; instead, the Legislature
authorizes a maximum amount of tax credits, designates an
administrative agency to allocate the credits, and then
designs an allocation process in statute. The Department
of Finance subtracts the expected revenue losses from tax
benefits from future revenue estimates. AB 93 authorized
the California Competes Committee to allocate a specified
amount of tax credits in each year, and AB 2389 reduced
that amount. Instead of repealing the reduction, AB 1560
instead allows to the Director of Finance the authority to
increase this amount at his or her discretion, a
significant delegation without much direct precedent in tax
policy. Generally, the Governor proposes spending in the
Budget Bill, and the Legislature debates and approves the
annual Budget Act after ensuring that it reflects its
budgeting priorities. AB 1560 would place the allocation
authorization increase solely in the hands of the
administration. The Committee may wish to consider
delegating tax credit allocation authority.
7. Urgency . AB 1560 contains an urgency clause, and
would take effect immediately if it's enacted. As such,
Legislative Counsel has assigned the measure its 2/3 vote
key.
Assembly Actions
Assembly Floor 74-2
Assembly Appropriations 17-0
Assembly Revenue and Taxation 7-0
Support and Opposition (08/28/14)
Support : California Chamber of Commerce, California
Manufacturers and Technology Association.
Opposition : Unknown.