BILL ANALYSIS �
AB 2389
Page A
( Without Reference to File )
ASSEMBLY THIRD READING
AB 2389 (Fox)
As Amended June 25, 2014
2/3 vote. Urgency
REVENUE & TAXATION 9-0
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|Ayes:|Bocanegra, Harkey, Beth | | |
| |Gaines, Gordon, Mullin, | | |
| |Nestande, Pan, | | |
| |V. Manuel Perez, Ting | | |
| | | | |
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SUMMARY : Modifies the current capital investment incentive
program for local governments and allows a tax credit under the
Corporation Tax (CT) Law to a qualified taxpayer in an amount
equal to 17.5% of qualified wages paid by the taxpayer during
the taxable year to qualified full-time employees, as specified.
Specifically, this bill :
1)Amends, in several respects, Government Code (GC) Section
51298, which authorizes specified local governments to
establish a "capital investment incentive program", whereby a
"capital investment incentive amount" is paid to the proponent
of a "qualified manufacturing facility" for up to 15
consecutive fiscal years. Specifically, the amendments:
a) Transfer responsibility for certifying the proponent's
initial investment from the Business, Transportation and
Housing Agency to the Governor's Office of Business and
Economic Development (GO-Biz).
b) Modify the definition of a "qualified manufacturing
facility" to apply to businesses described within Code
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<1> Refers to establishments manufacturing electrical equipment
and components (except electric lighting equipment,
household-type appliances, transformers, switchgears, relays,
motors, and generators).
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3359<1> or 3364<2> of the 2012 North American Industry
Classification System (NAICS) Manual.
c) Modify the definition of a "capital investment incentive
amount" as an amount up to or equal to the amount of ad
valorem property tax revenue derived by the participating
local agency from the taxation of that portion of the total
assessed value of the facility's real and personal property
that exceeds $25 million (instead of $150 million per
current law).
d) Expand the definition of "good cause" authorizing a
local government to waive a recapture of any capital
investment incentive amount for nonperformance.
e) Make other conforming changes.
2)Provides that GC Section 51298, as newly amended, shall become
inoperative on July 1, 2015, and shall be repealed on January
1, 2016.
3)Provides that a capital investment incentive program
established before the effective date of this bill may remain
in effect for the full term of that program.
4)Enacts a new GC Section 51298 that shall become operative on
July 1, 2015. This version is similar to existing law, with
the following key modifications:
a) Responsibility for certifying the proponent's initial
investment will be transferred to GO-Biz.
b) A qualified manufacturing facility will include a
business described in Codes 3321 to 3399<3>, inclusive, or
Codes 541711<4> or 541712<5> of the 2012 NAICS Manual.
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<2> Refers to establishments engaged in aerospace product and
parts manufacturing.
<3> Refers to a wide array of manufacturing activities.
<4> Refers to research and development in biotechnology.
<5> Refers to research and development in the physical,
engineering, and life sciences.
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c) The section will include the expanded definition of
"good cause" authorizing a local government to waive
recapture of a capital investment incentive amount for
nonperformance.
5)Extends the sunset date for the entire capital investment
incentive program from January 1, 2017, to January 1, 2018.
6)Allows a tax credit under the CT Law to a qualified taxpayer
in an amount equal to 17.5% of qualified wages paid by the
taxpayer during the taxable year to qualified full-time
employees, multiplied by the annual full-time equivalent
ratio.
7)Provides that the credit is authorized for each taxable year
beginning on or after January 1, 2015, and before 1, 2030.
8)Defines a "qualified full-time employee" as an individual that
is employed in this state by the qualified taxpayer and
satisfies both of the following:
a) The individual's services for the qualified taxpayer are
at least 80% directly related to the qualified taxpayer's
subcontract to design, test, manufacture property, or
otherwise support production of property for ultimate use
in, or as a component of, a new advanced strategic aircraft
for the United States (U.S.) Air Force; and,
b) The individual is paid compensation by the qualified
taxpayer that satisfies either of the following conditions:
i) Is qualified wages paid by the qualified taxpayer
for services not less than an average of 35 hours per
week.
ii) Is a salary paid by the qualified taxpayer as
compensation during the taxable year for full-time
employment, within the meaning of Labor Code Section 515.
9)Defines "qualified taxpayer" as any taxpayer that is a major
first-tier subcontractor awarded a subcontract to manufacture
property for ultimate use in, or as a component of, a new
advanced strategic aircraft for the U.S. Air Force.
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10)Defines "major first-tier subcontractor" as a subcontractor
that was awarded a subcontract in an amount of least 35% of
the amount of the initial prime contract awarded for the
manufacturing of a new advanced strategic aircraft for the
U.S. Air Force.
11)Defines "qualified wages" as wages paid or incurred by the
qualified taxpayer during the taxable year with respect to
qualified full-time employees that are direct labor costs,
within the meaning of Internal Revenue Code (IRC) Section
263A, relating to capitalization and inclusion in inventory
costs of certain expenses, allocable to property manufactured
in California by the qualified taxpayer for ultimate use in,
or as a component of, a new advanced strategic aircraft for
the U.S. Air Force.
12)Defines an "advanced strategic aircraft for the U.S. Air
Force" as a new advanced strategic aircraft developed and
produced for the U.S. Air Force under the New Advanced
Strategic Aircraft Program.
13)Defines "New Advanced Strategic Aircraft Program" as the
project to design, test, manufacture, or otherwise support
production of a new advanced strategic aircraft for the U.S.
Air Force under a contract that is expected to be awarded in
the first or second calendar quarter of 2015.
14)Defines "annual full-time equivalent" as either of the
following:
a) In the case of a qualified full-time employee paid
hourly qualified wages, the total number of hours worked
for the qualified taxpayer by the qualified full-time
employee, not to exceed 2,000 hours per employee, divided
by 2,000.
b) In the case of a salaried qualified full-time employee,
the total number of weeks worked for the qualified taxpayer
by the qualified employee divided by 52.
15)Defines "annual full-time equivalent ratio" as a ratio, the
numerator of which is 1,100 and the denominator of which is
the number of qualified full-time employees computed on an
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annual full-time equivalent basis for the taxable year. The
ratio may not be greater than one.
16)Limits the total aggregate amount of the credit as follows:
a) To $25 million, per calendar year, for years one through
five;
b) To $28 million, per calendar year, for years six through
10; and,
c) To $31 million, per calendar year, for years 11 through
15.
17)Prohibits a qualified taxpayer from claiming the credit
unless the credit was reflected within the bid, upon which the
taxpayer's subcontract is based, by reducing the bid amount by
a good faith estimate of the allowable credit amount.
18)Requires a qualified taxpayer to report to the Franchise Tax
Board (FTB), upon request, all references to the credit and
ultimate cost reductions incorporated into any successful bid
that awarded a subcontract for which the taxpayer is making a
claim.
19)Provides that, if a qualified taxpayer is eligible to claim
other tax credits for qualified wages, then only one credit
shall be allowed to the taxpayer with respect to any wage
consisting in whole or in part of those qualified wages.
20)Requires the FTB to allocate the credit on a
first-come-first-served basis.
21)Allows the FTB to prescribe necessary or appropriate
regulations, rules, guidelines, or procedures to implement the
credit program.
22)Requires the credit to be claimed on a timely filed original
tax return.
23)Allows a qualified taxpayer, in the case where the credit
allowed exceeds the tax liability, to carry the excess forward
to reduce the tax in the following year, and the seven
succeeding years, if necessary, until the credit is exhausted.
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24)Repeals the credit on December 1, 2030.
25)Takes immediate effect as an urgency statute necessary for
the immediate preservation of the public peace, health, or
safety.
EXISTING LAW :
1)Authorizes the governing body of a county, city and county, or
city, by means of an ordinance or resolution, to establish a
"capital investment incentive program." Specifically
authorizes the payment of a "capital investment incentive
amount" to the proponent of a "qualified manufacturing
facility" for up to 15 consecutive fiscal years.
2)Provides that the consecutive fiscal years during which a
"capital investment incentive amount" is to be paid shall
begin with the first fiscal year commencing after the date
upon which the "qualified manufacturing facility" is certified
for occupancy, as specified.
3)Provides that the annual payment to a proponent of each
"capital investment incentive amount" shall be contingent upon
the proponent's payment of a "community services fee."
4)Defines a "capital investment incentive amount" as an amount
up to or equal to the amount of ad valorem property tax
revenue derived by the participating local agency from the
taxation of that portion of the total assessed value of the
facility's real and personal property that exceeds $150
million.
5)Defines a "qualified manufacturing facility" as a proposed
manufacturing facility that meets all of the following
criteria:
a) The proponent's initial investment in that facility, as
specified, exceeds $150 million.
b) The facility is to be located within the jurisdiction of
the electing county, city and county, or city.
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c) The facility is operated by any of the following:
i) A business described in Codes 3500 to 3899,
inclusive, of the Standard Industrial Classification
(SIC) Manual, as specified;
ii) A business engaged in the recovery of minerals from
geothermal resources, as specified; or,
iii) A business engaged in the manufacturing of parts or
components related to the production of electricity using
solar, wind, biomass, hydropower, or geothermal
resources, as specified.
d) The proponent is either currently engaged in commercial
production or engaged in the perfection of the
manufacturing process, or the perfection of a product
intended to be manufactured.
6)Allows various tax credits under both the Personal Income Tax
(PIT) Law and the CT Law. These credits are generally
designed to provide relief to taxpayers who incur specified
expenses or to encourage socially beneficial behavior.
FISCAL EFFECT : Unknown. The bill is keyed non-fiscal by the
Legislative Counsel.
COMMENTS :
1)Proponents of this bill note the following:
As you know, the aerospace industry has a long and
rich history in Southern California. This extremely
diversified industry is comprised of small, medium and
large enterprises that manufacture aircraft (civil and
military), missiles, satellites and other space
vehicles, as well as the businesses that manufacture
and distribute parts and components. The state's
aerospace industry directly supports about 140,000
high-paying, high-skill jobs. More than 88,000 of
those jobs are located in Southern California.
However, we must always remember that in today's
global economy, location is not permanent, but by
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choice. Companies - especially those that would avail
themselves of the benefits offered in AB 2389 - have
many opportunities to locate outside of California.
We have to be ready as a region and as a state to make
that choice easier for them to locate their business,
suppliers, contract, and/or product or research and
development investment here. We see AB 2389 as an
action policymakers can - and must - take. And while
we fully understand that one program is in no way a
panacea to save an industry, it is a small step in the
right direction to help us attract new companies as
well as grow next-generation aerospace businesses.
2)Assembly Revenue and Taxation Committee comments:
a) Background. The aerospace industry began in California
with a few aircraft builders around World War I, and then
vastly expanded in the mobilization for World War II. The
industry steadily grew during the Cold War encompassing a
wide range of activities, including military and civilian
aircraft, reconnaissance and communications satellites,
strategic missiles, and space exploration. By the 1980s,
about 40% of the aerospace business resided in southern
California, and the industry employed close to a
half-million people. One of the region's strongest selling
points for aerospace was its environment: the clear blue
skies and ample open spaces were ideal for testing new
aircraft. California also was home to a variety of related
industries, particularly petroleum, as well as top-notch
research universities and a large labor pool.
Defense spending peaked at $557 billion in 1985 (in
constant fiscal 2009 dollars) and then began a downward
trend. The collapse of the Soviet Union and the end the
Cold War led to more than 50 major defense companies
consolidating into only six. According to the Employment
Development Department's Labor Market Information Division,
employment in the Aerospace Production and Manufacturing
sector declined from 139,300 in 1993 to 70,800 in 2013.
Most of the decline occurred before 2004. However, further
job decline is likely because defense spending is expected
to fall due to the implementation of federal budget cuts.
b) The capital investment incentive program: As noted
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above, current law authorizes specified local governments
to establish a capital investment incentive program,
whereby a "capital investment incentive amount" is paid to
the proponent of a qualified manufacturing facility for up
to 15 consecutive fiscal years. This bill would, among
other things, modify the definition of a "qualified
manufacturing facility" to apply to businesses described
within Code 3359 or 3364 of the 2012 NAICS Manual. These
sections, in turn, refer to establishments manufacturing
electrical equipment and components, and establishments
engaged in aerospace product and part manufacturing. This
bill also temporarily modifies the definition of a "capital
investment incentive amount." Under the existing
definition, a proponent pays property taxes on no less than
the first $150 million of the facility's assessed value and
then may receive a property tax rebate for the taxes paid
on the facility's value above that amount. This bill would
authorize a local government to rebate property tax
revenues paid on the facility's assessed value above $25
million (instead of $150 million per current law). These
modifications to the capital investment incentive program
will cease to be operative on July 1, 2015. Thereafter,
the capital investment incentive program will revert to its
current form, with certain modifications, and will remain
in effect until January 1, 2018.
c) The proposed income tax credit program: This bill
creates a corporation tax credit program for the aerospace
industry. The proposed credit amount is equal to 17.5% of
the wages paid to employees of a taxpayer engaged in
manufacturing of property for ultimate use in, or as a
component of, a new advanced strategic aircraft for the
U.S. Air Force. The annual amount of the credit is limited
to $25 million for the first five years, $28 million during
the next five years and $31 million for the remaining five
years. The credit program includes a 15-year sunset
provision, and it is allowed only for wages paid to
individuals employed in California.
d) The existing hiring tax credit program: Last year, the
Legislature substantially revised California's tax
incentive programs for economic development. A new hiring
tax credit was established under the PIT and CT laws, from
January 1, 2014 to January 1, 2021, for additional hiring
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of employees in defined geographic areas of the state. The
hiring credit is available in the geographic areas largely
covered by the former enterprise zones (EZs) (except
certain census tracts with low unemployment), two recently
expired EZs, and in designated census tracts that have a
civilian unemployment rate and a poverty rate in the top
25% of all census tracts in the state. The credit is
available for full-time employees who perform at least 50%
of their activities in the designated areas. To qualify
for any credit, the taxpayer must have experienced an
increase in total jobs throughout the state from one year
to the next. Taxpayers are only allowed the credit for the
number of new jobs provided in the state.
e) Wage subsidy: Unlike the existing hiring tax credit,
which attempts to encourage taxpayers to hire new
employees, the proposed tax credit appears to be simply a
state subsidy for wages paid by a qualified taxpayer
engaged in manufacturing of new advanced strategic
aircraft. At the same time, this bill seems to encourage a
qualified taxpayer to increase employee wages over time.
After reaching the 1,100 employee threshold, a qualified
taxpayer would only be able to increase an allowable credit
amount by increasing employee wages.<6>
f) Supply-side economics: Generally, advocates for tax
incentives, such as Arthur Laffer and N. Gregory Mankiw,
argue that reduced taxes allow taxpayers to invest money
that would otherwise be paid in taxes, thereby creating
additional economic activity. "Supply-siders" posit that
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<6> For example, a qualified taxpayer with 1,100 employees, each
earning $130,000 a year, would qualify for a $25,025,000 tax
credit. [$143,000,000 total wages x (1,100/1,100 employees) =
$143,000,000x17.5% = a tax credit of $25,025,000]. However, if
the qualified taxpayer were to hire one additional employee, the
taxpayer would again only qualify for a tax credit of
$25,025,000. [$143,130,000 total wages x (1,100/1,101
employees) = $143,000,000x17.5% = a tax credit of $25,025,000].
Therefore, in order to receive a larger credit, the qualified
taxpayer would have to increase wages for each of its 1,100
full-time equivalent employees beyond $130,000 a year. Hiring
additional employees beyond the 1,100 employee limitation would
make no difference.
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higher taxes do not result in more government revenue;
instead, they suppress additional innovation and investment
that would have led to more economic activity and,
therefore, healthier public treasuries, under lower
marginal tax rates. Critics, however, assert that tax
incentives rarely result in additional economic activity.
Companies do business in California because of its
competitive advantages, namely its environment,
transportation infrastructure, access to ports, highways,
and railroads, as well as its highly skilled workforce and
world class higher education system.
The budgets for defense projects are predetermined by the
federal government, and any increase in aggregate economic
activity would be dependent on additional federal defense
spending. One might argue that this bill subsidizes work
that has already been committed to by the federal
government. However, this bill has less to do with
increasing economic activity nationwide and more to do with
ensuring that such activity occurs in California.
g) Specific industry: In general, tax credits and other
tax incentives are used to encourage certain behavior, not
to necessarily aid a specific industry. For example, the
Research and Development Credit provides a credit for
qualified research, but the research can be accomplished in
a number of industries: computer and peripheral equipment
manufacturing, communications equipment manufacturing,
semiconductor and other electronic component manufacturing,
pharmaceuticals and medicine manufacturing, and software
publishing. In contrast, tax incentives provided to
specific industries are intended to retain or attract
certain industries to the state. Subsidizing certain
industries, not just certain behavior, may be more
beneficial in that targeted subsidies could provide the
state with a larger return on investment, both financially
and socially. However, as with other industry-specific
credit programs, providing subsidies to a single industry
could unintentionally cause aggressive competition among
various states, leading to what is known as a "race to the
bottom."
h) Double-dipping: This bill provides that a qualified
taxpayer may claim only one tax credit for qualified wages,
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if other tax credits are available. However, the exclusion
of other credits does not prevent the use of a deduction
for ordinary and necessary business expenses, which
includes wages paid to an employee. This bill would allow
a qualified taxpayer a double benefit: first, a deduction,
and then a credit calculated based on the same wages paid
by a qualified taxpayer for qualified full-time employees.
Generally, a credit is allowed in lieu of a deduction in
order to eliminate multiple tax benefits for the same item
or expense.
Analysis Prepared by : Oksana Jaffe, M. David Ruff, and Carlos
Anguiano / REV. & TAX. /
(916) 319-2098
FN: 0004121