BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, Chair
SB 998 (Knight) - Taxes: Exemption and Credits: New Aerospace
Projects
Amended: May 19, 2014 Policy Vote: G&F 6-0
Urgency: No Mandate: No
Hearing Date: June 23, 2014
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: Current law provides for a partial sales and use
tax (SUT) exemption of 4.1875 percent on purchases of
manufacturing equipment made by taxpayers within specified North
American Industrial Classification System (NAICS) codes, capped
at $200 million annually per taxpayer, for fiscal years 2014-15
through 2021-22.
SB 998 would increase the limit to $300 million in purchases
annually for qualified taxpayers engaging in new aerospace
projects, as defined, for calendar years 2015 through 2017.
Additionally, the bill would require (1) the Board of
Equalization (BOE) to report the purchase amounts to the
Legislature, and (2) the Employment Development Department (EDD)
to report to the Legislature on January 1, 2017, any increase in
aerospace employment manufacturing since the beginning of 2015.
Fiscal Impact:
BOE's estimation methodology suggests that this measure
could lead to an annual General Fund revenue loss of up to
$17 million for the period 2015-2017. (See Staff Comments).
BOE would incur costs to notify affected manufacturers,
audit claimed exemptions, programming costs to summarize
the data and prepare the report to the Legislature, and
respond to inquiries from taxpayers and the general public.
These costs are currently not completely determined, but at
a minimum would be in the hundreds of thousands of dollars
annually. (General Fund).
EDD would incur minor and absorbable costs to report
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employment data to the Legislature.
Background: The aerospace industry in Southern California began
roughly 100 years ago. Over the last century, early aviation
pioneers in the region transitioned from small workshops to
large factories that produced bombers and fighters and employed
tens of thousands of Southern Californians. In 1933, all the
airplane factories in Southern California employed approximately
1,000 people combined. By November 1943, that number had risen
to 280,300 workers. After World War II, technological
innovations pioneered by the region's aerospace firms made the
industry an important driver of economic growth in Southern
California. However, with the end of the Cold War in the late
1980s came defense budget cuts and military base closures. In
response, the industry's largest firms contracted in a wave of
consolidations and, as a result, many smaller, second and third
tier contractors were forced to close their doors. The result
was the loss of thousands of jobs. According to the Employment
Development Department's Labor Market Information Division,
state employment in aerospace product and manufacturing declined
by nearly half, from 139,300 in 1993 to 70,800 in 2013; however,
almost the entire decline occurred between 1993 and 2004.
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)
and SB 90 (Committee on Budget and Fiscal Review), measures
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
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that suffer from high levels of poverty and unemployment.
The credit lasts for a six-year period beginning in 2014.
A partial 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 the California
Competes Tax Credit Committee can award various tax credits
up to an annually capped amount to taxpayers who apply.
Proposed Law: SB 998 would establish a $300 million cap related
to the partial SUT exemption for manufacturing and research and
development equipment related to new aerospace projects, as
defined. The increased cap would be effective for three calendar
years beginning January 1, 2015. Additionally, BOE would be
required to report to the Legislature on January 1, 2017
regarding the amount of equipment purchased, while EDD would be
required to report on the increase in aerospace manufacturing
equipment.
Related Legislation: AB 1997 (Gorell) would provide for a full
SUT exemption (as opposed to the partial exemption in current
law) for qualifying purchases by manufacturers of unmanned
aerial vehicles. AB 1997 is currently in the Assembly Revenue
and Taxation Committee.
Staff Comments: The report that this bill mandates BOE to submit
to the Legislature will require the agency to new track
information. For example, a bolt manufacturer purchases
equipment to make bolts that subsequently become a component
part of an aircraft engine. This firm would have to inform BOE
of the purchase amount of the equipment to make those bolts.
Thus, BOE will need to request various manufacturers to
voluntarily report their equipment purchases that are used to
manufacture, design, or test aircraft, aircraft engine, guided
missiles, space vehicles, propulsion units, or related parts or
components. Any change to the sales and use tax return that
would require that the various manufacturers report their
applicable purchases that are described in the bill would
require computer programming, which would increase the agency's
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costs.
With respect to the bill's revenue impact, BOE notes that
available Census Bureau data indicate that there are four
aircraft manufacturing firms in California with employment in
excess of 1,000. Firms of this size would be most likely to have
the financial resources to make more than $200 million in annual
qualifying purchases. If these were the only affected firms, and
if all four of them made annual qualifying purchases of $300
million, annual SUT revenue would be about $17 million lower
than under current law for the period 2015-2017. However, the
extent to which these firms would increase their qualifying
purchases beyond the current-law $200 million is unknown, making
the $17 million estimate an upper-bound.
Additionally, to the extent that this bill were to lead to
increases in employment and other economic activities that
produce additional tax revenue, the fiscal impact of the bill
could be reduced.