The California Alternative Energy and Advanced Transportation Financing Authority Act establishes the California Alternative Energy and Advanced Transportation Financing Authority. Authority, consisting of 5 specified state officials. The act authorizes, until January 1, 2021, the authority to provide financial assistance in the form of a sales and use tax exclusion for projects, including those that promote California-based manufacturing, California-based jobs, advanced manufacturing, the reduction of greenhouse gases, or the reduction in air and water pollution or energy consumption. The act prohibits the sales and use tax exclusions for these projects from exceeding $100,000,000 for each calendar year.

This bill would instead prohibit the sales and use tax exclusions from exceeding $200,000,000 for each calendar year. The bill would specify that if less than $200,000,000 $100,000,000 is granted in a calendar year, the unallocated amount may roll over to the following calendar year. The bill would increase the membership of the authority to 7, with the Senate Committee on Rules and the Speaker of the Assembly each appointing one state legislator as a nonvoting member. The bill would declare the intent of the Legislature that the authority approve these project applications on a competitive basis.

The California Alternative Energy and Advanced Transportation Financing Authority Act establishes the California Alternative Energy and Advanced Transportation Financing Authority. The act authorizes, until January 1, 2021, the authority to provide financial assistance in the form of a sales and use tax exclusion for projects, including those that promote California-based manufacturing, California-based jobs, advanced manufacturing, the reduction of greenhouse gases, or the reduction in air and water pollution or energy consumption. The act prohibits the sales and use tax exclusions from exceeding $100,000,000 for each calendar year.

This bill would instead prohibit the sales and use tax exclusions from exceeding $200,000,000 for each calendar year. By increasing the limit on the sales and use tax exclusion, this bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of ²/₃ of the membership of each house of the Legislature. The bill would specify that if less than $200,000,000 is granted in a calendar year, the unallocated amount may roll over to the following calendar year.

The California Alternative Energy and Advanced Transportation Financing Authority Act establishes the California Alternative Energy and Advanced Transportation Financing Authority. The act authorizes, until January 1, 2021, the authority to provide financial assistance in the form of a sales and use tax exclusion for projects, including those that promote California-based manufacturing, California-based jobs, advanced manufacturing, the reduction of greenhouse gases, or the reduction in air and water pollution or energy consumption. The act prohibits the sales and use tax exclusions from exceeding $100,000,000 for each calendar year.

This bill would instead prohibit the sales and use tax exclusions from exceeding $200,000,000 for each calendar year. By increasing the limit on the sales and use tax exclusion, this bill would include a change in state statute that would result in a taxpayer paying a higher tax within the meaning of Section 3 of Article XIIIA of the California Constitution, and thus would require for passage the approval of ²/₃ of the membership of each house of the Legislature. The bill would specify that if less than $200,000,000 is granted in a calendar year, the unallocated amount may roll over to the following calendar year.

Date of Hearing: May 25, 2016

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 1683

Author:(Eggman) – As Amended Ver:May 16, 2016

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill:

1. States that it is the intent of the Legislature that the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) approve project applications on a competitive basis.
2. Adds two ex officio members to the seven-member CAEATFA: one state legislator appointed by the Assembly Speaker and another state legislator appointed by the Senate Committee on Rules.
3. Allows any amount of the CAEATFA sales and use tax (SUT) exclusion that is unallocated to be rolled over into the next calendar year, but for that one year only.

FISCAL EFFECT:

1. Unknown fiscal costs to CAEATFA to approve applications on a competitive basis.
2. Unknown use of the SUT exclusion as a result of rolling forward unallocated exclusion amounts for an additional year.

COMMENTS:

1. Background. The California Alternative Energy Source Financing Authority was established in 1980, with an authorization of $200 million in revenue bonds to finance projects utilizing alternative or renewable energy sources, such as wind, solar, and cogeneration and geothermal. In 1994, the authority was renamed the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA).

CAEATFA is also allowed to provide a SUT exclusion for certain specified projects, and this program has been expanded in recent years. The first SUT exclusion was granted to Tesla in 2009. SB 71 (Padilla), Chapter 10, Statutes of 2010, expanded the SUT exclusion to apply to purchases of equipment used for "advanced transportation technologies" and "alternative source" products, components, or systems. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012 added "advanced manufacturing" to the list of eligible projects and placed a $100 million cap on the amount of the SUT exclusion that may be awarded in a calendar year. In 2015, AB 199 (Eggman), Chapter 768, Statutes of 2015, further modified the SUT exclusion program to include manufacturing projects that either process or utilize "recycled feedstock." The expanded program is due to sunset on January 1, 2021.

1. Program oversubscription. Last year, CAEATFA had a high number of applications requesting an allocation of the SUT exclusion, and the existing cap of $100 million was quickly reached. With the expansion of the CAEATFA program to include projects that process or utilize recycled feedstock, the number of SUT exclusion applications is expected to increase even more.
   
   While historically small projects requesting less than $2.1 million in SUT exclusions comprised almost 75% of approved applications, in recent years CAEAFTA has approved a number of applications for large projects with more than $20 million in SUT exclusions, such as for example, the ones submitted by Tesla, Atieva, Lockheed, Space X, and Solyndra.
   
   Existing law does not impose a cap on the amount that a company may request in SUT exclusions, nor does existing law prioritize certain types of projects. Thus, applications involving large projects may utilize a considerable portion of the allowable $100 million cap, leaving no funds for smaller projects. Furthermore, the CAEAFTA does not have the authority to utilize the unclaimed awards. Finally, CAEAFTA may not award any amounts that remain unallocated in a particular calendar year in the following years. In other words, the un-awarded SUT exclusion amounts disappear.
2. Related legislation. AB 2334 (Mullin), also on today’s agenda, increases the amount of SUT exclusions available from $100 million to $575 million for 2016 and from $100 million to $350 million for 2017 through 2021.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 9, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 1683 (

Author:Eggman) – As Amended Ver:March 8, 2016

SUSPENSE

Fiscal committee. Majority vote. Tax levy.

SUBJECT: Alternative energy financing

SUMMARY: Increases the annual sales and use tax (SUT) exclusion amount available for allocation by the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) from $100 million to $200 million. Specifically, this bill:

1. Increases the amount of SUT exclusion available for allocation by CAEATFA in a calendar year from $100 million to $200 million.
2. Provides that, if less than $200 million is granted in a calendar year, the unallocated SUT exclusion amount may roll over to the following calendar year.
3. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Authorizes CAEATFA to provide financial assistance to certain facilities that use alternative energy sources and technologies, develop advanced manufacturing, process recycled feedstock, or develop and commercialize advanced transportation technologies that conserve energy, reduce air pollution, and promote economic development and jobs.
   
2. Allows CAEATFA to provide eligible projects financial assistance in the form of a SUT exclusion on property used to process recycled feedstock or used for the "design, manufacture, production, or assembly" of advanced manufacturing, advanced transportation technologies, or alternative energy source products, components or system, as defined.
   
3. Requires a project to demonstrate that the benefits to the state from the project equals or exceeds the projected benefit to the participating party from the SUT exclusion.
   
4. Requires CAEATFA to provide 20-day notice to the Legislature, once the value of SUT exemptions approved by CAEATFA exceeds $100 million. The notification must be provided prior to granting additional approvals.
   
5. Repeals the CAEATFA's expanded authority to promote the use of advanced manufacturing and recycled feedstock as of January 1, 2021.
6. Imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property (TPP) in this state, unless the sale is specifically exempt from taxation. It is presumed that gross receipts from a particular sale of TPP are subject to tax, unless the seller can establish either that the sale was not a retail transaction or that the sale is subject to an exemption.

FISCAL EFFECT: Unknown.

COMMENTS:

1. The Author's Statement. The author has provided the following statement in support of this bill:
   
   "The consequences of climate change can no longer be ignored. We need to look at all tools at our disposal not only to make sure that we are doing everything possible to mitigate climate change's effect on California, but also to ensure the state and its residents remain at the forefront of environmental entrepreneurship and stewardship. It is time to expand this proven program that promotes economic development and a greener economy."
2. CAEATFA Program: Background. The California Alternative Energy Source Financing Authority was established in 1980, with an authorization of $200 million in revenue bonds to finance projects utilizing alternative or renewable energy sources, such as wind, solar, and cogeneration and geothermal. In 1994, the authority was renamed the "California Alternative Energy and Advanced Transportation Financing Authority" and its charge was expanded to include the financing of "advanced transportation" technologies. During the energy crisis of 2001, CAEATFA's authority was expanded again to provide financial assistance to public power entities, independent generators, and others for new and renewable energy sources.
   
   The CAEATFA board consists of five members: the Treasurer, Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission. Generally, CAEATFA is authorized to provide financial assistance to approved projects via the issuance of bonds, loans, loan guarantees, and credit enhancements. CAEATFA may authorize up to $1 billion in revenue or prepayment bonds to fund projects. Over the last few years, CAEATFA has provided financial assistance through various programs, including qualified energy conservation bonds for projects that promote the use of alternative energy and energy efficiency in state, local and tribal government facilities, as well as clean renewable energy bonds for renewable energy projects.
3. CAEATFA's SUT Exclusion Program. CAEATFA is also allowed to provide a SUT exclusion for certain specified projects. The first SUT exclusion was granted to Tesla in 2009. Shortly thereafter, SB 71 (Padilla), Chapter 10, Statutes of 2010, expanded the SUT exclusion to apply to purchases of equipment used for the design, manufacture, production, or assembly of "advanced transportation technologies" and "alternative source" products, components, or systems. Alternative source products include cogeneration technology; energy conservation; and solar, biomass, wind, geothermal, specified hydro-electric, or any other energy efficient technologies that reduce the use of fossil and nuclear fuels. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012, added "advanced manufacturing" to the list of eligible projects. Consequently, the SUT exclusion program was enlarged to include "advanced manufacturing" projects. SB 1128 also placed a $100 million cap on the amount of the SUT exclusion that may be awarded in a calendar year. Finally, in 2015, AB 199 (Eggman), Chapter 768, Statutes of 2015, further modified the SUT exclusion program to include manufacturing projects that either process or utilize "recycled feedstock." The expanded program is due to sunset on January 1, 2021.
   
4. CAEATFA's Application Process for SUT Exclusion. California provides several tax incentives designed to encourage socially beneficial behavior, such as an increase in low-income housing, research and development activity, and overall economic activity. A major policy concern when enacting a tax incentive program is the possibility of rewarding behavior that would have occurred in the absence of the subsidy, known as "deadweight loss". The possibility of rewarding, instead of incentivizing, behavior has become an accepted reality for almost all tax incentive programs. The Legislature has attempted to address this problem by creating tax incentives programs that require potential beneficiaries to undergo a rigorous application process to ensure, on a case-by-case basis, that the state receives the desired benefit.
   
   One of the prime examples of such programs is the SUT exclusion administered by the CAEATFA. The CAEATFA has established a lengthy application process to ensure the efficient use of state resources by requiring each applicant to demonstrate a benefit to the state before an award may be granted. Before a SUT exclusion may be awarded, CAEATFA is required to determine the eligibility of an individual project based on a number of factors relating to the reduction in greenhouse gases and the creation of manufacturing jobs. Specifically, when evaluating an application, CAEATFA must consider the extent to which the project develops manufacturing facilities located in California; the extent to which the project will create new, permanent jobs in California; the extent to which the project results in a reduction of greenhouse gases; the unemployment rate in the area in which the project will be located; and any other factors that CAEATFA deems appropriate in accordance with this program, among other criteria. Most important among the factors is the requirement that applicants demonstrate a "net benefit" to the state. Known as the "net benefits" test, this test quantifies the fiscal and environmental benefits of the proposed project to ensure that the state receives a benefit beyond the cost of the SUT exclusion and is one of the most important factors that CAEATFA considers when awarding the exclusion. In this manner, the test attempts to address the "dead-weight" problem found within every subsidy. Projects approved for the exclusion receive a full exemption from the state and local portions of the SUT. The full SUT rate ranges from 7.5% to 10%, with a statewide average of 8.42%.

Once the exclusion has been granted, applicants are allowed three years to use the award but can request extensions from the CAEATFA Board. Amounts awarded in previous years, but not yet utilized, may not be recaptured by the CAEATFA. In November 2015, CAEATFA suspended acceptance of new applications due to the proposed program revisions and the development of the regulations to implement AB 199. Currently, $25 million of the 2016 annual amount remains unallocated.

1. What is the Problem? According to the author's office, last year CAETFA had a high number of applications requesting an allocation of the SUT exclusion. The existing cap of $100 million was quickly reached. In addition, with the expansion of the CAETFA program to include projects that process or utilize recycled feedstock, CAETFA estimates a higher demand for the SUT exclusion grants.
   
   During this Committee's informational hearing on February 22, 2016, the Executive Director of CAEFTA testified that the increased demand for the funds may be due to continued economic recovery, newly added categories of eligible projects and a number of applications requesting large SUT exclusion amounts. For example, large projects with more than $20 million in SUT exclusions include the ones by Tesla, Atieva, Lockheed, Space X, and Solyndra. Historically, small projects requesting less than $2.1 million in SUT exclusions comprised almost 75% of approved applications. However, according to CAEFTA, the current applications involving large projects may utilize a considerable portion of the allowable $100 million cap, leaving no funds for smaller projects.
   
   According to CAEATFA, a very diverse group of applicants are applying for the same funds. However, existing law does not impose a cap on the amount that a company may request in SUT exclusions, nor does existing law prioritize certain types of projects. Furthermore, the CAEFTA does not have the authority to utilize the unclaimed awards. Finally, CAEFTA may not award any amounts that remain unallocated in a particular calendar year in the following years. In other words, the un-awarded SUT exclusion amounts simply disappear.
2. Proposed Solution. The author believes that allowing a rollover of unallocated funds to the following calendar year and doubling the annual SUT exclusion cap would help mitigate climate changes' effect on California, promote economic development and green economy, and ensure that California remains at the forefront of environmental entrepreneurship. While this bill does not expressly specify the calendar years to which the increased allocation would apply, it appears that it will be available beginning with the 2016 calendar year.
3. Partial SUT Exemption for Purchases of Manufacturing and R&D Equipment. In 2013, Governor Brown signed AB 93 (Committee on Budget) Chapter 69, Statutes of 2013, which reformed California's economic development policies. The new law eliminated enterprise zones and other geographically targeted economic development areas and, instead, created three new tax benefits: (a) a temporary tax credit for wages paid by taxpayers to qualified employees within former enterprise zones, and other areas that suffer from high levels of poverty and unemployment; (b) a temporary SUT exemption on purchases of manufacturing equipment made by qualified taxpayers, capped at $200 million annually per taxpayer; and, (c) the California Competes Tax Credit program. Existing law limits the total annual amount of these three tax incentives to $750 million.
   
   With the passage of AB 93, sales and leases of certain manufacturing and R&D equipment may now qualify for the temporary SUT partial exemption. The partial exemption rate is currently set at 4.1875%, which means that sales of qualifying property sold to a qualified person are taxed at a rate of 3.3125% (7.5% current statewide tax rate minus 4.1875% partial exemption rate), plus any applicable district taxes. The exemption is available for purchases made until July 1, 2022. The program is generally self-certified, with little oversight from the State Board of Equalization (BOE). The program was created in such a way as to allow the partial SUT exemption to be taken immediately, without complicated forms and procedures.

Unlike CAEATFA's SUT exclusion, the partial SUT exemption does not necessarily attempt to encourage or incentivize beneficial behavior. Instead, the partial SUT exemption attempts to reduce the distortion from the imposition of a tax on a tax, otherwise known as "pyramiding". When manufacturers pay a SUT on tangible personal property, the tax is incorporated into the cost of a consumer product, often leading to double taxation. Ideally, taxes should only be levied once because pyramiding may cause consumers to favor goods and services provided by a single company instead of those that require multiple production steps.

1. The Interaction of the Partial SUT Exemption and the CAEFTA SUT Exclusion. To a large degree, the CAEATFA SUT program overlaps with the partial SUT exemption for manufacturing and R&D equipment. Thus, unless a project includes a purchase of manufacturing or R&D equipment worth more than $200 million, the purchase may qualify for the partial SUT exemption, which requires no application or allocation. However, as noted above, the partial SUT exemption provides tax relief only for the state portion of the SUT. When the partial SUT exemption was enacted, the BOE estimated that General Fund revenue would decrease annually by more than $600 million ($637 million in fiscal year (FY) 2014-15 and $681 million in FY 2015-16). However, the most recent data demonstrates that the exemption is currently underutilized. The total exemption amount claimed in FY 2014-15 was $91.2 million; in the first four months of FY 2015-16, the amount was only $77.2 million. The underutilization problem may be due to complexities of the program and/or may be attributed to the conditional nature of the SUT exemption, where only a certain type of property and purchasers qualify for the exemption. It may be argued that the partial nature of the exemption, where some amount of SUT still needs to be collected by the vendor, also contributes to the underutilization problem.

Meanwhile, the CAEATFA exclusion program has been oversubscribed. Although the program has no per purchaser limit, it is subject to the overall annual cap of $100 million and most likely will be oversubscribed in 2016 and 2017. In the absence of legislative intent, it is unclear which types of projects should receive priority.

The CAEATFA program had been in place for many years prior to the enactment of the partial SUT exemption. It is unknown whether the underutilization of one program has contributed to the oversubscription for the other program or whether there is any connection between the two programs. However, in light of the underutilization of the partial SUT exemption and oversubscription of the CAEATFA program, the Committee may consider restructuring the CAEATFA program to prioritize certain projects, in addition to allowing the recapture of allocated funds and rollover of unallocated funds. Furthermore, as an alternative to the proposed increase in the $100 million cap, the Committee may also consider authorizing CAEATFA to exempt only the local portion of the SUT in the case of projects that otherwise meet the eligibility requirements for the partial SUT exemption.

1. Related Legislation. AB 2334 (Mullin) is similar to this bill. AB 2334, among other things, would increase the annual amount of SUT exclusions available for allocation to $475 million in the 2016 calendar year and to $250 million in the 2017 calendar year and each year thereafter.

REGISTERED SUPPORT / OPPOSITION:

Support

California Compost Coalition

California Refuse Recycling Council

California Manufacturers & Technology Association

Californians Against Waste

CR&R Incorporated

Sanitation Districts of Los Angeles County

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098

Date of Hearing: April 4, 2016

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

ABPCA Bill Id:AB 1683 (

Author:Eggman) – As Amended Ver:March 8, 2016

Fiscal committee. Majority vote. Tax levy.

SUBJECT: Alternative energy financing

SUMMARY: Increases the annual sales and use tax (SUT) exclusion amount available for allocation by the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) from $100 million to $200 million. Specifically, this bill:

1. Increases the amount of SUT exclusion available for allocation by CAEATFA in a calendar year from $100 million to $200 million.
2. Provides that, if less than $200 million is granted in a calendar year, the unallocated SUT exclusion amount may roll over to the following calendar year.
3. Takes effect immediately as a tax levy.

EXISTING LAW:

1. Authorizes CAEATFA to provide financial assistance to certain facilities that use alternative energy sources and technologies, develop advanced manufacturing, process recycled feedstock, or develop and commercialize advanced transportation technologies that conserve energy, reduce air pollution, and promote economic development and jobs.
   
2. Allows CAEATFA to provide eligible projects financial assistance in the form of a SUT exclusion on property used to process recycled feedstock or used for the "design, manufacture, production, or assembly" of advanced manufacturing, advanced transportation technologies, or alternative energy source products, components or system, as defined.
   
3. Requires a project to demonstrate that the benefits to the state from the project equals or exceeds the projected benefit to the participating party from the SUT exclusion.
   
4. Requires CAEATFA to provide 20-day notice to the Legislature, once the value of SUT exemptions approved by CAEATFA exceeds $100 million. The notification must be provided prior to granting additional approvals.
   
5. Repeals the CAEATFA's expanded authority to promote the use of advanced manufacturing and recycled feedstock as of January 1, 2021.
6. Imposes a sales tax on a retailer's gross receipts from the retail sale of tangible personal property (TPP) in this state, unless the sale is specifically exempt from taxation. It is presumed that gross receipts from a particular sale of TPP are subject to tax, unless the seller can establish either that the sale was not a retail transaction or that the sale is subject to an exemption.

FISCAL EFFECT: Unknown.

COMMENTS:

1. The Author's Statement. The author has provided the following statement in support of this bill:
   
   "The consequences of climate change can no longer be ignored. We need to look at all tools at our disposal not only to make sure that we are doing everything possible to mitigate climate change's effect on California, but also to ensure the state and its residents remain at the forefront of environmental entrepreneurship and stewardship. It is time to expand this proven program that promotes economic development and a greener economy."
2. CAEATFA Program: Background. The California Alternative Energy Source Financing Authority was established in 1980, with an authorization of $200 million in revenue bonds to finance projects utilizing alternative or renewable energy sources, such as wind, solar, and cogeneration and geothermal. In 1994, the authority was renamed the "California Alternative Energy and Advanced Transportation Financing Authority" and its charge was expanded to include the financing of "advanced transportation" technologies. During the energy crisis of 2001, CAEATFA's authority was expanded again to provide financial assistance to public power entities, independent generators, and others for new and renewable energy sources.
   
   The CAEATFA board consists of five members: the Treasurer, Controller, Director of Finance, Chairperson of the Energy Commission, and President of the Public Utilities Commission. Generally, CAEATFA is authorized to provide financial assistance to approved projects via the issuance of bonds, loans, loan guarantees, and credit enhancements. CAEATFA may authorize up to $1 billion in revenue or prepayment bonds to fund projects. Over the last few years, CAEATFA has provided financial assistance through various programs, including qualified energy conservation bonds for projects that promote the use of alternative energy and energy efficiency in state, local and tribal government facilities, as well as clean renewable energy bonds for renewable energy projects.
3. CAEATFA's SUT Exclusion Program. CAEATFA is also allowed to provide a SUT exclusion for certain specified projects. The first SUT exclusion was granted to Tesla in 2009. Shortly thereafter, SB 71 (Padilla), Chapter 10, Statutes of 2010, expanded the SUT exclusion to apply to purchases of equipment used for the design, manufacture, production, or assembly of "advanced transportation technologies" and "alternative source" products, components, or systems. Alternative source products include cogeneration technology; energy conservation; and solar, biomass, wind, geothermal, specified hydro-electric, or any other energy efficient technologies that reduce the use of fossil and nuclear fuels. In 2012, SB 1128 (Padilla), Chapter 677, Statutes of 2012, added "advanced manufacturing" to the list of eligible projects. Consequently, the SUT exclusion program was enlarged to include "advanced manufacturing" projects. SB 1128 also placed a $100 million cap on the amount of the SUT exclusion that may be awarded in a calendar year. Finally, in 2015, AB 199 (Eggman), Chapter 768, Statutes of 2015, further modified the SUT exclusion program to include manufacturing projects that either process or utilize "recycled feedstock." The expanded program is due to sunset on January 1, 2021.
   
4. CAEATFA's Application Process for SUT Exclusion. California provides several tax incentives designed to encourage socially beneficial behavior, such as an increase in low-income housing, research and development activity, and overall economic activity. A major policy concern when enacting a tax incentive program is the possibility of rewarding behavior that would have occurred in the absence of the subsidy, known as "deadweight loss". The possibility of rewarding, instead of incentivizing, behavior has become an accepted reality for almost all tax incentive programs. The Legislature has attempted to address this problem by creating tax incentives programs that require potential beneficiaries to undergo a rigorous application process to ensure, on a case-by-case basis, that the state receives the desired benefit.
   
   One of the prime examples of such programs is the SUT exclusion administered by the CAEATFA. The CAEATFA has established a lengthy application process to ensure the efficient use of state resources by requiring each applicant to demonstrate a benefit to the state before an award may be granted. Before a SUT exclusion may be awarded, CAEATFA is required to determine the eligibility of an individual project based on a number of factors relating to the reduction in greenhouse gases and the creation of manufacturing jobs. Specifically, when evaluating an application, CAEATFA must consider the extent to which the project develops manufacturing facilities located in California; the extent to which the project will create new, permanent jobs in California; the extent to which the project results in a reduction of greenhouse gases; the unemployment rate in the area in which the project will be located; and any other factors that CAEATFA deems appropriate in accordance with this program, among other criteria. Most important among the factors is the requirement that applicants demonstrate a "net benefit" to the state. Known as the "net benefits" test, this test quantifies the fiscal and environmental benefits of the proposed project to ensure that the state receives a benefit beyond the cost of the SUT exclusion and is one of the most important factors that CAEATFA considers when awarding the exclusion. In this manner, the test attempts to address the "dead-weight" problem found within every subsidy. Projects approved for the exclusion receive a full exemption from the state and local portions of the SUT. The full SUT rate ranges from 7.5% to 10%, with a statewide average of 8.42%.

Once the exclusion has been granted, applicants are allowed three years to use the award but can request extensions from the CAEATFA Board. Amounts awarded in previous years, but not yet utilized, may not be recaptured by the CAEATFA. In November 2015, CAEATFA suspended acceptance of new applications due to the proposed program revisions and the development of the regulations to implement AB 199. Currently, $25 million of the 2016 annual amount remains unallocated.

1. What is the Problem? According to the author's office, last year CAETFA had a high number of applications requesting an allocation of the SUT exclusion. The existing cap of $100 million was quickly reached. In addition, with the expansion of the CAETFA program to include projects that process or utilize recycled feedstock, CAETFA estimates a higher demand for the SUT exclusion grants.
   
   During this Committee's informational hearing on February 22, 2016, the Executive Director of CAEFTA testified that the increased demand for the funds may be due to continued economic recovery, newly added categories of eligible projects and a number of applications requesting large SUT exclusion amounts. For example, large projects with more than $20 million in SUT exclusions include the ones by Tesla, Atieva, Lockheed, Space X, and Solyndra. Historically, small projects requesting less than $2.1 million in SUT exclusions comprised almost 75% of approved applications. However, according to CAEFTA, the current applications involving large projects may utilize a considerable portion of the allowable $100 million cap, leaving no funds for smaller projects.
   
   According to CAEATFA, a very diverse group of applicants are applying for the same funds. However, existing law does not impose a cap on the amount that a company may request in SUT exclusions, nor does existing law prioritize certain types of projects. Furthermore, the CAEFTA does not have the authority to utilize the unclaimed awards. Finally, CAEFTA may not award any amounts that remain unallocated in a particular calendar year in the following years. In other words, the un-awarded SUT exclusion amounts simply disappear.
2. Proposed Solution. The author believes that allowing a rollover of unallocated funds to the following calendar year and doubling the annual SUT exclusion cap would help mitigate climate changes' effect on California, promote economic development and green economy, and ensure that California remains at the forefront of environmental entrepreneurship. While this bill does not expressly specify the calendar years to which the increased allocation would apply, it appears that it will be available beginning with the 2016 calendar year.
3. Partial SUT Exemption for Purchases of Manufacturing and R&D Equipment. In 2013, Governor Brown signed AB 93 (Committee on Budget) Chapter 69, Statutes of 2013, which reformed California's economic development policies. The new law eliminated enterprise zones and other geographically targeted economic development areas and, instead, created three new tax benefits: (a) a temporary tax credit for wages paid by taxpayers to qualified employees within former enterprise zones, and other areas that suffer from high levels of poverty and unemployment; (b) a temporary SUT exemption on purchases of manufacturing equipment made by qualified taxpayers, capped at $200 million annually per taxpayer; and, (c) the California Competes Tax Credit program. Existing law limits the total annual amount of these three tax incentives to $750 million.
   
   With the passage of AB 93, sales and leases of certain manufacturing and R&D equipment may now qualify for the temporary SUT partial exemption. The partial exemption rate is currently set at 4.1875%, which means that sales of qualifying property sold to a qualified person are taxed at a rate of 3.3125% (7.5% current statewide tax rate minus 4.1875% partial exemption rate), plus any applicable district taxes. The exemption is available for purchases made until July 1, 2022. The program is generally self-certified, with little oversight from the State Board of Equalization (BOE). The program was created in such a way as to allow the partial SUT exemption to be taken immediately, without complicated forms and procedures.

Unlike CAEATFA's SUT exclusion, the partial SUT exemption does not necessarily attempt to encourage or incentivize beneficial behavior. Instead, the partial SUT exemption attempts to reduce the distortion from the imposition of a tax on a tax, otherwise known as "pyramiding". When manufacturers pay a SUT on tangible personal property, the tax is incorporated into the cost of a consumer product, often leading to double taxation. Ideally, taxes should only be levied once because pyramiding may cause consumers to favor goods and services provided by a single company instead of those that require multiple production steps.

1. The Interaction of the Partial SUT Exemption and the CAEFTA SUT Exclusion. To a large degree, the CAEATFA SUT program overlaps with the partial SUT exemption for manufacturing and R&D equipment. Thus, unless a project includes a purchase of manufacturing or R&D equipment worth more than $200 million, the purchase may qualify for the partial SUT exemption, which requires no application or allocation. However, as noted above, the partial SUT exemption provides tax relief only for the state portion of the SUT. When the partial SUT exemption was enacted, the BOE estimated that General Fund revenue would decrease annually by more than $600 million ($637 million in fiscal year (FY) 2014-15 and $681 million in FY 2015-16). However, the most recent data demonstrates that the exemption is currently underutilized. The total exemption amount claimed in FY 2014-15 was $91.2 million; in the first four months of FY 2015-16, the amount was only $77.2 million. The underutilization problem may be due to complexities of the program and/or may be attributed to the conditional nature of the SUT exemption, where only a certain type of property and purchasers qualify for the exemption. It may be argued that the partial nature of the exemption, where some amount of SUT still needs to be collected by the vendor, also contributes to the underutilization problem.

Meanwhile, the CAEATFA exclusion program has been oversubscribed. Although the program has no per purchaser limit, it is subject to the overall annual cap of $100 million and most likely will be oversubscribed in 2016 and 2017. In the absence of legislative intent, it is unclear which types of projects should receive priority.

The CAEATFA program had been in place for many years prior to the enactment of the partial SUT exemption. It is unknown whether the underutilization of one program has contributed to the oversubscription for the other program or whether there is any connection between the two programs. However, in light of the underutilization of the partial SUT exemption and oversubscription of the CAEATFA program, the Committee may consider restructuring the CAEATFA program to prioritize certain projects, in addition to allowing the recapture of allocated funds and rollover of unallocated funds. Furthermore, as an alternative to the proposed increase in the $100 million cap, the Committee may also consider authorizing CAEATFA to exempt only the local portion of the SUT in the case of projects that otherwise meet the eligibility requirements for the partial SUT exemption.

1. Related Legislation. AB 2334 (Mullin) is similar to this bill. AB 2334, among other things, would increase the annual amount of SUT exclusions available for allocation to $475 million in the 2016 calendar year and to $250 million in the 2017 calendar year and each year thereafter.

REGISTERED SUPPORT / OPPOSITION:

Support

California Compost Coalition

California Refuse Recycling Council

California Manufacturers & Technology Association

Californians Against Waste

CR&R Incorporated

Opposition

None on file

Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098