Assembly Budget Subcommittee No. 5 on State Administration

Good afternoon and welcome to Assembly Budget Subcommitee 5 on State Administration hearing today. And I just have to share that I got my little coffee and they wrote, Sharon, you got this, queen. So anyhow, welcome everybody.

Today our hearing will focus on our tax agencies, the California Department of Tax and Fee Administration, Board of Equalization and the Franchise Tax Board. This is an in person hearing with all panelists testifying in person.

We will take questions from Members of this Subcommitee after each panel and public comment will be taken at the end of each panel. So every panel then will ask those wanting to comment at each panel.

If you are unable to attend this hearing in person, you may submit your comments via email to the Assembly budget [email protected] all right. With that, we are going to start on our first panel and we our first topic is cannabis and tobacco programs. And if we can have our panelists come on up.

Welcome to our Member Assembly Member Ward from San Diego. And if you can, make sure you please introduce yourself as you make your comment. Sure. Thank you. Welcome everybody.

Good afternoon, Madam Chair and Members of the Committee, I'm Trista Gonzalez, the Director of the California Department of Tax and Fee Administration. I'm joined at the table by Jason Mallett, our Chief Financial Officer. I'd just like to provide a brief overview as we get started.

In fiscal year 2024 and 2025, the CDTFA administered 42 tax and fee programs that generated just under 98 billion in revenue supporting essential public services across California. Of this amount, more than 30 billion was distributed to local governments, including counties, cities and special taxing jurisdictions.

Our focus is fair, efficient revenue collection and enforcement activities that protect compliant businesses. And we have steadily improved our efficiency by reducing the cost to administer every $100 of revenue from approximately $0.81 in fiscal year 2019-2020 to $0.65 in fiscal year 2024 and 2025.

This year's proposals strengthen our ability to enforce new laws involving flavored tobacco, intoxicating hemp and cannabis and maintain the systems that support California's revenue infrastructure. These resources allow CDTFA to continue removing illegal products from the market, protect our communities, and ensure tax fairness across industries. We remain committed to modernization, transparency and responsible Administration of these state programs.

Jason, great.

Thank you.

Thank you, Trista. Hi, Madam Chair and esteemed Committee Members. My name is Jason Mallett, the CFO of the Department of Tax and Fees. And just to frame a little bit extra on what Trista had said, so our revenues were roughly 98 billion last year, just over 80% of that is sales tax.

Another 10% is fuel, and the remaining 10% are the other 41 tax programs. So we'll jump into the BCPS now, if that works.

Thank you. Yes.

Great. All right, so we'll start with cannabis. I'd like to frame the discussion a bit first. So cannabis was legalized in 2016 through Prop 64 with official retail sales beginning in 2018. The policy was structured so the Department of Cannabis Control issues the license to the operators, and CDTFA collects the taxes. Originally, there were three taxes.

There was the cultivation tax on the harvested plant. There was the excise tax on the product, and then also the sales tax on the product. From the outset, there was a steep learning curve for taxpayers because of the three different taxes. There were also challenges in bringing the previously illicit market into the legal system.

So to encourage compliance, starting in 2022, AB195 was passed and simplified the tax code by doing two things. One, it eliminated the cultivation tax, and two, it shifted the excise taxpayer from the distributor to the retailer. AB 195 helped address the learning curve for taxpayers, but our team Members still are finding a significant amount of illicit product.

From CDTFA's perspective, we really have two goals, and this is how it's been and how it continues to be. The first is to bring sellers of illicit product into the legal market through education, outreach, and enforcement. And the second is to collect the right amount of tax as per the law.

This BCP request is for $5.6 million from the cannabis Tax Special Fund, which would increase funding to the level of actual spend last fiscal year 2425. This proposal effectively removes the annual shortfall in the cannabis tax Fund that the General Fund had covered. And with that, I'd like to open it up for any questions.

Why don't we go ahead and do the other bcp? zero, sure. And then we'll go ahead and open it up for questions.

Sounds good. So move on to hemp. Okay. Yes. Okay. Okay. So the background on AB8 is that it was passed last year, and it really does two things. It strictly prohibits tobacco licensees from possessing or selling cannabis or intoxicating hemp at their business. And the second thing is it integrates intoxicating hemp into the state's cannabis framework.

The Bill is implemented in two stages. In phase one, which started this January of 2026, it banned tobacco licensees from selling cannabis or intoxicating hemp. And it requires the CDTFA to seize cannabis and intoxicating hemp from tobacco shops and issue penalties and suspend or revoke a tobacco license for for having cannabis or intoxicating hemp.

The penalties are escalating based on the retail value of the seized goods and the number of violations. There are basically three steps to the escalating penalties. The first is we seize, cite and fine 1 to $2,000. On the second violation, we seize, cite, fine 2,000 to $5,000 and suspend the tobacco license.

And on the third violation, we seize, cite and fine 5 to $10,000 and revoke the tobacco license. That's the first phase that started in a month ago in January. Two months ago in January. The second phase is in January of 28.

This expands the definition of cannabis product to include intoxicating hemp and brings intoxicating hemp into the cannabis tax program. So to implement AB8, CDTFA requests 3.3 million in 2627 and ongoing. This is based on the two implementation phases. The 3.3 million is split between the Cigarette and Tobacco Compliance Fund and the Cannabis Tax Special Fund.

In the budget year, the split is 8515 between the compliance fund and the cannabis fund. And that is based on the percentage of seizures that we the seizure volume that we had last year. And then after the budget year, the split is roughly 80:20 between the compliance fund and the cannabis fund.

As intoxicating hemp is integrated into the cannabis tax program, the rationale for our request is there's significant new workload. One, there are new inspections now that intoxicating hemp is banned. Two, there are now citations through the escalating penalties I described and seizures.

And I would just like to note that doing a citation and a seizure takes twice as long as doing a basic inspection. Three, disposing and destroying the illicit product. Four, we have to go back to the seller again to do another inspection to enforce the escalating penalties for the second and third violation.

And then five, we need to ensure due process during the legal proceedings. So that's the introduction on hemp. Happy to answer any questions.

All right, so sorry. So I said that we would just ask questions at the end, but let me ask the Members, since we have three Members with this, if you, if you have any questions at this point of either. Okay,

let me ask the LAO if you'd like to make any comments LAO on either the first two presentations.

Yes, Seth Kerstein with the LAO. So my comments are going to focus on the two main questions raised in the agenda on this item. So. So the first of those questions is how much should CDTFA spend on cannabis and tobacco enforcement.

So this is fundamentally a policy choice, and the information we've reviewed doesn't point to an obvious right answer regarding that policy choice. So we recommend that the Legislature approach the governor's proposals not as one time workload adjustments, but as components of of a broader, more sustained effort to address these policy challenges.

To support that sustained effort, we recommend that the Legislature set up opportunities to revisit program resources in the 2027 or 2028 budget process. And the second question, the second major question that your agenda raises for this item is how should the state pay for these enforcement activities?

And so here our main concern is the administration's recent use of of General funds to support the cannabis tax program. So this arrangement that's been in place for a little while raises equity and efficiency concerns and it does not reflect, as far as we can tell, the legislature's or voters intent.

And so by proposing a cannabis tax Fund augmentation for cannabis enforcement costs, the Administration acknowledges that spending General Fund for this purpose isn't ideal. So we recommend that the Legislature adopt this proposal with a few modifications.

First, we recommend that you reduce CDTFA's General Fund appropriation by the amount of the department's annual General Fund spending on the cannabis tax program. Second, we recommend that you direct the Administration to switch over all funding for the cannabis tax program for from the General Fund to the cannabis tax Fund immediately rather than waiting until July.

And third, we recommend that you consider, based on this experience, whether new provisional language is needed to prevent this type of problem from recurring in the future. So those are the main takeaways from our analysis, and I'd be happy to go into more detail if the Committee has questions.

Any other comments from LAO? You'll have some other chances here. All right. We talked about the cannabis tax, also the hemp. And did you want to go into more detail on the flavored tobacco?

Sure, we can go into the flavored tobacco. Okay. Okay.

Okay, so California's flavor ban on tobacco that started in fiscal year 2223 did not authorize CDTFA to seize flavored tobacco unless the excise tax wasn't paid. Last January 25, AB3218 and SB1230 enabled CDTFA to seize flavored tobacco.

Last year, we requested one year limited term funding for 3.5 million because the volume of the seized product was not yet known.

Now that we have better visibility on volumes and the related cost to seize and destroy illicit flavored product, we're comfortable requesting ongoing funding of 3.8 million in 26-273.7 in in 27-28, and 1.2 thereafter from the Cigarette and Tobacco Compliance Special Fund.

Our request ratchets down from 3.8 million in 26-27 to 1.2 in 2930 because we expect our enforcement push in the early years to yield benefits of greater compliance in the out years. So that's the introduction for the flavor bin.

Thank you. All right, any comments on the flavored tobacco from our LAO, Seth Kerstein?

LAO, my prior comments were sort of intended to cover the all three of the proposals.

And I apologize because I had you go out of order on some of these. All right, so let's get back to where we were. Any of our Members have any comments on these funds or BCPs, Comments or questions?

I do.

Oh, I'm sorry. There you go. Working.

Hello. oh, there we go. Thank you to our Chair for convening today's Subcommitee hearing. I wanted to ask a question specifically around what's going on around some of the enforcement with cannabis dispensaries and some of the things that we see advertised online.

I represent places like Echo park and Silver Lake in Los Angeles, Dodger Stadium area, and we have a number of license dispensaries in my district. And then at the same time, we also know that it is, you know, very easy to find a lot of unlicensed illegal cannabis dispensaries online, including doing a simple Google search.

Can you talk to us a little bit about what enforcement you're doing in that space? How can we help our licensed cannabis retailers in this space?

Sure. And I'll give you a brief summary and then we'll call up a few of our colleagues as well. So just to frame the discussion around how much spending we're spending on cannabis, to Mr. Kirstein's earlier question, just let me give you a couple stats and then we'll get a little deeper on the activities, if that's okay.

All right. So last fiscal year, our cannabis revenues were Roughly a billion 1,635 million was from the excise tax and 430 was from sales and use tax. Against that revenue of a 1,000,000,001 we spent roughly $16 million. Roughly 11 from the special Fund.

And then the overage was from the five and a half was from the General Fund. Regarding our enforcement activities, we have some statistics here. So on cannabis. So we conducted. Last fiscal year, we conducted 590 inspections for cannabis. Of that 590440 were at tobacco shops, convenience stores, gas stations, and the remaining 150 were at cannabis dispensaries.

In terms of our seizures against the 590 inspections, we. We did 540 seizures. Of the 540440 were at the tobacco retailers and 100 were at cannabis retailers. And just on your question of legal versus you know, licensed versus unlicensed, all 100 of our seizures at cannabis dispensaries were at unlicensed locations last year. Like 100%.

Thank you. And that's really helpful. You know, I think for me, like, increasingly that's, you know, one of the things that I continue to want to see from the Department is really looking at the enforcement. I know we're obviously having a Committee hearing today to really look at, you know, taxes and the role of your agency.

In my district, there was a store in Silver Lake that showed an increased sale sales from a little over 12,000 in October 2024 to an increase of almost 16,000 in October of 2025 by some of the increased enforcement around some of the unlicensed cannabis retail retailers in the area.

And so I think that that is a positive for the state, for my district, for making sure that we really even the playing field for folks who are actually doing the things that we're asking them to do, which is to get a license, to pay a sales tax and to do it the right way.

And so those are some of. And I know you know this, I know I'm speaking to the choir, but I really just wanted to add that emphasis that those are things that I am encouraged by. So hearing some of the things that you're saying around enforcement is good.

And in terms of the revenue that we collect back is there. Can you talk to us about the value of some of these seizures and these inspections? Like, what value are you seeing to your agency and to the state?

Sure, sure. And actually, if I could just respond to the comment on leveling the playing field. I mean, that is a major reason why our expenses have increased over the last few years for cannabis. You know, there's a financial reason, you know, the billion dollars of revenue that we're protecting, but there are also non financial reasons.

And I think this goes back to Mr. Kirstein's point about how much do we want to spend as a, you know, as a state on this? Some of the non financial reasons. I think first is what you said, fair competition. We do not want to give someone elicit an advantage over selling product by a licensed seller.

Of course that would drive, that's a competitive disadvantage and that would drive those sellers who are licensed to, to either go out of business or potentially move to illicit sales. And then of course there's the public health angle.

You know, a lot of times youth are able to access these products that are not tested, not regulated and contain harmful chemicals. So that's on your first comment with regard to our, you asked for the value, I believe, of our seizures, is that right? Yeah. Okay.

So last fiscal year the retail value of our seizures was $17 million. The year before that it was $13 million. And the year before that in 2223 it was $36 million. And you can see there's quite a change. And actually over the last few years there's been a decrease.

And a big reason why we've seen a decrease is because cannabis, really unlicensed cannabis sellers are becoming more savvy in terms of keeping less cash on hand and less product on hand too. Consequently, we're not able to seize as much as we were we were before.

Thanks for sharing that. And in terms of how, you know, the public or any of our Assembly offices can assist with some of your enforcement, can you talk to us a little bit about that?

Like if we were to be out in our district and we're not sure whether there is a licensed or unlicensed cannabis retailer, is that something we can report to your agency? Can you talk to us a little bit about how that works?

Yes. So I'm a finance guy, so I might be a little bit off my skis here, but we have, we have audit activities and we have compliance activities. You know, a key feature of our compliance activities is referrals from the public and from lawmakers.

And I think that is if you look at the bcp, you see that while the inspection volume is relatively flat, our seizure volume is going much higher. And that is because we're able to focus on non compliant sellers. And that is thanks primarily or predominantly to referrals from People from your constituents and other constituents and law enforcement.

Thank you. I don't have any further questions, but I just wanted to emphasize those points.

Thank you. Any questions? Assemblymember, any questions? I wanted to refer back to the LAO who mentions that we are using General Fund Dollars and yet you said that you are now using the cannabis tax Fund. If you are using that, then what would the remaining General Fund Dollars be going to?

Sure, sure. And can I give a little background on how we ended up using the General Fund? I just want to make sure you have the full color because we work closely with our finance colleagues. So first, the cannabis tax special fund is continuously appropriated up to 4% of revenues. That's roughly $25 million a year.

But you know, as a Department, we have two constraints. One is we're limited to how much funds are transferred into fund. You know, we can only use up to the amount of money that's in the fund.

And the second thing is, you know, through this BCP process, we have an annual appropriation which has been stamped 10 to $10 million. So given those constraints, we really try to stay within our annual appropriation. At the same time, we can't leave illegal product on the shelf, you know, for financial and non financial reasons.

And so given creation deficit, you know, we've worked very closely finance and it was decided to use the General Fund to cover that shortfall. Okay, that's the first question you also asked about, you know, why shouldn't we cut your General Fund additionally. So let me just give a little bit of color too.

So first off, on our revenues, our revenues have grown to $98 billion, which is a 30% increase since 1920.

In the last five years, in addition to our higher revenues, our cost per dollar of revenue, our efficiency has improved by 20% before in 1920, it costs for every $100 of revenue, it cost the Department 82 cents to collect. Now in the last year, for every $100 of revenue, it cost us just 66 cents to collect.

So that's the background. As you know, over the last couple of years there have been pretty big budget cuts. And you know, we as a Department at CDTFA, we gave, we relinquished 300 of our vacancies and we believe that is the most of any tax Department in the state.

And so after that we believe that our General funding is reasonable for a few reasons. One, we're a revenue Department, so filling vacancies means more revenue for the state. For reference, every sales tax auditor we hire brings in 650k year.

In addition, our audit activities last year brought in over $850 million and our collection activities brought in a 1,000,000,003. Each of those buckets by itself is greater than our entire annual budget. The other thing I'd like to note is in the last year we've gained significant traction in making hires.

You know, the hiring market has not been as strong. That has been to the state's benefit. We've run a number of mass hiring events. I think we've run six in the last two years. We've hired 150 people altogether from those mass hiring events.

In addition, as you are as you're aware, there is an opportunity to hire experienced IRS auditors, which is also perhaps a temporary opportunity. So in any case, we need the budget to advertise and hire to make more money for the state.

We would rather have the General Fund use it to make appropriate hires and then return the excess like we have, then prematurely give you the funds and then prevent making more money for the state. We think that's a bad trade and that's the reason why we did not do a negative BCP for the 5.6 million.

Thank you. Appreciate that answer to our Lao. Any comments on that?

Sure. Seth Kerstein, Lao so a couple things on the cannabis tax Fund Fund issue, so we summarize in our analysis that we posted, I think sort of what we understand to be the rationale for why the Administration has been using General Fund and which I believe Mr. Mellett just summarized.

And so I mentioned initially that this raises concerns related to legislative intent, efficiency and equity and relative to the alternative which the Administration had at the time, time of simply using their continuous appropriation authority in the cannabis tax Fund to make the corresponding augmentation from that Fund.

So those concerns are first, we're not aware of any instance in which the Legislature or the voters when they enacted Prop . 64, conveyed any intent for the General Fund to be used in this way.

Second, on the efficiency side, the General Fund can be used on any of the same programs as the cannabis tax fund or on a much wider array of programs. And one of the basic core principles of budgeting efficiency is to use dollars that have the least valuable alternative use.

So in this case, that would be the Cannabis Tax Fund then sort of from an equity standpoint.

So one of the when we were asking the Administration why General Fund, one thing they pointed to was that there are positive spillovers of cannabis tax enforcement activities on the General Fund because enforcement against cannabis retailers can because those sales are subject both to cannabis excise tax and to sales tax.

Sales tax generates General Fund revenue that therefore there's a benefit to the General Fund. Of course, a similar argument could be made for local sales tax revenues, which are even greater.

So when asked why this supplementation to the cannabis tax program didn't come from Lowe's reimbursements from local governments, they cited legal restrictions on the use of those reimbursements. And so because General Fund wasn't subject to those restrictions, it bore a disproportionate burden relative to local reimbursements.

And so all those concerns we felt applied to this situation led to our analysis and recommendations as far as cdtfa retaining the 5.5 million. Yes, revenues have grown a lot relative to costs. We think that's mostly due to economic trends, more so than tax Administration issues also.

But beyond that, I think we think the Department has demonstrated through use of these funds for the cannabis tax program over this period of time that sort of that they haven't been needed for other activities. Could the Department put them to good use? Sure.

But to us that's not where the bar is set for a General Fund appropriation. Really, there needs to be some kind of concrete justification presented to the Legislature specifically for what the Department would do with those funds that it's not doing already.

Merely having the flexibility to potentially use them for some benefit doesn't clear the bar to us to justify the appropriation. And certainly tax Administration activities have a revenue benefit, but I mean, if there's a lot of money sitting on the table, we should be seeing a significant proposal for a budget augmentation to capture those revenues.

We haven't seen that from the Administration. And absent that, it's not clear to us quantitatively how the benefits and costs compare of giving this money to cdtfa.

Thank you. Lots of dialogue here and appreciate the concern.

Madam Chair Chris Hill, Department of Finance if I could just. I'm going to make a couple high level comments. I'm going to turn it over to my colleague to make a couple more comments. But I would like to note that the Administration did authorize the use of General Fund resources.

We weren't shifting dollars from the General Fund into the Cannabis Tax Fund. CDTFA was just using General Fund supported resources to assist with that workload. So I wanted to make that point clear.

First and second, if we had not allowed that to happen, it would have resulted in a drawdown of additional Cannabis Tax Fund money which would have had a knockover effect on the allocation 3 Appropriations for child care, which is why we made the decision to not allow that to happen.

And I'd also like to turn it over to my colleague for a couple more comments.

Thank you.

And just. Actually, I just want. No more. No, one more thing. I'll be it. Just to reiterate that what they did was within keeping within standard operating procedures of departments. Departments often do use resources that are funded by one fund to support workload in another fund.

And you can have a person working in one assignment one day, then they'll be helping out with another assignment the next day. And I think that's a bit of a different color than it is shifting money from one Fund to another, which I just want to reiterate, did not happen here.

Yeah, maybe you should just clarify. At no point have we attempted to state or imply that money was shifted from one Fund to another.

Just to add a little bit. When we hire people, we hire people to do a responsibility, whether it's an inspector to go to a smoke shop or a cannabis dispensary or an accountant to reconcile different funds. Our folks use their time where the market demands, and then they allocate their time accordingly.

In this case, there was a greater need in cannabis, and that's where we allocated our time.

We heard quite a bit about cannabis enforcement last year, and I know that it was noted not only by myself as a Chair of the Committee, but other Members, the concern for enforcement and really the state, if you want to say the state of cannabis.

And as you mentioned in your opening comments, we had proposition and then the beginning and there was quite a decline. And so in your. You made your remarks that we are now seeing encouragement in the market. Where are we with cannabis sales that had gone down quite a bit in the legal market?

Yeah. If I could delineate, you know, where we're seeing encouragement. I think the simplification of our Cannabis taxes through AB195 has made life a lot easier for our taxpayers because there's no more cultivation tax. The payer of the excise tax has shifted from the distributor to the retailer, and the sales tax is still paid by the retailer.

So I think there is where we see the encouragement, the positive feedback, I think on the side of unlicensed sales, that is a persistent problem and we are still finding a lot of illicit product out there.

Seth Kerstein, Lao so this is something that the Department sort of updates, provides quarterly revenue updates. And so that's sort of one of the major sources of ongoing, timely data on how the licensed market is doing over the last Couple of years.

We characterized the trend in dollar revenues as being fairly stagnant, not really sort of declining or growing a whole lot. There had been a period of substantial growth early in the pandemic and then a bit of a period of decline. And one thing. But when you look at dollar sales, it's really not.

There's not a good way to separate out changes in quantity from changes in price. And so the Department of Cannabis Control commissioned a report that was published last year that used other data sources to try to unpack those things and found that quantities had, even during this period of revenue decline, quantities had continued to grow. But that.

That had been there or I'm not. Yeah, these quantities, I think, had generally continued to grow, but there had been very substantial price declines and that. That was sort of what had been driving that trend.

All right. Well, as our viewers can see, we could spend a very good amount of time really unpacking the cannabis industry and looking at the trends, enforcement. Just. There's so much that we can. But we appreciate comments from our panelists here. And now we will open it up to any public comments.

Any public comments on item number one here.

Oh, that looks. Thank you. Thank you, Madam Chair and Members. Amy O'Gorman Jenkins here on behalf of the California Cannabis Operators Association. I really appreciate the robust dialogue and the questions that came from the Committee Members. Our association strongly supports the proposed investments in cannabis tax compliance and the implementation of the Hemp derived cannabinoid oversight.

Strong enforcement is essential to protecting public health and preserving the integrity of the legal cannabis marketplace. And as it relates to the state's economic analysis that was previously covered in prior hearings, I would note that we continue to see a 60% illicit market in the state.

And I appreciate the efforts that are being done by cdtfa, but we certainly need more. And we would support the augmentation as well as the ongoing General Fund expenditure to ensure that enforcement continues and is prioritized towards addressing illicit market activity. Thank you.

Thank you. Any other public comments? Seeing none. We want to thank our panelists and appreciate you. Thank you. We will go to item number two here, which is. I think we have some of the same panelists. We will have centralized Revenue opportunity, opportunity system, CROs, the reappropriation and.

Sure, thank you. So as background, the centralized Revenue Opportunity system, or cross, is the department's tax collection and distribution system that covers all 43 of the tax programs and the $98 billion in revenues. Cross was implemented in 2019. So we've had it for some time.

Our request is for a reappropriation of 3.8 million from this fiscal year 25-26 to next fiscal year 26-27 to deploy a significant upgrade. The upgrade will do a number of things. One, it will enhance taxpayer services. For example, there will be a single sign on and face ID to eliminate the need for passwords.

And there will be improved navigation on the screens. Two, there will be stronger data security, automatic, you know, scrambling and masking of confidential taxpayer information, and also faster restoration in the event there's a disaster. And three, it updates the programming language to current standards, which will enable easier programming in the future.

And just for the avoidance of doubt, the request is for no incremental funds. What we're asking to do, it's a timing shift from this fiscal year to next fiscal year. Thank you.

Thank you. Any comments here? See no comments. Any comments from our panel or our Members? Sorry, seeing none. Let's go ahead. I have no questions. Let's see if we have anybody from the public. Anybody from the public speaking on item number two, CROs. All right. No one is running up to the mic.

We want to thank our panelists. Thank you. Thank you. And we're going to move very quickly here to item number three, sales and uses, taxes, market price, place facilitators. Seth will stay with us. Thank you, Seth.

All right. Please make sure you introduce yourself as you Good afternoon.

I'm Brad Miller. I'm the Chief with the Technology and Data Analysis Bureau with the CDTFA. Today I'm here to talk about this proposal that will address a compliance issue as is a result of confusion under existing sales and use tax law.

Under the Marketplace Facilitator Act, a a person that makes sales of 500,000 or more to California customers in a year and operates a marketplace to facilitate sales for other sellers is a marketplace facilitator.

The law makes the marketplace facilitator the retailer for sales made through the marketplace and requires the marketplace facilitator to collect and remit the tax due on each sale. The law also provides an exemption for delivery network companies under the Marketplace Facilitator Act. However, a delivery network company may make an election to be a marketplace facilitator.

Some delivery network companies have made such an election. Most have not. Sellers utilizing delivery network companies are primarily restaurants, but other types of sellers utilize the delivery network companies as well. Our audits of restaurants have discovered many taxpayers are failing to report sales made through the delivery network companies.

This is most likely due to confusion about the responsibility to report the tax. Since some of the delivery network companies collect and report the tax, the restaurant operators believe that all the delivery network companies are reporting the sales tax. This can be a costly mistake.

This proposal would make all delivery network companies a marketplace facilitator, alleviating the confusion and improving compliance. It would. It would also shift the reporting requirement from thousands of smaller taxpayers to a limited number of larger taxpayers.

We estimate that shifting the reporting requirements to the delivery network company will result in approximately $44 million in sales tax revenue over a full fiscal year, of which $20 million will be General Fund money. This is tax money that customers are already paying to the retailer and that will now be paid to the state as required.

In addition, there may be some additional revenue related to the application of tax on fees charged by the delivery network companies. The estimate will be updated at the May revision. California is unique by having a delivery network company carve out under the Marketplace Facilitator Act.

Most other states that have a Marketplace Facilitator act include a delivery network company within the definition of a marketplace facilitator. This proposal would make California consistent with other states treatments of delivery network companies.

Thank you. Any other comments here?

Just JT Creeden, Department of Finance Just here to answer any questions.

Thank you Lao, and just for the public. Again, when you are talking about delivery network, you are talking about. Give us a few examples.

Examples would be Doordash, Uber Eats, Instacart. There you go.

Now you're speaking to the public.

Yes. Now you know what we're talking about.

Yes. Yes. All right, Here we go.

Thank you, Madam Chair. So the Administration characterizes this as a compliance measure, but under California's NPF statute, marketplace facilitators collect sales tax on service fees, not just on the underlying goods. I believe you stated this, but can you confirm that under this proposal, DNC delivery fees and service charges are subject to to the sales tax.

So under this proposal, the delivery fees will still be exempt. Right. Delivery fees are the amounts that are collected by the delivery network company and are passed on to the actual drivers. Those are transportation charges. Under current law, those are exempt, and that would remain so under this proposal.

The service charges are unique with regards to how delivery network companies do things, like most companies, but buy product, they mark it up and they sell it for a marked up price. And that's how they make money with delivery network companies. They typically sell it at the same price.

They buy it from the restaurant, but they make their money by charging a service fee. So those service fees would be considered part of the taxable gross receipts, similar to how all other retailers of tangible goods charge tax on service fees.

So, for example, if a restaurant charges a service fee for to cover employee healthcare costs, that's considered part of their gross receipts, and that would be taxable as well.

I guess what I'm getting at is how does the Administration justify framing this as just a compliance fix when it sounds to me like it's a tax increase that gets passed on to consumers?

Our focus was the compliance issue. We do understand that this does bring in those service fees. That wasn't our focus, but we do understand that it does bring those in as additional tax.

Okay, next question. So the sales tax obligation on the goods themselves isn't under dispute. Under current law, merchants are already required to collect and remit. Can you just walk us through what specific compliance burden is being alleviated for small businesses given that those merchants still need to track their own in store direct sales remit accordingly.

Isn't it just simply adding a new business mandate while increasing costs for consumers?

The confusion that the restaurants have right now is that obviously, yes, they have to collect and report the tax on the sales that they're making to their customers, as well as some of the delivery network company sales and not all of the delivery network company sales.

Because again, we've had there's an option for the delivery network companies to opt in and be a marketplace facilitator and then be the retailer again. Some have made that option election, and so some collect, not all collect.

And so the small restaurants, they're a little confused about, okay, well, if this guy's collecting the tax, they assume the others are as well. And so then they mistakenly don't report those sales. So what this does is it makes everybody consistent. They would all have to be collecting.

And so that confusion about which DNCs are collecting and which are not would. Would cease to be a problem.

Okay, can appreciate that. So in my district, the Coachella Valley, particularly, many of the merchants using these delivery platforms are small, independent operators with just a few locations. They're family owned restaurants, small retailers that added delivery as a lifeline and that now they depend on it to compete.

Delivery workers in the valley rely on that order volume for meaningful income in a region with seasonal employment patterns. It gets hot in the summer. If you've been down there, you guys should check it out. But not those three months out of the year. It is warm.

But you know, consumers here, we're navigating high costs for gas, rent, utilities, groceries. And when delivery becomes more expensive, people are going to order less. Right. So that means fewer sales for small merchants, fewer earnings for delivery workers, and higher costs for working families. The Legislature has been very focused on affordability. It's a top concern for Californians.

I'm just kind of wondering how the Administration. Can you explain why this proposal is the right direction in this affordability crisis facing Californians.

J.T. Creeden, Department of Finance well, I think it's important to make sure that this is about clarity, consistency and parity with businesses. Marketplace facilitators, DNCs are already, some of them are already collecting taxes on service fees and everything affiliated with the sale of tangible goods from the retailers. Already. Some of them are not.

And it's about cleaning up the confusion and simplifying things for businesses. They're also doing this across the country. They're collecting and remitting sales tax also on the fees across the country, all sorts of agencies, most states.

So we can see this as a consistency issue, creating clarity and simplifying for businesses and fairness for taxpayers between the different business entities.

But you agree that it would increase costs on businesses that would probably get passed on to consumers?

Well, it depends on how they're doing things now. Like I said, some of these are already doing them. So it just depends on how they're structured.

Okay. That's all I have thank you, guys. Appreciate it.

All right, any other Members? Seeing None. Yeah, we worked on some of the same questions you had as far as is this going to add more to the consumer? Which I know is a concern for all of us. But I think when we look at other states. I've been.

You've mentioned a few times now in your remarks that this would add parity from California to other states and some are already paying and others aren't. So across the state, certainly having that equity would be valuable with that. Do we have anybody wishing to speak publicly on this item? Item number three, sales and use taxes.

Seeing no one coming to the microphone, we will close this item. We thank our panelists, and we will move to item number four. Did you have a question? Okay, you're okay. Okay. I think we're okay. Just wave me down next time. Yeah, yeah. Thank you. Sorry. All right. All right.

We now are moving to item number four, sustainable aviation fuel trailer Bill Language. And we have new panelists. Please make sure that you introduce yourself as you speak. And we are going to go ahead and begin.

Good afternoon, Chair and Members. Andrew March with the Department of Finance. As the agenda notes, the governor's budget includes a tax credit proposal for sustainable aviation fuel. The value of the tax credit would be 1 to $2, depending on the carbon intensity of the sustainable aviation fuel. And it's a tax credit against the diesel excise tax.

We know that this is important to help decarbonize the aviation industry, which is one of the most difficult industries to decarbonize in the nation, and that there are a number of other states that have taken the opportunity to provide sustainable aviation fuel incentives, including the state of Washington and the state of Illinois.

Additionally, the Federal Government has a sustainable aviation fuel tax credit. This program, this tax credit will leverage existing low carbon fuel standard program administered by the California Air Resources Board. And we don't anticipate that there will be any additional Administration costs that will be needed as a result of this. With that, happy to answer any questions.

I'm joined by colleagues from the California Air Resources Board, the California Department of Tax and Fee Administration, and of course, the LAO is here as well.

Welcome. Who would like to go next?

Helen Kerstein with the Legislative Analyst Office. So we're recommending, rejecting this proposal and we have five main reasons why we're recommending rejection.

The first is we think this is a pretty expensive way for the state to decarbonize and it's not very cost effective relative to other approaches the state could undertake and we think it's really important in general for the state to focus first on the most cost effective approaches before you're taking more costly approaches with some very limited exceptions.

Second, we think that the environmental benefits of this proposal are really uncertain and might actually be pretty overstated. There are a couple key reasons for that.

One is we think one of the potential effects of this might be to sort of shift fuel production from renewable diesel to sustainable aviation fuel, so basically from two renewable fuels from one to another. To the extent that happens, the net effect on environmental benefits could be pretty modest.

We also think there's a lot of uncertainty in quantifying these emission reductions from this kind of technology and this kind of process. And so, you know, given that, we think there's a chance that the environmental benefits could be substantially overstated for the proposal.

The third issue I wanted to highlight is that we think that there's a lot of uncertainty about the size of this tax credit. So the Administration has estimated that kind of a maximum amount would be 165 million to start, potentially growing to 300 million. However, we think there's a chance it could be lower than that.

We also think there's a chance it could be substantially higher than that. Potentially a billion dollars a year or more. I would note, I think the fourth reason this one's a really key one, is that to the extent there are reductions in diesel excise tax revenues, that translates into reductions in transportation programs.

So those funds are used for state and local transportation projects. So the bigger the tax credit that's provided, the less money goes into those programs. And then the final comment, the fifth one I wanted to make was that we think that this proposal deviates from really the spirit of voter approved constitutional requirements on transportation revenues.

So historically, the state has said, hey, users of the road, you pay fuel taxes, those are going to go generally to support those roads that benefit you. Instead, this would divert funds that would go to support streets, highways, and some specific transit purposes and instead use them for aviation.

So we think that's inconsistent with the spirit, not the letter, but with the spirit of sort of those that approach. So happy to take questions at the appropriate time.

All right, thank you. Any money? Any other comments? All right, with that, let's go ahead and we'll start over here. Members, please make sure you introduce yourself. Not. Yes. Oh, Assembly Member Ortega.

Yes, Good afternoon. Thank you both for your presentation. I had a question to the Department of Finance.

Can you kind of address some of the LAO points that they made in terms of the reduction in Transportation funding and the deviation, if you were to move forward, how it would reduce the funds for roads and other things that were intended for.

Yeah. So just from a high level, the reason why we chose the diesel excise tax as the credit to put the tax credit against is because we don't believe that these refiners are operating very profitably. So they may not have corporate tax that they can offset with a tax credit.

So fuel taxes are one of the largest tax revenues. So that being said, with respect to the discussion about Article 19 and the limitations, we don't have a direct rebuttal or understand the voter's intent from 1976.

I would just note that it's probably the same conversation that you're going to have with any tax credit, whether it's General Fund or not. There's Prop 98, there's an additional other spirit of the law sort of ideas that the voters have put out there that I think would fit into the same argument that the LAO is making.

Got it. And for the lao, did you take into consideration some of the changes that are being made at the federal level when it comes to some of these tax incentives and balancing both the environmental protections that we want, but also the fuel and consumption and rising prices?

So I think that's a really interesting point, as was noted, and I think that, that there has been a reduction in what the Federal Government is providing in terms of a tax incentive. I would note that in many other areas of state policy, we're not backfilling state policy or federal policy changes.

So this would be kind of, you know, one place where we would choose to do that, where in many other places we're choosing not to do that. And I think for us, it's just not clear that this is an area where we would want to divert those limited state resources.

And given that we think the environmental benefits are probably quite limited, potentially overstated, and this is a very, as we see it, a potentially quite an expensive approach to decarbonization. So we haven't really seen sufficient benefit.

We think that certainly if you want to, if you want more sustainable aviation fuel, the bigger the credit, the more likely you are to have to see more of that come into the state.

We're just not clear that that is a policy goal that's worthy enough to justify really the substantial cost and the potential effects on the transportation funding.

Any other questions?

Yeah, one more. Sorry. Did in your assessment, in your report, did you assess the risk absent this incentive?

So I think absent this incentive, certainly there's a potential that there would be less sustainable aviation produced, at least produced for California than otherwise would be the case. I don't think we did a full assessment of all of the potential impacts of that.

But certainly there could be somewhat less sustainable aviation fuel and that could in turn mean relatively more renewable diesel as well, because again, those fuels have some interchangeability. They use many of the same feedstocks, they have many of the same use, much of the same kind of production processes.

There is some additional equipment that's needed for sustainable aviation fuel, but it's largely, there's a lot of similarities. So part of it might be again, that reshuffling. So I think that's, I don't know if you have anything else to add,

Andrew, if I may. So one thing that you see in the overall sales of sustainable aviation feels a real uptick sort of in 2024, which is when the federal tax credit took effect. That tax credit is active as it was under the Inflation Reduction act for tax year 2024, tax year 2025.

So we don't necessarily have data where we're seeing that fall off effect beginning in 2026. To the LAO's points about costs, I would just note that there are many other programs that the state funds that actually have similar costs, but per ton of carbon dioxide avoided as what the LEO calculated.

So this wouldn't necessarily be a new policy that the state would be taking here. It would be in line with other programs that are fairly popular, including the low Carbon Transit operations program, which is around $165 per ton.

And then to the LAO's point about sort of this reshuffling, that would assume that all feedstocks in the world are currently being used, which is not true. There's still sufficient capacity across the world to produce additional renewable fuels. And so this would help increase the amount of renewable fuels that are made in California or sold in California.

Yeah, I would like, you know, I would like additional information on this as we move forward. I particularly am supportive of the, of the proposal, particularly as it relates to what you mentioned, producing environmental production that also protects workers.

And unfortunately that was not addressed in any of the reports that I saw in terms of the impact that this would have if we do not have the incentive as we're closing, you know, production in the state. So thank you for that and I appreciate, would appreciate some follow up after this hearing.

Thank you. I do have two questions, one for Mr. March. Mr. March, you started your comments with one to two dollars. Can you expand on what you were meaning related to that?

Yeah. So the floor would be a dollar for any sustainable aviation fuel that has a carbon intensity that's 50% lower than fossil jet fuel and then it would rise 2 cents for every point. So if you get to a fuel that's has a carbon intensity that's 100% lower than fossil jet fuel would be $2.

And so this is similar to what the state of Washington enacted a couple years ago. Similar structure to how that works.

Appreciate that. And then I had a question for Ms. Kerstein and you were saying the request is 165 million out of the diesel exit excise tax. But your concern was that could be the floor, but it could go up much more. How are you making that? Can you said maybe even over 300 million.

Sure. So we don't see that as the floor. We think it could be lower than that, certainly. So the 165 million potentially rising to 300 million. That was a Department of Finance estimate. And we, we understand that sort of their, what they think of as kind of the maximum, I think, rough estimate.

There is quite a bit of uncertainty. I think we would all acknowledge the reason we think it could be bigger is because that's our understanding is that's the sort of liability for the current producers of SAF in the state. However, one, we could see imports of SAF from other states. We've seen that with renewable diesel.

We could certainly, we think this is a big enough tax credit. You could see production from elsewhere and there's about, I think, capacity for about 800 million gallons kind of nationwide. And so if, if that were to come to California, again, there's a lot of uncertainty about whether that would all come to California.

But if it would, that could be, that could generate potential, a potential tax credit of over $1 billion. Of course, the refiners would have to have a diesel excise tax liability as well. But you could imagine it's a big enough tax credit.

There could be enough, there could be incentive to kind of restructure some of those companies, buy other companies, those kinds of things. So again, we think there's a lot of uncertainty. We're not saying it's going to be that higher number.

We're just saying there, there is, you know, there's potential, it's lower, there's potential, it's higher, there's no upper bounds. There's no sort of statutory limit in this proposed trailer Bill on the size of it.

And so it's something we just wanted to highlight for the Committee because there is, we think, a significant risk that this could eat, you know, a decent chunk of diesel excise tax revenue and that could have some real transportation impacts. To the extent that happens, yes.

Thank you. So just point to that. I think the Laos may be looking at maybe different capacity numbers than what we would. So the U.S. energy Information Administration last year estimate estimated total staff capacity in the nation around 560 million gallons.

So under the Laos proposal, if every single gallon of sustainable aviation fuel that could be produced in the nation meets the requirements of this tax credit and comes into California, we would be sort of, you know, somewhere around a billion dollars at the high end. We think that's really unlikely.

We've seen tax credits in other states come into effect and we haven't seen this sort of scenario that the LAO is predicting, including in Illinois, which has a more generous tax credit than what we would be providing at A$50 for sustainable aviation fuel. That's at 50% carbon intensity, where we would have a dollar.

We haven't seen that sort of big increase of everyone trying to sell SAF in Illinois. And then the same for Washington State, which actually hasn't even triggered theirs yet because renewable diesel plants haven't shifted to making SAF in Washington state.

Thank you. Any last questions from Members? Okay, I know we have quite a few speakers, so if you'd like to come. Oh, you do have another question.

All right, just taking out your presentation in. And two opposing sides of this proposal. Thank you all for, for your presentation. Appreciate it. Appreciate the analysis from LAO as well as you know, thoughts from from the agency on. On why the Administration is pushing for this.

Can you just elaborate a little bit more about how many companies would be eligible for this tax credit? How many companies currently are eligible for this in California?

Yes. So based on the most recent data from the Air Resources Board, there are four companies that currently have what we call certified pathways, or they have. They have certified sustainable aviation fuel that they sell into California that would meet the requirements of this.

So those companies are Montana Renewables, which is from the state of Montana, Neste, which produces their sustainable aviation fuel in Finland, Paramount, Altair Paramount or World Energy Paramount, which is down in Southern California, and then Phillips 66, which is in Rodeo in the Bay Area. So those are the four companies that currently right now, have qualifying pathways.

However, additional companies can go through the process with the Air Resources Board to certify additional pathways. It would take probably around two years or one to two years for a company to do that, if not longer.

Thanks for Sharing that I know tax credits enacted by the Legislature have a five year sunset. Can you explain why this tax credit will extend for 10 years?

Yes. So as I mentioned previously, this sort of pathway process with the low carbon fuel standard can take about two years. So if it was a five year tax credit, an entity would maybe only have one to two years to claim it.

Sustainable aviation fuel in order to upgrade a plant or create a new plant is a very capital intensive process. It's not something where you have an existing renewable diesel plant and can just shift it over in a short amount of time. It takes significant capital investment in order to do that.

And so in order for our facility to realize to make that investment and to change behavior, we would want to provide it for 10 years.

Additionally, there are some policy recommendations from the International Council on Clean Transportation that recommend to have a at least a 10 year incentive period for sustainable aviation fuel for these reasons that I noted.

And last question for me. What's the rationale for paying for these from the diesel tax Fund? Did you consider other funds?

Yeah. So we estimate that many of these entities are not very profitable. So they don't have corporate tax that they have liability against. So a tax credit against corporate tax or sort of a tax credit that would be paid for by the General Fund is not attractive to them.

But most of their tax liability we estimate is in the fuel taxes and sort of the diesel excise tax area.

Okay. I don't have any further. Sorry, Madam Chair.

That's okay. My aura ring just told me that I should get up, so. All right. We do have Assembly Member here who is joining us and would you like to ask questions or if you want to make comments. Okay, go ahead.

Is that on? That is on. Yes. Thank you Madam Chair and Members for allowing me to join today. California is committed to transitioning from fossil fuels to renewable energy and have asked private companies to invest their own resources to make this happen.

A number of refineries, including one that is critical union employer in my district have made significant investments to meet this climate goals requirements. As a result, it is now one of the largest renewable fuel production facilities in the nation.

However, these investments were made at a time when federal initiatives were available and when low CARB fuel standard pricings were projected to remain higher than it is today in 2026. These facilities are now on the brink of closure. Allowing the leading edge facilities to close sends the wrong message to the entire energy sector.

More importantly, California loses countless union jobs and sets back efforts to address climate change. We must stand by this industry and our partners who have made the choice to embrace renewable fuels closing our refineries will have detrimental impacts in my district. This is not a regional problem. This is a statewide problem.

We have to be investing in innovation and we must invest wisely and we must support our workers of California and we must invest in alternative fuels closing these refineries.

And I strongly would encourage the Governor's proposed sustainable fuel tax credit and urge this Committee to approve it and would be very grateful for the support for not only my district but for the state of California. Thank you very much for your consideration and I hope you understand the importance of this issue.

Thank you Assemblymember. We appreciate your attendance. Now we will go to any other comments before we close comments here we will invite the public for comments under 30 seconds each, please.

Good afternoon, Madam Chair, Members of the Committee, Alberto Tirico on behalf of Airlines for America Trade Association for the major US based airlines and freight carriers. We've been working on various methods to increase the production of SAF in California because it's the fastest way to reduce emissions for the airlines, for their. For the jets. 67%.

60 to 70% reduction in emissions. We have a bill with the Senate Member Rubio for expedited judicial review of expanded SAP projects. We wholeheartedly support the proposal. Thank you.

Thank you.

Hello Chair, Members. Thank you for the opportunity to speak. I'm Bobby Thomas, Vice President of the Rodeo Renewable Energy Complex at Rodeo. We did exactly what California asked. We took a petroleum refinery and transformed it into a renewable fuels facility. That facility is just over an hour from here in Rodeo.

Last year at the end of the session, we had the honor of hosting a tour for 14 of your fellow legislatures. They got to see firsthand a state of the art facility that diverts waste products from landfills and turns them into clean renewable fuels. We are a proud union shop providing over 600 livable wage jobs.

Again, that's livable wage jobs that include contractors and skilled trades. The SAP incentive is not simply a climate policy. It's about California jobs and California's future. Replacing traditional jet fuel with sustainable aviation fuel provides a benefit to the entire state and communities next to airports.

As a leader of the facility, I can tell you we stepped up, invested billions to preserve jobs. We respectfully urge you to support union jobs by supporting the SAF incentive. Thank you.

Thank you. Ask our speakers 30 seconds or under if you're going too long. I'm going to go like that. That means wrap it up.

Good afternoon, Chair and Members. Catherine Charles on Behalf of the Bay Area Council in support of this proposal. Aviation is one of the hardest sectors to decarbonize and this is one of the most practical solutions we have today. It can cut life cycle GHG emissions by up to 80%, reduce particulate pollution

by 90% and eliminate sulfur emissions near airports. We really need stable long term incentive framework and this will help California meet growing demand created, create union jobs and support renewable fuel facilities already operating in our state. So you're in support. Thank you.

Good afternoon, Tim Sbranti, Contra Costa Building Construction Trades here to support the track the tax credit. It's very rare you get the opportunity to support blue collar union jobs with health care and benefits and make such an environmental impact as we are today. You have that opportunity.

I think the Assembly Member asked the appointed question, what are the alternatives? Potential facility closures and a potential disincentive for these types of investments when you have facilities making these kinds of investments. So we as a state need to incentivize that.

And the last point I want to make is some of the federal changes that have happened with the Trump Administration that have given more incentive to Midwestern and Gulf states. We need to balance that with the staff tax credit support producers here in California. Thank you so much.

I got it. Thank you. Good afternoon, Madam Chair Members. Kathy Van Osten, I represent United Airlines. Just want to respond to a couple of things that have been said earlier about this being a very expensive alternative. Airlines don't have other alternatives. We don't have electrified planes. We are in the process of electrifying ground equipment.

It's minuscule compared to what we can save through SAF. SAF is our most meaningful way to reduce emissions. When you look at that billion dollar number that has been quoted and I know LAO and I think UC Berkeley, Haas, that billion dollar figure reflects out of state production coming in.

My understanding as I've been working with this is that this is for in state production only. I'll wrap it up. We don't have other alternatives and at this point in time other states are exceeding they're getting these massive tax credits.

So even if we produce in California, it's going to go out of state to other states where they get the benefits of those, those emission reductions.

Thank you.

Thank you

Madam Chair Members. Mike Monaghan, on behalf of the State Building and Construction Trades, we strongly support the tax credit. It's going to keep good paying refinery jobs in California and ultimately will assist refineries in converting to sustainable fuel. Thank you.

Good afternoon, Madam Chair Members. Kate Bell on behalf of American Airlines Echo. The comments may be United and here in strong support. Thank you.

Thank you.

Good afternoon. Jim Lights on behalf of the California Airports Council. Since before the pandemic, California has been using more SAF than any other state. But we were contributing to worldwide GHGs to get it here by vessel from Singapore, inputs from Europe to Houston and then truck and rail to get it to California.

Aircraft are the largest single emitters in the airport environment. The best way to reduce that is through saf. However, with the imposition of tax incentives in other states last summer, the volumes of SAF being used in California started to get diverted to other states where the economics were more favorable.

So if we're going to compete, the best way to do that is with in state production being supported. And so we're in strong support of the proposal. Thank you.

Thank you. Good afternoon, Chair and Members. Evan Giorcus on behalf of the Boeing Company in support of the SAF tax credit. We echo the sentiments of our airline and airport partners and we appreciate the administration's effort to provide an incentive to produce more staff in California.

While Boeing is hard at work developing alternative technologies in each generation of our planes is more fuel efficient than prior generations. SAF is the only pathway to a zero emissions aviation sector until at least 2050. Additionally, there's no replacement technology that currently exists to carry 150passengers 1,000 miles or more.

And we look forward to contributing to CARB and the A4A working group to develop other efforts to expand the production and use of staff in California to help reach our industry's goals of net zero by 2050. Thank you. Thank you.

Thank you. Good afternoon. Julie Malinowski Ball on behalf of Southwest Airlines. Southwest airlines has electrified 80% of its ground support equipment which is monumental for the state of California. We've invested in more fuel efficient planes, but we need staff to round out our climate goals for the company. If you still want to get away

today, you should support this measure. Thank you.

Good afternoon, Madam Chair. Tatum Eckler on behalf of Alaska and Hawaiian Airlines and just align our comments with Airlines for America and our airline partners. Thank you.

Good afternoon. My name is Timothy Jeffries with the International Brother of Boilermakers Online.

My comments with those building trades in support of those careers and those jobs in this industry and I want to applaud the potential move for the council here to support a measure like this and supporting those industries that we're going to need for quite some time in the future. Thank you.

Thank you.

Chair Members. Thank you. For the opportunity to speak today. My name is Joe Jawad. The United Steel Workers Local 326 President represent about 250 union members here at the Renewable Energy Complex. Our members are skilled workers operating one of the largest renewable energy facilities in the world. Producing renewable diesel and sustainable aviation fuel right here in California.

The Governor's SAF incentive helps protect good paying jobs while continuing to reduce emissions. On behalf of our members and their families, I respectfully urge you to support the Governor's SAF incentive package. Thank you.

Thank you.

Good afternoon Madam Chair and Committee Members. My name is Michael Miller. I'm a resident in Benicia. I stand today in support of the Governor's SAF incentive package and ask for your support as well. Thank you.

Thank you.

Madam Chair and Members, my name is Derek Vines. I'm a longtime resident of Contra Costa County, also of Rodeo. I've seen many, many generations that have grown UP through Phillips 66 and the refining process there.

I think the company has given a lot to the community and quite frankly a community that is in badly need of good paying jobs. I support the Governor's SAF incentive package and urge you to do so as well.

Thank you.

Good afternoon. My name is Cooper Wilkerson and I support the Governor's SAF incentive program and I hope you guys support it too. Thank you.

Thank you.

Good afternoon Chair Members. My name is Nina Thomas. I support the Governor's staff incentive package. I ask for support as well. Thank you. Appreciate it. Thank you.

Good afternoon Chair and Members. Thank you for the opportunity to speak. My name is Amy Henry. I'm here today in support of the Governor's sustainable aviation fuel incentive package in the budget. The proposal helps us ensure that sustainable aviation fuel is sustainable and that we will have the jobs, the good paying jobs here.

So I ask that you please support it as well. Thank you.

Thank you

Madam Chair and Members, my name is Derek Henry. I'm a Local 326 USW Member and just like to know that like you to know that we are in support of the SAF initiative program. Two reasons. One, mainly it keeps good paying jobs going out for our union Members and also it's keep renewable energy and support

for for our state. Thank you.

Thank you.

Madam Chair, Members, my name is James Jamison. I support the SAF initiative. I believe in good paying jobs and the safety of the facility and having that support from good labor and trade craftsmen.

Thank you.

Good afternoon Chair Members. My name is Dylan. I'm a health and safety with usw. I wanted to speak to you today about sustainable aviation fuel, which is currently the only realistic way to lower emissions and be aligned with California's climate goals. This facility supports over 600 livable wage jobs, is a real world example of lowering emissions.

I'm here today to ask respectfully to support the SAF incentive so folks like me can continue to be a part of the climate change and meet California's goals of lowering emissions. Thank you.

Thank you.

Good afternoon, Chair and Members. Alessandra Magnasco. On behalf of the California Fuels and Convenience Alliance, representing fuel retailers and marketers across the state, we respectfully oppose the proposed SAF tax credit because it creates significant fiscal risk while delivering limited climate benefits.

Independent analysis shows it could raise gasoline and diesel prices by 10 to 15 cents per gallon, adding billions in annual costs for consumers, while also reducing diesel excise tax revenues that Fund road repairs. The benefits are narrowly concentrated, but though costs are widely shared, we respectfully urge you to reject this proposal. Thank you. Thank you.

Good afternoon, Chair, Members. My name is Nicole Follett with Schultz Mechanical, and I am fully supporting the SAF incentive package and ask that you do as well.

Thank you.

Good afternoon, Chair, Members, my name is Jared Witchery. I'm also a resident of Benicia, California. I strongly support the Governor's initiative for the SAF incentive and I hope you do as well.

Good afternoon Chair, Members, my name is Paul Hollidge. I wanted to speak to you today about our sustainable aviation fuel which is currently the only realistic way to lower emissions in aviation. It's right in line with the governor's tax credit proposal. Our facility which produces it again, it supports over 600 jobs and supports our state and local economy.

Remember, this local facility is an integral part of our local economy and strong climate solution that California has set its sights on. SAF produced in California is good for the economy and the state's cleaner climate solution. Please seriously consider this initiative. It is a win win for all of us. Thank you.

Good afternoon Chair, Members, my name is Steve Kokonen. I am a resident homeowner in Rodale and I highly support the Governor's staff incentives and any other green incentives he recommends. Thank you.

Thank you.

Good afternoon Chairman Members. My name is Jeff Kenyon. I'm a former USW 326 Member and a proud parent of a UA 342 local Member. I strongly support the Governor's SAF incentive program.

Thank you.

Good afternoon Chair and Members. My name is Pier Bjornstadt and I'm a proud Member of United Steelworkers 326. These are skilled middle class jobs that support families in Contra Costa and surrounding counties. And I support this incentive so that workers like me can continue to be part of the solution. Thank you.

Thank you.

Good afternoon Madam Chair and Members, my name is Darren Brown. I strongly support the Governor's SAF incentive package. We got some airports around here. Regardless of what decisions made, we're going to have jets flying in and flying out.

Do we want to say they're burning jet fuel or do we want to say they're held off on green energy, on sustainable aviation fuel produced here in California under the strictest environmental standards providing good wages for local families. Thank you.

Thank you.

Good afternoon Madam Chair Members. I'm Victor Diaz. I'm with the USW 326 local. I'm here to support the Governor SAF incentive program and I asked you please to support two that will keep another refinery open and prevent it from closing. Thank you.

Good afternoon Chair, Members. My name is Jeff Mwango and I strongly support the Governor's SAF incentive package and I ask for your support too. Thank you.

Thank you.

Good afternoon Chair, Members. My name is Mike Miller Jr. I'm the Vice President of Local 326 Union. I am in support of the Governor's staff incentive both for myself, my family and all the Members of My union.

I've been a resident of Contra Costa County my whole entire life and I've worked at the Rodale Renewable Energy complex since I was 18 years old and I'm in support of this. Thank you.

Good afternoon Chair Members. My name is Joseph McNerney. I'm a United States Steel Workers Local 326. I support the governor's staff incentive program because it protects good paying union jobs and keeps renewable fuels production here in California. Thank you.

Good afternoon Chair, Members. My name is Marty Springfield.

I am a very proud member of the Local 326 Union for Redeo Renewed and I strongly support this as the governor's SAF incentive which allows us for have multiple good wage paying jobs clean for myself to be able to, you know, to be able to raise a family, own a home and continue to do what I do to help try and make any green incentives work for for the state of California.

Thank you.

Good afternoon Chair Members. Tommy Thompson, Solano County. I ask that you please stand with us in support of the SAF initiative and keep production in California. Thank you.

Good afternoon Chair and Members. My name is Mahamo Stefavi and I respect respectfully ask that you help us keep clean energy jobs in our state and urge you to support this incentive. Thank you.

Good afternoon Chair, Members. I'm Philip Hunter. I proud member of the Local 326 and I'm in support of the staff and hope you do too. Thank you.

Good morning Chair, Members. My name is Josiah Alfonso, proud Member of the USW Local 326. I fully support the staff incentive and ask that you do too. Thank you.

Good afternoon Chair, Members. My name is Amid Palkar. I am a resident of Benicia. California has always led the way in decarbonization efforts and I really urge you guys to consider leading here again. I strongly support the governor's budget SAF incentive package and please do consider voting for it in the favor. Thank you.

My name is Ted Wickers. I am a local member of 326. I've been there 43 years. My biggest proudest moment is to transition from fossil fuel to renewables. Something about our Local 326. I've been there long enough to now I am working with grandchildren.

So when we talk about jobs and not just talking about daily jobs, we're talking about generational jobs. So please, we stand in support of the government staff incentive. Thank you.

Good afternoon. Thank you very much for your time today. My name is Brad Schultz, engineer and California resident. Like to Strongly encourage you to approve funding for the staff incentive package. Thank you. Thank you.

Good afternoon Madam Chair and Committee Members. My name is David Schonthal. I represent the hard working men and women of Phillips 66. I'm in strong support of the SFA, FAF incentives. Fired up and ready to go.

Good afternoon Chair and Members. Zach Cleary. On behalf of the Western States Petroleum Association, I represent the refineries in the state that provide a bulk of the jet fuel to all the airports in California. Want to just urge caution as you consider this proposal. We are at.

While incentivizing a fuel that is not yet has a market, you're potentially going to lose more refineries. You're losing a refinery likely next month that provide the fuel that folks use every day.

And we believe that the state and the Legislature should be focused on preserving and protecting the remaining petroleum refineries that you have left as you consider these proposals. Thank you.

Good afternoon. My name is Felix Luna, proud Member of USW 326. I am the Joint Health and Safety Committee chair. I'm a California resident. SAF incentives are the greenest choice for California and provide working wages for California residents. I urge you to please vote in favor and thank you.

Good afternoon Madam Chair. My name is Enoch Yakopo and I. I'm a Member of the USW 326 and I support the Governor's incentive staff program. I hope you guys do too. Thank you.

Good afternoon. My name is James Cross, Venetia resident, local firefighter as well. I support staff incentives. I hope you do too. Thank you.

Good afternoon Madam Chair and Committee Members. My name is Tony Ivanienko. I'm a local resident in Concord, California and for years we have been working on decarbonizing solutions for our fossil fuels. And I think this is the right step forward in order to go for a greener energy program and bluer skies.

So I'd like you to support this program. Thank you.

My name is Ralph Alter. I'm a resident of El Soprante. I've had a long career in the energy business. I've never seen anything come off as well as this Rodeo Renewed project. Our safety record is nobody can match it and we're better in the community than we've ever been. I want people to support this.

The jobs are incredible that we have out there. People are putting their kids through college on our jobs. It's very important that you support this bill. Thank you.

Good afternoon Madam Chair and council Members. My name is Neil Jean Charles and I support the initiative, the SAF initiative for jobs, obviously. But also I'm an avid hiker and California is one of the most beautiful states in the nation. Every microgram mission we're able to get off, then it helps. Right? So preserve California, preserve the jobs.

Good afternoon, Chair, Members. My name is Demetrius Roscoe. I'm a proud Member of the USW Local 326. I respectfully ask that you include the staff incentive in the state budget. Thank you.

Thank you.

Hi, good afternoon.

You can pull the mic down. There you go.

Hi, good afternoon, Chair and Members. My name is Angelique Oria. I'm a proudly Member of USAW 326 and I strongly support the Governor's SAF insensitive package. Ask you that you support it too, please. Thank you.

Thank you.

Any last calls for public speakers? Anybody outside? Last call. All right, bringing it back. There are more. There's no. All right, thank you. Thank you to Local 326, USW in the house. I just have a few comments before we we finish this panel as I didn't make any on this particular item.

I really hear both sides on this issue. I know that there is definitely concerns with transportation coffers as far as looking at taking a substantial amount of money out for this.

On the other hand, when we look at aviation, a lot of times when we talk about fuel or gas prices in California, we hear a lot about highest in the nation prices going up. Of course we're very concerned what's happening internationally right now.

But I like to think about this particular topic as our infrastructure in California to keep people working.

So whether it's cars that continue to need fuel to get to work, we know many of our lower wage earners have not been able to transition to fuel efficient cars simply because of the cost and because we don't have the infrastructure.

When we look at aviation, many times we don't intersect those conversations from our highways to the skyways. And yet at 1.0 on this dais, there were at least three or four Members who travel to our jobs through the skyways. And we certainly know the impact, as was mentioned, that our airlines are using now.

When we look at our climate and wherever we can to whether it's decarbonize or to move towards that, we're not there yet, but we can only imagine when we can be. So I do in fact support this. I definitely hear the concerns of the cost and why out of the diesel Fund.

But I feel that ultimately when we look at this part of it that we have to focus on is jobs. Last year we heard a lot about some of our refineries, not only closing, which indeed we've seen, but potential closures. And I'm a firm believer that when

we can offer jobs, whether it's to men or women of a working wage, and they can, as was mentioned, not comments, raise their families and even generationally be part of this workforce, we change lives and we are not doing that enough when it comes to job prospects for many young men, not only in California, but in the United States, we've seen a slump in these type of opportunities.

So if something like this comes before me, I'm certainly going to support it because I want to continue to see California as the fourth largest economy. And if we aren't protective, we will not have that state status. So with that, those are my last comments. Did you have any comments Assembly Ward on this particular?

All right, just walked in then. That was close. This panel, we appreciate you for being here. And that is going to take us to our next item. Item number five, Information Tech Technology Modernization Project. Item number five. Welcome and please introduce yourself.

Thank you. Good afternoon, Madam Chair, Members of the Committee, I'm Yvette Sowers, the Executive Director for the State Board of Equalization. Joining me to my right is Mr. Jack McColl, Chief State Assessed Property Division, Property Tax Department. Thank you for the opportunity to participate in today's hearing. A little history.

I was appointed Executive Director in April of 2022. Since the BOE's reorganization in 2017, these are the first budget change proposals we have brought before this Subcommitee.

Because of that, I would like to take a moment to provide a brief bit of background and context on how we are structured today and how our proposals fit within our new framework. You want to move the mic up a little bit? There you go. Thank you.

In 1879, the BOE was established under the California Constitution to regulate county assessment practices, equalize county assessment ratios and assess properties of intercompany railroads. Subsequent constitutional and statutory changes added on the Administration of tax fees and an appellate program.

Today, the BOE focus on its constitutional responsibilities, oversight and Administration of California property tax system, a system that results in $9.1 trillion of assessed value and the Administration of our alcoholic beverage tax and our tax on insurers.

Today, the BOE operates as a small agency with about 190 staff and a flat organization structured consistently mostly of property tax program staff supporting our constitutional functions. One of our main property tax program is valuing status as public utilities and railroad properties in 2025. The BOE determined the value of status as properties at 167.2 billion.

Then this was for the 2025 lean year. This was a 15 billion increase over 2024. Status as properties produced 2.83 billion in local property tax revenues for the state 58 counties. I provided materials to your staff on our other programs and in the spirit of saving time, I would just move on to the BCP.

The boe's technology project before you today modernized the technology platform used specifically for status as property Administration. The new system will replace outdated billing system, improve data integrity, strengthen cybersecurity protections, streamline workflows, and enhance our ability to analyze and manage highly technical valuation information.

The current system is 35 plus years old and relies heavily on manual processes and aging infrastructure. This creates operational risk inefficiencies and and potential delays in completing timely accurate assessments. Given the scale of revenue involved, even small inefficiencies could have significant downstream impacts on local government. The project is designed to operate with our leaner organization needs.

The proposal is target investment to stabilize and modernize the function we are required to perform while also positioning the BOE to meet current and future statutory requirements and efficiency responsibility. I also want to emphasize that this IT project has been actively developed and managed by the same staff and managers who carry out this work every day.

The staff understands the operational realities, the compliance requirements, and they have this understanding because they are directly invested in making sure it is delivered successfully on time in a way that truly supports the program.

And on a second note, I would like to acknowledge that the Project Technology Project Sponsor is the Chief Information Officer for California Department of tax and fee, Mr. Scott Capelan. We respect the request your support in this IT project. Thank you.

Thank you. Next.

Yes, thank you. Chair and Members Alexander Bentz Legislative Analyst Office. We just would like to note that given the state's tight budget, in our view projects of this type, funding for these projects should be reserved for projects with immediate compelling need.

And while there is some risk to continuing to use the current system, in our view the Department has not yet offered a convincing rationale for why this project needs to happen this year as opposed to in a future year when hopefully we have more resources.

And so we recommend that the Committee ask the Department to explain this urgency and why the risk is heightened this year. Thank you.

Would you like to respond to that? Absolutely. Mr. McCall?

Hi, I'm Jack McColl. I'm the Chief of this Dataset Properties Division at VOE. The urgency is basically around the fact that we're using a patchwork of technologies that are over 20 years old and no longer meet our needs.

So we've reached a point where we have significant manual workarounds that we have developed on our own and in partnership with CDTFA as our IT service provider.

And we're at a point now where we have a need, where we are deferring work that our in house staff should be completing, but we can't because our systems don't allow us to have the flexibility to do a lot of the functions that our staff used to do.

So we have we're spending more and more time on IT workarounds and less and less time doing analytical work that our staff should be doing.

The Short Answer thank you Members. Any questions? I Any other comments?

And if I could add just one thing, we do have an extra sense of urgency because we are expecting a significant increase in our assessment workload this year and going forward. There was a regulatory change at the California Public Utilities Commission that has given assessment jurisdiction to the VOE over voice over Internet protocol entities.

We are estimating conservatively at least a 50% increase in our assessment workload. It's difficult for us to accurately measure it until we've gone through one assessment season.

Our annual filing date for State assessees is March 1st, so we're literally in the middle of discovering the true impact of this regulatory change, but we are expecting it to be extensive.

Thank you. Appreciate that. I know that many of our discussions up here are relating to technology and the upgrades and after 20 years we talked about this. I think last hearing there certainly has to be attention to it. With that, do we have anybody from the public that would like to comment?

Anybody from the public wanting to comment on item 5? See none. We thank you for your time. Thank you so much. Oh, we have some of the same panelists here on item number six, intergenerational real property transfers.

Thank you for the opportunity to present on this next budget change proposal. This proposal relates to the implementation of Senate Bill 293 which modifies provisions governing intergenerational transfers and real property transfer base year values, including those connected with the Wildfire Relief.

As a state entity charged with issuing guidance to the 58 county assessors and promoting uniform state grade property tax Administration, the BOE must ensure legislative changes are implemented consistently, accurately and and in a manner that provides clarity to taxpayers. Our request is straightforward. We're asking for $154,000 to support the three core responsibilities.

First, to develop and issue formal guidance and technical instructions to all 58 county assessors. Second, to update public information materials so taxpayers, practitioners and stakeholders clearly understand what how the law applies to generational transfers and wildfire relief.

Third, to respond to an expected increase in public and stakeholder inquiries and to conduct the necessary administrative and legal review to ensure consistent statewide implementation. I want to underscore this request relates to our capacity. The program responsible for this work consists of seven dedicated property tax professionals and experts.

When Proposition 19 fundamentally changed intergenerational transfers and base year value transfers, the BoE did not receive additional funding to implement this historical reform. Reabsorb the workload. We have done more or less for several years at this point. We cannot responsibly take on additional statutory workload without limited targeted support. This proposal does not expand programs.

It does not create new initiatives. It allows us to fulfill our statutory responsibilities, implement the new change in law to do so in a way that maintains statewide consistencies and protects taxpayers from confusion. An uneven application. We respectfully request your Support for this 154,000 budget change proposal to ensure SB293 is implemented. Thank you.

Myself and my team are available to answer any questions.

Thank you so much. And next to Lao, Alex Spence.

LAO. We have no concerns.

Thank you. I think this is the smallest budget ask that I've seen before me.

We're being very.

Nevertheless, it seems to be very important, so we appreciate you bringing that forward. Any other comments here on the panel? Not seen. Any public comments? Not seen anybody. Thank you for your time. Appreciate it. Thank you, Madam Chair and Committee. And next we have our friends from the Franchise Tax Board. zero, our friendly tax friends.

And if there's Mr. Rowan. I haven't seen you this year. Hello. All right. Hi, friends. Okay, we're ready for you.

Hi. I almost said good morning. Good afternoon, Madam Chair. Thank you for your time today. I am Roger Lackey here with the Franchise Tax Board. I'm the Chief Financial Officer here at FTB. I'll be presenting on issue seven, item one. I also have with me is our Budget Director, Abel Escobar.

He'll be presenting on item two, which is our mainframe workload bcp. So with item one, am I close enough to the microphone?

Yes.

This is FTB's final BCP, supporting the enterprise data to revenue phase two EDR2 project. Before diving into the proposal, just provide some brief background. 2007, FTB introduced its tax system modernization, which was a 30 year strategic vision comprising three major initiatives.

Each initiative spans approximately 10 years from planning through implementation, with each phase building upon the foundation established by the previous one. Phase 1 the initial EDR project established our foundational enterprise platform and modernized both tax return processing and our correspondence workflows.

Phase two the project we're here for today has moved our compliance workloads, audit, legal collections and filing enforcement onto the shared enterprise platform created by EDR1. The final phase of our EDR project has moved sorry is to replace our accounting systems and also to resolve our six key business problems.

We target pre planning of that in 26-27 and we plan to have a contract in place in 2031. So the planning for the EDR2 project began in 2016 and implementation in 2021. The implementation releases were carried out to ensure that no negative impact to EDR FTB operations as well as to taxpayers.

In 2023, we introduced the personal income tax audit and protest workloads to our enterprise platform. In early 2024, we incorporated our PIC collection workloads. Later that year we also added audit protest workloads for our pass through entities and our business entity audit cases.

In early 2025, we transitioned our business entity collection workloads, legal workloads, and at the end of the year our personal income tax and business entity filing enforcement workloads. Each implementation also added new self services, expanding our model capabilities, added data visualization and the ability to leverage additional data capture.

In January the project successfully completed its final implementation release and we entered the warranty period. The warranty period extends to the end of the 2026 calendar year. During this time we'll continue to focus on maturing the functionality and completing the project closeout activities following the statewide process established to support funding for larger projects.

An annual BCP is required for new costs related to the year.

This year's proposal is the final proposal for this project and requests augmentation of 59.89 or 8.5-7 million for 262723.975 million for 272817.635 million for 282917.64 for 2930 and 17.637 for 3031 and ongoing and the full time equivalent of 20 permanent positions.

The 26-27 fiscal year includes 32.8 million for the payment to the solution partners. In addition, the proposal includes 12 million annually for IT transition software. Please note throughout this project, FTBA used a just in time approach to requesting resources. We are asking for the resources for the same functions across the years as they were needed.

We have noted these ongoing limited term or one time costs within the BCP. Lastly, statewide policy requires a special project report to be submitted when there's a 10% or more increase in schedule or cost or when there is a scope change.

However, due to the size of this project, it's subject to the special condition where a special project report is also triggered if the cost increased by 5 million or more. In January of this year, the EDR project submitted and received approval for its third special project report.

While the project scope, schedule and date remain the same, the total project costs increased by approximately 17 million or 2.2%. These additional costs are necessary as the project is 99% complete, it's entering its final year of implementation, transitioning from development to warranty period, and operational support as the state prepares to assume full ownership of the solutions.

Targeted updates to staffing, infrastructure and support contacts are required to support maintenance and operations. As mentioned earlier, we are at 99% complete. We're wrapping up this project. We're looking forward to seeing it completely done over this next fiscal year.

Thank you for your time and I'll like earlier if you'd like us to go to the second BCP before you ask questions. Sure.

Good afternoon Assembly Members. My name is Abel Escobar, Director of the Financial Management Bureau for Franchise Tax Board, here to present issue 7, item 2.

So item 2 is FTB's BCP titled Mainframe Workload Growth and it requests $13.1 million to replace primary and disaster recovery mainframe servers and 389,000 in fiscal 27-28 and ongoing for the support and maintenance of these servers. So Franchise Tax Boards, mainframe primary and disaster recovery servers have reached end of market.

That means that these models are no longer available and parts are limited. So this necessitates a critical refresh to ensure continued system reliability, performance and security. So a mainframe server is a high performance computer equipped with vast memory and powerful processors capable of handling billions of transactions and calculations in real time.

It is a mission critical system known for its exceptional resiliency, security, agility and these are essential qualities that demand reliability at scale. These mainframe servers process data essential to FTB's mission critical tax and non tax applications that support filing, collections, audit and non filer processes as well as external web self services.

A timely refresh of these critical hardware and software components allows FTB to maintain operational stability, current and future mainframe needs, backup data and mitigate risks associated with running a system past end of market. Those risks include network constraints, software compatibility risks, performance degradation and limited new component availability.

So FTB is responsible for administering the income and franchise tax laws for the state of California. FTB's data center, which hosts the mainframe environment, provides the necessary operating and storage capacity for FTB to administer its program successfully.

As a result of these efforts and reliance on These servers, in 2425, FTB processed more than 22.8 million tax returns, over 9.9 million payments, responded to more than 3.1 million telephone calls, and serviced over 59.8 million Internet contacts, collected about 166 billion in revenue and represented approximately 78% of California's General revenue, from which is critical to Fund programs and services for Californians.

So with that, we'd like to thank you for your time and support and open it up to any questions. Thank you.

Thank you. Appreciate remarks.

Rowan Isaacs, LAO. We have no concerns with either of these proposals.

What? This is close to $150 million. We appreciate your remarks. Any questions here?

Thank you. Madam Chair. Yeah, just two quick questions from my end.

So for, you know, the first item for the Enterprise Data to Revenue project, and I'm, you know, new to this Committee, so, you know, let me know if I'm asking things that you've explained already prior, but can you explain why the amount that you're requesting for 2627 is exponentially higher than years after that? It's 59 million.

Relative to the one goes to 23, then 17 million. Can you just elaborate?

Sure.

It's a great question. So, yeah, for that year it's much larger. It includes the final. Excuse me, the final payment to our solution partner, which is approximately, and I think it was in there was $50 million. And then it also includes our transition over. So there's two items of significance there.

One is the IT software hardware transition, that is about approximately $12 million. And then there's the maintenance and operations, that's about $11 million. And then within the warranty year with the maintenance and operations, that actually includes about 60,000 hours of support during that transition year from the solution partner.

So those are the big kind of the big ticket items. And then that's why you see it significantly drop down. And then that's ongoing cost in those future years.

And you said this is 99% complete.

Correct.

So this is phase two of two.

Phase two of two? Yes.

Okay.

Or phase two. I'm sorry, phase two of three.

Phase two of three. Okay. What's the total cost that we've spent on this entire project?

This one? This project is $801.5 million.

Okay. And then is this on budget, on track? Is this how long you guys expected to implement this project?

Yes.

On, on schedule, scope cost.

Okay.

Okay, thanks for sharing that. I know, I mean, as I've joined the chairs Committee, we've just seen a large, you know, very long. And I know this, they're all like this, just very long timelines to implement very large scale, you know, modernization programs like this. So just curious on that front.

And then for the second item, the mainframe workload growth, how long are we expecting to use these new mainframe servers? How long do we expect to update it in the future?

I can take that one. So I wanted to share some context on mainframe technology. Mainframe technology does not change on a fixed annual schedule. Instead, the refresh cycle is driven by workload growth, system capacity needs and vendor supported hardware and software life cycles.

So at FTB, as part of our IT plan, we're always looking five years out and evaluating how these processing demands affect filing collections, refund, issuance and fraud detection programs, all which heavily rely on the mainframe environment. So historically FTB has had to upgrade or refresh server hardware and various components.

And typically the market for these is the life cycle is about four years. However, FTB currently on these existing ones has purchased extended warranty to help reduce the cost to the state. But these servers are going to reach end of life soon, so we want to make sure that we protect California's interests before that happens.

So just so I understand that correctly, in four years we should expect for you to come back for a refresh of these?

Possibly, yes.

Okay. Okay. Thank you for answering my additional questions. I. I don't have anything else.

Madam Chair, can I make one correction? The Last payment is $32 million to the, to the vendor. So I just wanted to clarify. Sile you take taking notes.

I was surprised that our LAO didn't have more comments, but only because I see 20 permanent position positions and I believe last year we were talking about not filling positions. So can you speak to that?

Sure. The positions that we've included in there. Yeah, so. And there's workload metrics that are behind each one of those to support.

So the work, what we're requesting in terms of the resources, increases in the volumes of collection cases and then being able to support that and being able to maintain the same collection customer service level, compliance level for the collections. Same thing with the new services related to our audit programs is the ability to issue more assessments.

And then similarly is one of the important points, kind of going through that process is both the protest and appeal. So there's also resources that are included in there for auditors to address protests, remain timely as well as for some of our attorneys to be able to continue to stay timely with those with Office of Tax Appeals.

Then there are also a handful of IT positions in there to support that transition over to the new IT infrastructure that exists that's a little bit more different and that's a net from other positions that have been redirected with the other legacy systems that are going away.

Thank you. I certainly want us to be able to do collections as that adds to our revenue. I think IT is going to be the theme and as a new Member, you're going to see under almost every Department, we're seeing very hefty dollars for IT.

I don't think it can be avoided and I know, but it is just a note that in the last two decades, and I'm assuming in the future, we will be spending billions and billions of dollars on technology and upgr and we certainly can't let them fail.

But this is a huge amount of money that's going to have to be allocated the next 10 years. But I did like that phrase you said a critical refresh. I think we all need little critical refreshes. So that's a good way to get me to support that. Right? We could all do with a little critical refresh.

But thank you. We appreciate it and appreciate I know you guys are gonna be working very hard in the next or two months here. So appreciate it and that any public comments on this.

Madam Chair Jason Fox of the California Society of Certified Public Accountants comments not related to this item, but an item that has historically been addressed via the budget process and administered by FTB. So I want to take the opportunity to kind of put on the public record.

This relates to the pass through entity tax or the pte, which has been a successful program that provides California taxpayers a path to navigate the federal cap on State and Local Tax deductions or SALT deductions.

It has allowed taxpayers to deduct their PTET payment from their federal return, effectively helping keep dollars in pockets of California taxpayers at no cost to the state's General Fund. Over the years, the program has been implemented, refined, improved through the budget process, and I think it's been very well received from the practitioner and the taxpayer community.

There's one remaining item that's the strain of tax credits that are coming up from expiration dates. That creates uncertainty and challenges for a lot of the practitioners and taxpayers. Uncertainty for the state related to projections of how taxpayers are going to behave and what those credits are going to do from a budget revenue planning standpoint.

So we would suggest that the Legislature and the Governor, through the budget process, consider removal or extension of those expiration dates on those PTET credits. So I want to put that on the record. Happy to have further conversations with you others. Thank you.

Can you repeat that again?

Pt, just PTE, Pass through entity tax credit. Okay, thank you. They're very well versed on that.

Yes. Yes, we are. Good afternoon, Madam Chair. Pat Joyce here on behalf of the National Accounting Firm so EY, KPMG, PWC and Deloitte want to echo the comments from Jason Fox who represents the profession. This is a big, big deal for owners of professional services firms.

So large multi state accounting firms, law firms, engineering firms, they all take advantage of this program. And what's happened over time is they've accrued a massive amount of tax credits where they're unable to spend them and catch up. And now they're facing this expiration date problem where credits are vulnerable to being stranded.

And they're not going to let that happen. I mean, they're going to just opt out of the program and cash those tax credits in. So the state's not going to get the PTEP payment. And what we want to avoid is folks missing out on this great opportunity to get tax savings at the federal level.

So we can avoid that by eliminating the expiration date. That will maximize participation in the program. And at a time when the Federal Government's actively looking at ways to reduce spending in California. This is the one program that allows taxpayers to get dollars directly from the Federal Government and put them back in their pocket.

So we want to make sure that we're taking full advantage of that and encourage the Legislature and governor's office to look at eliminating the expiration expiration date on the tax credits. Thank you.

All right. Thank you. Appreciate those comments. Definitely look into it in would like to have future conversation. Any comments on that at all? I know it was not on the agenda. All right. All right. Well with that we thank you.

And that will finish panel seven and we will go to our last panel, Governor's Office of Business and Economic Development, better known as Go-Biz.

Good afternoon Chair Member. Welcome. Scott Dasick, Deputy Director of the California Competes program at Go-Biz. Thank you so much for having us here today. We are here today to talk about the renewal of the California Compete's tax credit. Our proposal is for a five year extension with no other changes to the program.

The Cal Competes tax credit has been around for 12 years this month and is California, simply put, is California's strongest deal closing measure. It was created to incentivize full time job creation in California that would otherwise not be here today. It is. I'll keep my comments brief.

It has been lauded for its success and efficacy in bringing businesses to California. Keeping California businesses here, giving us the greatest tool we have to compete with other states that are trying to take California businesses away or when companies are choosing where to grow, where to expand or where to site in the first place.

This provides us with that tool to keep them here. Providing this extension would give certainty to these businesses and the business community to know that California values them, wants to keep them here and we want to keep putting Californians to work in high quality full time jobs in the state. Thank you.

Before we go to lao, can you give we have this nice graph here. Appreciate it. Can you give us some examples of some of these businesses that are being awarded this grant?

Sure. So today we're talking about the California Creeds tax credit, right? So some examples of companies and I'll just take some of the more recent ones. For example, for example, in Gimme Health, if you ever go seaweed shopping at Costco, you might see the packages of Gimme Health seaweed produced in Korea.

They were looking to onshore jobs into California as a result of or to the United States as a result of California Competes. They selected Madera for their first ever US Factory in California. So we'll have seaweed manufacturing in the Central Valley in Southern California. We have headquartered in Santa Monica, Legendary Foods.

They make low CARB, high protein toaster pastries, donuts and other type foods. Think about for folks that are especially on like a keto or a low CARB diet. And the majority of their manufacturing was outsourced into other states as a result of California Competes. They opened and expanded their factory in the city of Bell.

And I did have a chance to try one of the donuts, the low CARB donuts, fresh off the line. And we're very proud of that investment in California. So I don't know how many more examples you want, but these are examples.

No, I have the chart here. Now I can see it. What is the process they have to go through in order to attain these awards?

Thank you for the question. So we have an extraordinarily rigorous multi phase application process where companies and we have the Now I think 15 or 16 statutory criteria that we evaluate companies on. So companies are asked lots of information.

Probably the guiding principle that we use is language that the Legislature put into CalCompetes when it was first renewed probably nine years ago for the first time.

Go Biz shall evaluate the extent to which the credit will influence the applicant's ability or willingness to create new full time jobs that would otherwise not be created in the state by the applicant or any other California business. So the first thing that we look at is what evidence are they providing that they are truly at risk?

Are they truly looking outside of California? Can the jobs go outside of California or are they geographic or location dependent? And we take an extraordinarily deep dive, not just looking at the information they provide, but also doing our own independent analysis of the information they're providing to better understand their situation, the industry.

And then above and beyond that, then we look at all the other criteria. How many jobs are they proposing to create? What are the wages and the benefits that they're going to be offering? Are those wages and benefits relevant to the region of California where the jobs are going to be created?

And then looking at all of the other evaluation criteria in each phase they provide more and more and more detailed information until only the most competitive applicants that have truly demonstrated this credit is a material factor in their decision making process are the ones that are recommended for award.

And then those awards are not official until approved at a public meeting of the California COMPETES Tax Credit Committee which consists of the Director of GO Biz, the state Treasurer, the Department of Finance and then two legislative appointees. And they're the ones who have the ultimate authority on whether or not to approve those agreements.

Just learned something. I didn't know there was a board that reviewed those. All right, there you go.

Thank you. Rowan Isaacs, Lao so I'm just going to give our broad thoughts on the program itself, and then I'm going to address one of the questions in the agenda about recycling and recapture, and then I'll just briefly give our recommendations for this proposal. So generally, we think the program is fairly well designed.

It is a competitive application process. It does combine, as Scott mentioned, these very specific corporations, quantitative metrics like the amount of jobs that you're going to create relative to how much tax credit you're requesting. So it's like a bang for your buck kind of metric.

But also there's a lot of these other metrics that are considered, and they're kind of evaluated holistically or qualitatively by the program staff and with the goal of trying to decide or determine whether giving a tax credit to that firm would actually result in them creating jobs that they would not have otherwise created.

This is a big issue when we think about lots of tax expenditure programs, business incentives, are we giving tax credits or incentives to firms that would have expanded or would have come to California anyway? And the goal of looking at all these different factors is to try to mitigate that.

And so we think that's a good structural component. Additionally, in the agreements that Go Biz makes with firms, if they do not manage to hit their hiring or their investment targets, or if they create those jobs but then later reduce their jobs, again, these credits can be revoked or recaptured.

So this mitigates a lot of the downside risk to the state of making these awards. There's also been a couple of academic research studies in the last couple of years that have provided evidence that there is actual net job creation as a result of the California COMPETES tax credit.

And so in General, we view it rather favorably in terms of tax expenditure programs just to qualify that. A lot of this evidence comes from looking at the earlier years of the program.

So up through 2018 or 2019, and there has been, you know, around 2020, there has been somewhat a big change in the types of awards that are made. So in the early years of the program, the awards tended to be smaller in size, and there were more of them since 2020.

And in more recent years, the average award size has gotten a lot larger. So we're making bigger awards but to fewer companies, and the industry composition of those awards has changed a little bit. So we think that, given that, you know, there is some need for sort of continued oversight. And, you know, one of the.

We have to, because of the length of the agreements, are five years long, plus an additional three years that they have to maintain those jobs. It takes a long time for us to be able to evaluate all of these economic outcomes.

So in terms of evaluating this proposal, we're not able to look at the more recent years of the program, but that's something definitely to consider if we do extend this program, the next time we come back here, we'll be looking at the more recent data. Now, thinking about recycling this issue that was brought up in the agenda.

So, roughly looking at the data from the early years of the program, a lot of the awards that were given out are eventually recaptured, meaning that the companies don't end up claiming all of the credits, especially in the first few years of the program. In excess of half of the credits are potential to be recaptured.

And there's two ways of looking at this. This is almost. You could make the argument that it's a sign that the program is doing its job, that if companies are not following through, then they're not getting the tax credit, which is a good thing. But it does create this.

Because of the way that the allocation for CalCompetes is structured, any recaptured or unallocated credits can be rolled over into future years of the program. And because this recapture rate has remained fairly high and there have been some years where there haven't been as many qualified applications, this pool of recycled credits has increased from the baseline.

Allocation is currently 180 million. And now it stands, the total amount is over 900 million for this fiscal year. And there are two things to say about this. So, on the one hand, having a big pool of credits stocked up is actually a beneficial thing for Go-Biz because of the business cycle.

There might be some years in which there are lots of good business opportunities and lots of businesses trying to invest in favorable conditions. Then there might be lots of good applications in a particular year. And so bygob is having this big pool of credits.

We can take advantage of the fact that maybe in one specific year, there are lots of really good applicants that we want to Fund and incentivize to come here.

The concern from a fiscal perspective is that Cal Competes could choose to allocate a large number of tax credits in any one given year, and that would lead to the program having a much higher fiscal cost over the next four or five years, over the time period which those credits are typically claimed.

And so in the context of the budget problem, the structural deficit. That's something that Legislature might want to take into account. And there are many ways of thinking about this. It's not one way or it's not one extreme or the other. Right now we let the credits accumulate unfettered.

There's no upper limit on the amount of credits at the moment, but we don't have to completely ban their usage.

There might be some middle ground if the Legislature wants to explore sort of, you know, mitigating the effects of a large year of awards by sort of smoothing out or limiting the amount of credits that can be used in any given year. That's certainly a middle ground option that you could pursue.

But we do recommend approving the extension of California Competes in its current form, but noting that if Legislature is concerned about potentially spiking fiscal costs of the program, if there is a favorable investment environment, then there are many options available. Thank you.

Any other comments?

Yeah. Nick Thomas, Department of Finance no additional comments at this time, but available and happy to answer any questions.

Assemblymember, any questions?

Yes, thank you so much. Chair thanks for your presentation. This was, you know, a tax credit that I didn't know too much about. But I think for me it's great to see and hear about the results that this tax credit is producing to retain and grow industries, to keep and grow jobs in California.

I was trying to find some companies that were in my district. There are none. So that's my note for you for next year time, but I'm just half joking for that point. But I actually just want to know. It seems like a very popular tax credit that businesses are applying for.

I know you have three award periods during the year. I saw that one just recently closed. How many rounds of this tax credit have you done? And then can you just tell us a little bit more about how many applications are you getting versus how many of those businesses are actually getting the credit?

Are you having to deny a lot of businesses? If you can just tell us a little bit more about that, sure.

So the program was created 12 years ago this month. We do three application periods each year, so roughly 35ish periods so far over the last 12 years. So three application periods a year. That's evolved with the program.

But we try to make sure that it's aligning with frequently enough to meet the needs of the business community without creating a program that would require us to massively staff up. So we've been able to find that right balance with three application periods each year.

So typically one that starts mid summer with an award in November, another one January with an award in April, and then we have our third application period that just started yesterday that will have the award period taking place in June and then that cycle repeats itself.

We are typically over subscribed in terms of the gross number of applicants and the amount that they request. But certainly over the last few years, as LAO alluded, we have awarded less than we had available to allocate.

And simply put, when we look at those evaluation criteria and especially that threshold question of is this credit truly a material factor in the business decision making process, that's the first thing that we look at. And if the credit's not a material factor, that's the difference between a subsidy and an incentive.

CalCompetes is not here to subsidize decisions that have already been made. It's here to incentivize full time job creation that would otherwise not happen in the state.

So if they don't meet that basic threshold question, then they will not be recommended for an award, but they will be invited to reapply if they if the jobs truly are at risk or they have. And it's not just that we're just done in a vacuum.

There's an iterative process with the company where we truly ascertain the level of risk.

And thanks for sharing that is Does Go Biz do can you tell us about some of the outreach that you do to businesses to get them to apply more if there's things that how is Go Biz encouraging more investment for folks to actually apply for this tax credit?

Sure. So we do a number of different things to promote the program. First, we have an email list that grows every year that now has over 10,000 discreet individuals on it. And we blast that out every time that there's an application period. And that includes local economic development organizations, chambers of commerce.

So like the San Diego and Los Angeles EDCs, for example, orange County Business center, lots of different organizations that then further blast out the information about Cal Competes.

We do online webinars every round that are live, where we also take live questions at the end of each webinar to answer not just promote the program, but to answer specific questions about how to apply for the program, how to submit not only competitive but an accurate information.

Because one of our goals through all of this is through our technical assistance is make sure that we're never disqualifying a company because they didn't submit a good application, because they don't have a full time grantor contractor tax credit Writer on staff. We work with them providing that technical assistance to ensure the accuracy.

So then we can truly evaluate whether it's a strong applicant, not whether they're good at filling out an application.

Thanks for sharing that. And last question is, what, like, trends are you seeing from folks who are benefiting from this? I can kind of like see here from this chart. Who are which industries Would love to hear from you. Is there a specific industry that you feel like, you know, this is really benefiting?

Just curious to hear what trends you're seeing from the uptake of this tax credit. Like, what industries is it helping? Sure.

So, you know, and obviously we have folks with a bit stronger economic background than I have that can talk about global and national economic trends. We've seen a lot of economic instability overall. There's a lot of things happening nationally that's creating trepidation in the business community about.