California’s clean-energy tax breaks getting close look

The Solyndra debacle has forced a critical look at California’s clean-energy tax incentives – and serves as a reminder that difficulties remain in the state’s ability to attract manufacturing despite these hefty tax breaks.

“California in the past 10 to 15 years has gotten 45 to 50 percent of the country’s venture capital, that’s great. But it doesn’t mean it will transform into manufacturing in California,” said Gino DiCaro of the California Manufacturers and Technology Association.

A Capitol hearing was recently held on the sales tax program that benefitted Solyndra, the Silicon Valley company that collapsed despite more than $500 million in federal government subsidies. More than 1,100 workers lost their jobs.

Discussion revolved around the state’s continued loss of green manufacturing jobs in the face of California’s leadership in research and development and the tax benefits used to attract and retain these businesses.

According to the CMTA, electricity rates in California are 50 percent higher than other states, the tax burden is 20 percent and the wage burden is 13 percent higher, all of which acts as a deterrent to manufacturers, especially in the capital-intensive green industry.

DiCaro also contends that California’s “culture of regulation” imposes rules without examining their economic effect, something that is being addressed by the recently signed SB 617 (Calderon and Pavley) requiring impact analysis on regulations made after November 2013.

The political debate over tax breaks is fierce in the Capitol.

In renewable energy, the question of tax breaks – how much and for whom – is especially critical as California, by law, requires cleaner power in the coming years.

Tax breaks have been a standard approach to help defray the hefty start-up costs of the renewable industry, as was the case with the sales tax exemption on green manufacturing equipment that benefited Solyndra.

But, as noted by the nonpartisan Legislative Analyst’s Office, the benefits of tax exemptions like this are difficult to assess. For example, evaluating whether these companies would have purchased the equipment regardless of the existence of the tax break.

While state and local costs are a factor for many businesses, they are relatively small in comparison to the federal taxes, not to mention expenses accumulated through labor, facility and utility costs.

The LAO suggests that the renewable energy sector benefits more when the state’s regulations and policies are clear, by encouraging demand and sending market signals to investors.

“In the long term, looking at changing our business tax policy is something the Legislature very much needs to do. We are in a very lonely position among the states in the way that we tax manufacturing equipment,” said John S. Sisney from the LAO at the hearing, suggesting that an exemption for all manufacturing equipment might be something for the state to consider in the future.

V. John White, executive director of the Center for Energy Efficiency and Renewable Technology, suggests it may be more effective to shift the focus to market transformation by providing tax breaks for customers instead of businesses.

“If the policy goal is to promote manufacturing in California, then helping support the market for the products that you’re making is the most important thing you can do,” White said.
“If we are the largest market for these technologies, and if we, for example, exempted customers who buy products made in California from our sales tax, that’s going to create a better opportunity to capture those supply chains and capture those jobs,” he added.

But despite the criticism the sales tax break has received, the LAO found the program to be a “minor, but complementary” effort to the state’s energy policy goals.

 A lot of attention has been paid to the $25 million in state funding lost to Solyndra, but that total pales in comparison to the $50 billion in forgone state revenue due to various tax expenditures. In the Capitol, “tax expenditures” is another term for “tax loopholes,” of which various sales tax exclusions are a part.

State Treasurer Bill Lockyer has noted that the green sales tax incentive is “the only [tax break] that I’m aware of, where someone has tried to assess whether the benefits to Californians outweighs the tax subsidy granted by the statute.”

The recently resumed program is actually one of the most transparent tax incentives in the state. Administered by a board chaired by Lockyer, applicants must demonstrate the benefits of the project for California, like its ability to create new permanent jobs or reduce greenhouse gas emission, before qualifying.

Overall, the state has provided about $104 million in clean energy sales tax breaks to 33 companies.

Though, as critics have noted, the review process does not evaluate the financial viability of the company.

But unlike most of the state’s other 86 tax expenditure programs, this sales tax exclusion has a sunset date (January 2021) and a mandatory review by the LAO on the effectiveness of the program by 2018.

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