Capitol Alert

Tax cuts for power companies offered in Jerry Brown’s climate plan

Here's what's in California's cap-and-trade deal

The deal Gov. Jerry Brown and Democratic leaders in the Legislature made to extend the state's cap-and-trade system to battle climate change has many elements, including some to win Republican votes.
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The deal Gov. Jerry Brown and Democratic leaders in the Legislature made to extend the state's cap-and-trade system to battle climate change has many elements, including some to win Republican votes.

Until this week, Gov. Jerry Brown’s administration has resisted proposals to extend an existing sales and use tax break for manufacturers.

Brown’s finance department, warning of lost revenue, came out this spring against a pair of bills to continue the exemption as well as broaden it to include power providers and farm businesses.

The administration has also gone to great lengths to preserve a fire prevention charge on thousands of residents in the state’s rural areas. State lawyers have battled fee opponents in court for several years.

That was then.

Legislation to extend California’s nationally watched cap-and-trade program, which could come up for a vote as early as Monday, contains key fiscal sweeteners meant to win its passage: extending the sales and use tax exemption for manufacturers and research and development companies, and expanding it to cover purchases by biomass and other renewable energy generators as well as agricultural businesses. It also suspends the fire prevention charge.

Backers of the tax breaks say the cuts would help lower consumers’ electric bills and help achieve the state’s pollution-control goals by encouraging more spending on renewable energy.

But the perks would be expensive. The new tax cuts for power companies would total about $90 million a year. Extending the breaks for manufacturers would mean a total cost of a quarter-billion dollars annually, or $2.4 billion through 2030.

$178 million Estimated yearly cost of sales tax exemption on equipment purchases by some manufacturing businesses

$89 million Estimated revenue loss from tax breaks to power companies and agricultural businesses

The state’s general fund wouldn’t bear the cost. Instead, the budget hole would be plugged with money generated by the renewed cap-and-trade program. Yet that reimbursement would consume a sizable chunk of the cap-and-trade auction money remaining after transfers to Brown’s high-speed rail project and other locked-in programs. Less would be available for the Legislature to spend on projects aimed at combatting climate change.

“It’s not a worthwhile use at all,” Bill Magavern, policy director for the Coalition for Clean Air, said of the incentives, which he said are meant to attract Republican support for the bill. The volatility of auction results, he added, means “we don’t know how much (money) will come in every year.”

It’s not clear the tax cuts and fire fee proposals are enough to secure Republican votes.

No Republican lawmaker has publicly committed to support the legislation. In an interview Tuesday, Gov. Jerry Brown acknowledged the cap-and-trade concerns of lawmakers who represent agricultural districts. “It’s very up in the air at this point,” Brown said.

No one has publicly embraced the proposed fire fee suspension. The Howard Jarvis Taxpayers Association, which is leading the class-action lawsuit to overturn what it calls an illegal “fire tax” and require refunds, was not part of the Capitol talks and has yet to take a position on the proposal.

“Nobody ever called us up and said we want to put the tax you’re currently litigating on the table,” said Jon Coupal, the group’s president.

$78.7 million Estimated 2017-18 revenue from the state fire prevention fee

The group, influential in GOP legislative circles, signaled Tuesday that it still has major problems with the cap-and-trade program. It noted in an email to members that the fire fee’s suspension would end in 2031 under the bill.

“Costs to taxpayers as the result of California’s global warming policies are substantial and include higher prices for gas, electricity and consumer goods,” the email read.

The proposed sales and use tax breaks have gotten more public backing.

“This means lower electricity rates and a greener California,” read an April letter to lawmakers signed by a lengthy list of supporters of similar legislation that stalled earlier this year. It “delivers a clear message that California is committed to employers who are here, and is driven to attract those who are not.”

The California Chamber of Commerce, PG&E Corp., and the state farm bureau, as well as the California Taxpayers Association, are among the politically influential groups backing the idea.

The proposed tax cuts would build upon 2013 legislation that eliminated a type of economic development program called enterprise zones. To win passage, the package made certain types of manufacturers eligible for a sales tax exemption on equipment purchases. Those are scheduled to expire at the end of 2022.

Editor’s Note: This story was updated at 8 a.m. July 13, 2017 to correct the total annual cost of the tax breaks to a quarter billion dollars.

More tax exemptions on the way?

Legislation to renew the state’s cap-and-trade program would extend dozens of existing sales and use tax exemptions, and create these 11 new ones, for equipment purchases made by certain energy-related businesses:

  • Fossil fuel electric power generation
  • Biomass electric power generation
  • Electric power generation
  • Nuclear electric power generation
  • Hydroelectric power generation
  • Electric power distribution
  • Solar electric power generation
  • Agricultural business activity
  • Geothermal electric power generation
  • Wind electric power generation
  • Other electric power generation
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