Evaluation of a Sales Tax Exemption for Certain Manufacturers

Evaluation of a Sales Tax Exemption For Certain Manufacturers MAC TAYLOR LEGISLATIVE ANALYST DECEMBER 2018 analysis full gutter AN LAO REPORT LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Executive Summary Authority Under Treasurer Administers Tax Exemption. The California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA) administers a sales tax exemption for equipment used for certain manufacturing activities. This program aims to expand California’s economy and reduce pollution. Under current law, the program will end on January 1, 2021. CAEATFA Allocates the Exemption Through Formal Application Process. CAEATFA evaluates each application based on the exemption’s estimated effects on state and local government budgets, the exemption’s estimated effects on pollution, and some other criteria. Program Likely Increases Participants’ Equipment Purchases. We estimate that the current program increases participants’ equipment purchases in California by roughly 5 percent to 9 percent. The exemption also likely increases participants’ output and employment in the state, though by a smaller amount than the increase in equipment purchases. Overall Economic Effects Highly Uncertain. The economic effects of the CAEATFA exemption extend well beyond the direct effects described above. Available data and methods cannot support credible, precise estimates of the net effects of the program on jobs or economic output. Depending on the alternative uses of the forgone sales tax revenue, the net economic effects of the program could be positive or negative. Some Environmental Benefits Likely, but Overall Effects Limited. The CAEATFA exemption likely produces some environmental benefits. However, several factors limit the overall net environmental effects of the program. For example, much of the increase in California-based output likely is offset by reductions in other states or countries. As a result, the net increase in global production of “green” goods—a key factor determining environmental benefits—likely is much smaller than the increase in production within California. Allocation Process Unnecessarily Complex. To use the CAEATFA exemption, equipment purchasers must fill out extensive applications, wait for board approval, and submit periodic reports to CAEATFA. These requirements make participation more costly, likely reducing the effectiveness of the exemption. In addition, most of the information provided by applicants is not useful for allocating the exemption. These requirements have, however, led to greater transparency than the state typically provides regarding the use of tax expenditures. State Has Overlapping Tax Exemptions. Most purchases that qualify for the CAEATFA exemption would be eligible for a different program—the partial sales tax exemption for manufacturing, research and development, and electricity-related equipment. The partial exemption is broader than the CAEATFA exemption and easier for businesses to use. Recommend Allowing CAEATFA Exemption to Expire. We do not see a need for the state to administer both the CAEATFA exemption and the partial exemption. Of the two programs, the CAEATFA exemption is narrower and harder for businesses to use. Consequently, we recommend that the Legislature allow the CAEATFA exemption to expire as scheduled under current law. To the extent that some CAEATFA participants would not be eligible for the partial exemption, the Legislature could expand the partial exemption to include them. Alternatively, Streamline Process for Claiming Exemption. If the Legislature renews the CAEATFA exemption, we recommend streamlining the process for claiming it and transferring the program to the California Department of Tax and Fee Administration, which administers most sales tax exemptions. www.lao.ca.gov 1 analysis full gutter AN LAO REPORT 2 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT INTRODUCTION Statute Requires Report on Sales Tax statute appears in the nearby box.) This report Exemption. The California Alternative Energy fulfills that statutory requirement. and Advanced Transportation Financing Authority The first three sections of the report describe (CAEATFA) administers a sales tax exemption for the statutory development of the tax exemption, equipment used for certain manufacturing activities. CAEATFA’s implementation of it, and some key (Many people refer to this program as an exclusion state policies that interact with it. The fourth rather than an exemption.) Under current law, section contains our assessment of the exemption, this program will end on January 1, 2021. Public including its economic, fiscal, and environmental Resources Code 26011.8(g) requires our office effects. (Further discussion of these effects to report on the effectiveness of the program— appears in the Appendix.) The fifth section provides including its economic, fiscal, and environmental recommendations and options for Legislative effects—by January 1, 2019. (The full text of the action. THE CAEATFA SALES TAX EXEMPTION Basic Background Local governments’ portion of the sales tax ranges from 1.25 percent to 4.25 percent. As a California’s Sales Tax. California’s state and result, the overall rate ranges from 7.25 percent local governments charge a sales and use tax to 10.25 percent. The California Department of (hereafter, sales tax) on retail sales of tangible Tax and Fee Administration (CDTFA) administers goods, including many goods purchased by the sales tax and also administers most sales tax businesses. The average rate is 8.5 percent. Of exemptions. that, 3.94 percent raises money for the state’s CAEATFA. CAEATFA is housed within the General Fund, and 2.06 percent raises money the State Treasurer’s Office and operates a variety of state provides counties for various local programs. programs that provide financial assistance—such STATUTE REQUIRING REPORT Public Resources Code 26011.8(g) The Legislative Analyst’s Office shall report to the Joint Legislative Budget Committee on the effectiveness of this program, on or before January 1, 2019, by evaluating factors, including, but not limited to, the following: (1) The number of jobs created by the program in California. (2) The number of businesses that have remained in California or relocated to California as a result of this program. (3) The amount of state and local revenue and economic activity generated by the program. (4) The types of advanced manufacturing, as defined in paragraph (1) of subdivision (a) of Section 26003, utilized. (5) The amount of reduction in greenhouse gases, air pollution, water pollution, or energy consumption. www.lao.ca.gov 3 analysis full gutter AN LAO REPORT as tax exemptions, loans, and bonds—largely At its October 2009 board meeting, CAEATFA to entities developing technologies intended to agreed to purchase equipment on behalf of Tesla reduce air pollution and conserve energy. CAEATFA Motors, giving Tesla a $30 million tax exemption consists of five members: the State Treasurer (who for this equipment. This agreement was part of serves as the chairperson), the State Controller, the Schwarzenegger administration’s efforts to the Director of the Department of Finance, the convince Tesla to establish a factory in California. Chairperson of the California Energy Commission, 2010 Statute Created Current Program . . . and the President of the California Public Utilities When CAEATFA approved Tesla’s first use of the Commission. tax exemption, the statutory language governing the exemption was sparse. Chapter 10 of 2010 Statutory Development (SB 71, Padilla) created a more detailed statutory This section describes major events in the structure for the exemption, including policy goals, statutory development of the CAEATFA exemption. eligibility criteria, and an application process Many of these events appear chronologically in (described in detail below). Initially, the exemption Figure 1. was available for two types of manufacturing Sales Tax Exemption for CAEATFA. The activities: production of alternative energy products law that created CAEATFA (Chapter 908 of (such as solar panels) and production of advanced 1980) allowed the authority to purchase and transportation products (such as electric vehicles). transfer certain goods without paying any sales tax. SB 71 also established the reporting requirement Although the Legislature created this exemption for our office and the 2021 sunset date for the in 1980, its first notable use occurred in 2009. exemption. Figure 1 CAEATFA Sales Tax Exemption Timelinea CAEATFA awards a $30 million sales tax exemption to Tesla Motors. Legislature passes SB 1128, expanding the CAEATFA exemption to include advanced manufacturers and setting a $100 million limit on total annual awards. Legislature passes AB 199, expanding the CAEATFA exemption to include recyclers. 2008 2010 2012 2014 2016 2018 2020 2022 CAEATFA exemption scheduled to sunset under current law. Legislature creates partial sales tax exemption for manufacturing and R&D effective July 1, 2014. Legislature passes SB 71, creating a formal programmatic structure for the CAEATFA exemption. a The Legislature created this exemption in 1980. CAEATFA = The California Alternative Energy and Advanced Transportation Financing Authority and R&D = research and development. 4 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT . . . Laid Out Policy Goals . . . comparison between the “benefit to the state” and SB 71 established economic and environmental the “benefit to the participating party,” though the goals for the CAEATFA exemption. In particular, the statute did not define these terms. statute highlighted the creation of manufacturing Subsequent Statutes Changed Exemption. and jobs and reductions in pollution and energy The Legislature has made further changes to the consumption as the main purposes of the program. exemption since 2010. In particular, two laws . . . And Required CAEATFA to Evaluate created new eligibility categories, bringing the total Individual Applicants. Many sales tax exemptions to four, as shown in Figure 2. Chapter 677 of 2012 are entitlements—the law guarantees that any (SB 1128, Padilla) made advanced manufacturers taxpayer who meets specified eligibility criteria can eligible for the program and set a $100 million cap use them. SB 71 did not structure the CAEATFA on the total exemptions that CAEATFA can approve exemption as an entitlement. Instead, it directed in each calendar year. (Advanced manufacturers the authority to evaluate each potential participant use production processes that exceed industry individually and to award exemptions based on standards.) Chapter 768 of 2015 (AB 199, Eggman) those evaluations. The law listed a variety of expanded the program to include certain types of criteria to be included in these evaluations but recycling facilities. also authorized the authority to consider other criteria not specified. The listed criteria included a Figure 2 CAEATFA Eligibility Categories Year Added Category to Program Equipment Is Used… Examples . . . to make or to design Biomass Processing, Alternative 2010 something that uses an Solar Panel Manufacturing, Source alternative energy source. Biogas Capture . . . to make or to Electric Vehicle Advanced 2010 design an advanced Manufacturing Transportation transportation technology. . . . in an advanced Aerospace, Advanced 2012 manufacturing process. Biopharmaceuticals, Manufacturing Fiberboard, Metals . . . to process or to use Mixed Recycling, Recycled 2015 recycled feedstock to Composting Feedstock make another product. CAEATFA = The California Alternative Energy and Advanced Transportation Financing Authority. www.lao.ca.gov 5 analysis full gutter AN LAO REPORT CAEATFA’S IMPLEMENTATION OF THE EXEMPTION Process for Allocating Exemption CAEATFA staff review the application. First, they determine whether the applicant meets the Statute directs CAEATFA to allocate the basic requirements described in Figure 2. If the exemption based on individual evaluations of applicant meets these requirements, staff perform equipment purchasers. This section describes a calculation known as the “net benefit test.” To the allocation process that the authority has conduct this test, staff use the information in the implemented. application to compute two numbers: an overall Purchaser Talks to CAEATFA Staff. When score, and an “environmental score,” which reflects prospective equipment purchasers want to claim the estimated reductions in pollution resulting the CAEATFA exemption, they often start by from the applicant’s use of the exemption. If these contacting CAEATFA informally. (Most applicants scores exceed specified thresholds, then the are businesses, but some are local governments applicant passes the net benefit test, and staff or other entities that plan to purchase equipment.) recommend that the board approve the application. At this stage, CAEATFA staff help prospective (Regulations allow staff to recommend approval of applicants determine whether the program is applications that do not meet the net benefit test if appropriate for them and whether their applications they articulate specific reasons for doing so.) are likely to be approved. Evaluation Focuses on Estimated Fiscal Purchaser Submits Application to CAEATFA. Benefits. As noted above, statute requires To be considered for the exemption, each potential CAEATFA to evaluate applications based, in participant must submit a written application to part, on a comparison between the “benefit to the authority, along with an application fee. The the state” and the “benefit to the participating information required for the application varies party.” CAEATFA has interpreted “benefit to the among eligibility categories. As an example, state” primarily to mean state and local fiscal Figure 3 lists the information required for benefits—that is, positive effects on state and local applications in the advanced transportation government budgets. The authority has interpreted category. “benefit to the participating party” to mean the CAEATFA Staff Evaluate Application. After amount of the exemption. Accordingly, the overall a potential participant submits an application, score assigned to each application depends Figure 3 Information Required for Advanced Transportation Applications Qualitative Information Quantitative Estimates • Contact information • Cost and useful life of each piece of tax-exempt equipment • Description of business • Fuel consumption of comparable vehicle • Description of product • Improvement in vehicle fuel efficiency • Explanations of assumptions used to produce • Projected annual units sold and sales price all quantitative information • Projected construction/installation employment • Legal disclosures • Projected employment at facility • List of planned tax-exempt equipment • Projected labor costs purchases • Projected purchases from suppliers • Ownership of business • Projected share of product sales in California • Projected share of production costs from California suppliers • Useful life of product • Value of capital stock • Vehicle’s consumption of other energy, for example, electricity 6 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT primarily upon the authority’s estimate of the fiscal remaining instance, the board followed the staff benefits to California state and local governments recommendation to deny an application that did not from the applicant’s use of the exemption. It also pass the net benefit test. depends on some other criteria listed in Figure 4. . . . Including Three That Did Not Pass the CAEATFA Board Votes on Application. After Net Benefit Test. As noted above, CAEATFA staff CAEATFA staff make their recommendation, the may recommend approval of applications that do application may proceed to the authority’s next not meet the specified scoring thresholds. Over the monthly board meeting. At the meeting, CAEATFA’s course of the program, CAEATFA staff have made five-member board may vote on a resolution to three such recommendations, and the board has approve the application. approved all three applications. Applicants Purchase Equipment and Submit Outcomes Reflect Pre-Application Reports. After the board votes to approve an Screening. As described above, prospective application, the applicant—now a participant in equipment purchasers talk to CAEATFA staff the program—may then purchase tax-exempt before they submit their applications. Many of equipment up to the amount approved by the them subsequently decline to apply. In some board. (Under current law, CAEATFA does not need cases, they decline to apply because they do to purchase equipment on behalf of applicants.) not meet the basic requirements described in Active participants must submit two types of Figure 2. In other cases, CAEATFA staff advise reports to CAEATFA: semiannual reports tracking the prospective applicants that they likely would their use of the exemption, and annual reports not pass the net benefit test. (The net benefit test tracking a broader set of business activities. focuses on equipment purchases that accompany net increases in production. As a result, other Applications types of equipment purchases—such as routine CAEATFA Has Approved Nearly 200 replacement or research and development (R&D)— Applications . . . Through October 2018, CAEATFA tend not to pass the net benefit test.) Based on this has approved 191 of the 192 applications feedback from staff, such purchasers do not apply presented at its monthly board meetings. In the for the exemption. Figure 4 Applicant Evaluation Criteria Criterion Factors Contributing to Higher Scores Points Awardeda Estimated net fiscal benefits to Greater benefits per dollar awarded Typically 900 to 5,000 state and local government Estimated environmental benefits Greater benefits per dollar awarded Typically 30 to 200 Estimated jobs created More jobs created per dollar awarded 0 to 150 Unemployment Higher local unemployment 0 to 50 Emerging strategic industry Emerging strategic industry 0 to 40 Related R&D facility in California R&D facility 0 to 25 Training partnerships with Training partnerships 0 to 25 educational institutions Part of industry cluster Part of industry cluster 0 to 25 a Approval thresholds are overall score of 1,000 and environmental score of 20. R&D = research and development. www.lao.ca.gov 7 analysis full gutter AN LAO REPORT Use of Exemption exemptions include pharmaceutical manufacturing, recycling, and aerospace manufacturing. CAEATFA Has Awarded $700 Million in Awards Have Hit $100 Million Cap in Exemptions. As shown in Figure 5, the authority Recent Years. As noted above, a 2012 law set has awarded $700 million in exemptions. a $100 million cap on the total exemptions that Participants have used $340 million of exemptions CAEATFA can award in each calendar year. Awards to purchase $4 billion of equipment. made by the authority first hit the $100 million Half of Recent Awards Have Gone to Vehicle annual cap in 2015, and they have continued to hit Manufacturers. As shown in Figure 6, roughly half the cap every year since. If the program uses up of the exemption amount awarded since October the entire $100 million well before the end of the 2016—when recyclers became eligible—has calendar year, then additional applicants must wait gone to vehicle manufacturers. Tesla has received until the following calendar year. To address this 38 percent of the total amount awarded. Other issue, the authority issued a regulation in 2016 that industries receiving large amounts of CAEATFA Figure 5 Use of Exemption (In Millions) Recyclers Exemption Exemption Equipment Date Applications Approved Eligible? Amount Awarded Amount Used Purchased November 2010 Through September 2016 No $456 $216 $2,552 October 2016 Through October 2018 Yes 243 121 1,445 All — $699 $337 $3,997 Figure 6 Exemptions Recently Awarded by Industry Millions of Dollars Awarded Since October 1, 2016 $100 80 60 40 20 Tesla Other Vehicle Alternative Pharmaceutical Recycling Aerospace Other Advanced Manufacturers Source Manufacturing Manufacturing Manufacturing 8 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT caps each individual applicant’s initial award at the year. Applicants seeking exemptions exceeding $20 million. The purpose of this regulation is to $20 million can obtain the additional exemption prevent the largest participants from using up the amounts at the authority’s December board program’s $100 million “budget” before the end of meetings if funds are still available. RELATED POLICIES In this section, we discuss some state policies • Aggregate Cap. As described above, that interact with the CAEATFA exemption. CAEATFA cannot award more than $100 million of tax exemptions in each Partial Exemption for Equipment calendar year. In contrast, there is no Sales Tax Applies to Many Goods Used in aggregate cap on the partial exemption. Production. The sales tax applies to many sales • Individual Cap. Each purchaser can apply of tangible goods that businesses use to produce the partial exemption to no more than other goods or services. As described in the box on $200 million of equipment in each calendar page 11, including these transactions in the sales year—equivalent to a $8 million annual cap tax base raises some economic concerns. These on the exemption. As described above, each concerns could justify broad sales tax exemptions CAEATFA applicant initially can qualify for no for business-to-business sales. more than $20 million of tax exemptions, but 2013 Laws Created Partial Exemption for they often can receive more at the end of the Equipment. Chapters 69 and 70 of 2013 (AB 93, calendar year. Committee on Budget; SB 90, Galgiani) established • How to Claim. The partial exemption is an a package of new tax expenditures—including two entitlement. To claim it, purchasers must fill credits and an exemption—to replace the state’s out a one-page certificate and present it to Enterprise Zone program. One of the new policies the seller of the equipment. There is no public was a partial exemption for certain purchases of record of such purchases. As described above, equipment used for manufacturing or R&D. The the CAEATFA application process is much 2013 laws authorized the partial exemption through more extensive, and this process produces a 2021. public record of each exemption awarded. 2017 Law Expanded and Extended Partial Major Overlap Between the Two Exemptions. Exemption. Chapter 135 of 2017 (AB 398, Most participants in the CAEATFA program are E. Garcia) pushed back the partial exemption’s manufacturers who use the exemption to purchase sunset date to July 1, 2030. This law also equipment used in the manufacturing process. As expanded the partial exemption to include certain such, most purchases made under this program purchases of equipment used to generate, store, or likely would be eligible for the partial exemption. distribute electric power. (A business can participate in both programs, but it Comparing the Two Exemptions. Figure 7 (see cannot apply more than one exemption to any given next page) compares the CAEATFA exemption to purchase.) There are some important exceptions, the partial exemption along several dimensions, however. For example, some recyclers likely do including: not fall within the industry classifications that are eligible for the partial exemption. Furthermore, the • Rate Reduction. Both policies exempt largest CAEATFA participants receive exemptions purchases from the state General Fund on equipment purchases that exceed the cap on portion of the sales tax rate (currently the partial exemption. 3.94 percent). The CAEATFA exemption further exempts purchases from the rest of the In Most Cases, CAEATFA Not a Full Exemption. sales tax (averaging 4.6 percent). As noted above, most purchases made with the www.lao.ca.gov 9 analysis full gutter AN LAO REPORT Figure 7 Comparing Two Tax Exemptions Feature CAEATFA Exemption Partial Exemption Exemption from state General Yes Yes Fund sales tax? Exemption from other parts of Yes No sales tax? Taxpayers publicly identifiable? Yes No Aggregate cap? Statutory hard cap: CAEATFA cannot None. In 2017-18, purchasers applied award more than $100 million $210 million of exemptions to of exemptions per year (roughly $5.3 billion of equipment purchases. $1.2 billion of equipment). Individual applicant cap? Regulatory soft cap: $20 million Statutory hard cap: $200 million of exemption per year (roughly of equipment per year (roughly $235 million of equipment). $8 million of exemption). Basic eligibility Equipment used to design or make Equipment and businesses engaged certain products or used in certain in manufacturing, R&D, or certain types of industrial processes. electricity-related activities. Primarily administered by CAEATFA CDTFA How to claim Submit extensive application, wait for Fill out one-page certificate, then staff review and board meeting vote, purchase equipment. then purchase equipment. R&D = research and development; CAEATFA = California Alternative Energy and Advanced Transportation Financing Authority; and CDTFA = California Department of Tax and Fee Administration. CAEATFA exemption would be eligible for the partial permits to emit, also known as allowances. exemption. If the CAEATFA exemption were not Allowing businesses to buy and sell (“trade”) available, these purchasers still could use the partial allowances results in a market price, which exemption. In these instances, CAEATFA effectively creates a financial incentive for businesses acts as an add-on exemption consisting of: and households to undertake emission reduction activities that are less costly than • An exemption from the portion of the sales the allowance price. tax rate that funds local programs (averaging • Low Carbon Fuel Standard. This program 4.6 percent). establishes declining annual statewide • An exemption from the entire sales tax rate on standards for the greenhouse gas emissions purchases that exceed the partial exemption’s per unit of energy in California’s transportation $200 million cap. fuel—also known as carbon intensity. To comply with the program, traditional California’s Environmental Policies transportation fuel suppliers—largely gasoline refiners and importers—must reduce the California has a wide variety of policies intended carbon intensity of their fuels or purchase to reduce pollution and improve environmental credits from low carbon fuel suppliers. quality. For example, some of the major state policies aimed at reducing greenhouse gas The state also has goals for reducing the amount emissions include: of waste going into landfills (known as waste diversion) and operates several programs meant • Cap-and-Trade. This program establishes to encourage recycling, composting, and reducing a declining annual “cap” on emissions from waste. In addition, state and local governments large emitters by issuing a limited number of 10 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT have many different policies—including regulations governments provide funding to replace older, and incentive programs—intended to reduce high-polluting diesel vehicles with cleaner ones. local air pollution. For example, state and local ASSESSMENT EFFECTS OF CAEATFA EXEMPTION Economic Effects In this section, we discuss some of the effects of Program Likely Increases Participants’ the CAEATFA exemption. Further discussion of the Equipment Purchases . . . We estimate that program’s effects appears in the Appendix. the current program increases participants’ Taxing Business-to-Business Sales Raises Economic Concerns Sales Tax Applies to Many Business-to-Business Sales. California’s sales tax applies to retail sales of tangible goods. Many of these sales are made to businesses who, in turn, use those goods to produce other goods and services. For example, businesses often purchase furniture, tools, computers, or basic office equipment. Although the total amount of business-to-business taxable sales is uncertain, it likely constitutes a large share of total taxable sales. Taxing Business-to-Business Sales Can Lead to “Tax Pyramiding.” As described above, many businesses purchase goods that are subject to sales tax. Many of these businesses, in turn, sell taxable goods to other businesses or to consumers. As a result, taxing business-to-business sales can lead to tax pyramiding—the application of the same tax at multiple stages of production. To the extent that tax pyramiding varies across businesses and industries, it raises a couple of economic concerns: • Arbitrarily Disadvantages Certain Businesses. Within each industry, some businesses rely more heavily on taxable goods than others. (For example, some carpenters spend relatively large amounts of money on tools, while others spend much less.) Taxing business-to-business sales leads to disproportionate cost increases for businesses that rely heavily on taxable goods. As a result, such taxes can shift production from more productive businesses to less productive ones, leading to higher aggregate production costs and higher prices for consumers. • Arbitrarily Disadvantages Certain Industries. Some industries rely more heavily on taxable goods than others. Taxing business-to-business sales leads to disproportionate cost increases for industries that rely heavily on taxable goods. As a result, those industries’ output can become relatively expensive. Tradable Production Geographically Mobile. Many businesses produce goods or services that are tradable—they can easily be shipped from another state or country. Tradable businesses in California compete directly with tradable businesses in other jurisdictions. As a result, their location choices can be more sensitive to production costs—such as taxes—than location choices made by households or non-tradable businesses. Due to this cost sensitivity, taxes on tradable businesses’ inputs can reduce in-state economic activity to a greater extent than taxes on goods purchased by consumers. www.lao.ca.gov 11 analysis full gutter AN LAO REPORT equipment purchases—a type of capital in other states and countries. As a result, the investment—by roughly 5 percent to 9 percent. program’s effects on the targeted industries’ global (A detailed discussion of this estimate appears in output could be quite small. the Appendix.) As shown earlier in Figure 5, for Net Effects on California’s Economy Could example, recent applicants approved have used Be Positive or Negative. As described above, the CAEATFA exemption to make $1.45 billion of the CAEATFA exemption likely has some positive equipment purchases. Applying our 5 percent to economic effects on the targeted industries in 9 percent estimate, the program increased these California. It is unclear, however, whether the purchases by roughly $70 million to $130 million. program has positive or negative net effects on In other words, if the CAEATFA program did not the state’s economy as a whole. For example, exist, we estimate that these businesses would absent the CAEATFA exemption, state and local have purchased equipment worth $1.32 billion to governments would have additional sales tax $1.38 billion. revenue. They could use this revenue for other . . . For Two Reasons. The response described purposes—namely, additional spending or other above consists of two economic effects: a “scale types of tax reductions. Those alternative uses effect” and a “substitution effect.” also would have some positive economic effects. The true net effects of the CAEATFA exemption • Scale Effect. The exemption reduces depend crucially on the effects of those alternative participants’ costs. As a result, participants uses of the funds. If the best alternative use would have an incentive to expand their operations have larger economic benefits than the CAEATFA within California—leading to higher equipment exemption, then the net effects of CAEATFA are purchases, employment, and output. negative. If CAEATFA has larger economic benefits • Substitution Effect. The exemption than the best alternative use, then its net effects reduces the cost of equipment relative to are positive. the costs of other production inputs. As a result, participants have an incentive to use Fiscal Effects proportionally greater amounts of equipment Program Has Some Fiscal Benefits . . . The and proportionally lesser amounts of other increases in equipment purchases and output inputs, such as labor. described above have a variety of fiscal effects, Program Likely Increases Participants’ Output including many positive effects. For example, and Employment. The two economic impacts participants pay property taxes on the equipment just described generate different outcomes. The they purchase. Furthermore, the increase in scale effect, for instance, increases both output output within California leads to higher income tax and employment. The substitution effect, by revenue. comparison, reduces employment and is neutral . . . But Claims That It “Pays for Itself” with regard to output. On net, the exemption likely Problematic. We cannot provide precise estimates increases participants’ output and employment. of the program’s net effects on state and local Due to the substitution effect, however, the revenue and spending. That said, we have serious increases in participants’ output likely are smaller concerns with claims that the program generates than the increases in equipment purchases, and net fiscal benefits large enough to pay for itself. the increases in participants’ employment likely are As a starting point, we note that typical state smaller still. and local programs do not generate economic Global Effects Smaller Than In-State Effects. activity anywhere near the level required to pay The description above focuses on effects within for themselves. As described in the Appendix, California. As described in the Appendix, some a program can pay for itself through economic evidence suggests that large portions of the growth only if its economic effects are at least six increased equipment purchases within California times as large as a typical program. The CAEATFA likely are offset by corresponding reductions exemption could have larger economic effects than 12 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT a typical program, but we doubt that the effects the country (or world) to California. For example, are six times as large. Furthermore, CAEATFA’s many of the additional electric vehicles produced net benefit calculation—which suggests that the in California as a result of the program likely exemption largely pays for itself—incorporates would have been produced elsewhere. If so, the several assumptions that tend to overstate fiscal net environmental benefits associated with these benefits. (We discuss these assumptions in detail vehicles likely are limited. As discussed above, in the Appendix.) Finally, as described above, however, such a shift in production can have alternative uses of funds also would generate economic benefits for the state by attracting more economic—and therefore fiscal—benefits. It is manufacturing investment. Also, to the extent that unclear whether CAEATFA’s fiscal benefits exceed electricity used in California generates less pollution the benefits that would result from those alternative then electricity used elsewhere, there could be uses. some environmental benefits from relocating Program Likely Yields Net Benefit for State production to California. General Fund. Absent the CAEATFA exemption, Environmental Benefits Depend on the bulk of CAEATFA participants would be eligible Interactions With Other Policies. In some cases, for the partial exemption, so they would not pay the CAEATFA exemption might simply reduce the state General Fund sales tax. As such, the the costs of meeting existing environmental General Fund revenue loss due to the CAEATFA requirements without providing any additional exemption is minor. Furthermore, to the extent environmental benefit. For example: that the exemption leads to increases in economic • Cap-and-Trade. Within sectors covered activity, much of the tax revenue generated by that by the state’s cap-and-trade program, activity goes to the General Fund. As a result, the the exemption could fail to achieve a net CAEATFA exemption likely produces a net benefit reduction in emissions. Instead, it might for the state’s General Fund. The vast majority of simply shift emissions from some covered the fiscal costs are borne by local governments. entities to others. For example, if the Environmental Effects exclusion leads Californians to drive more electric vehicles instead of conventional Some Environmental Benefits Likely, but gasoline vehicles, then it reduces the amount Overall Effects Limited. The CAEATFA exemption of gasoline sold by transportation fuel likely produces some environmental benefits. suppliers. As a result, those suppliers need For example, additional recycling capacity could to purchase fewer cap-and-trade allowances reduce the amount of waste going into landfills than they otherwise would. This reduction and help the state meet its waste diversion goals. in allowance purchases could, in turn, free Also, increasing the number of electric vehicles, up allowances to be used by other emitters, electric buses, and alternative forms of energy negating the original drop in emissions. (See could lower greenhouse gas emissions if they our 2016 report, Cap-and-Trade Revenues: replace higher-polluting vehicles and energy Strategies to Promote Legislative Priorities, for sources. Despite these potential benefits, a few more details.) key factors—described below—limit the overall net • Low Carbon Fuel Standard. If the environmental benefits of the program. program encourages additional low carbon Environmental Benefits Depend on Global transportation fuels—such as biofuels—these Production, Not In-State Production. The fuels will likely generate credits that can be environmental benefits of the CAEATFA exemption used to comply with the Low Carbon Fuel depend in part on the degree to which the program Standard program. This increases the supply increases global output of qualifying products, of credits and reduces credit prices. As a rather than simply the amount produced in result, there is less of an incentive for other California. As discussed above, the exemption businesses to produce other types of low likely shifts some production from other parts of carbon fuels. www.lao.ca.gov 13 analysis full gutter AN LAO REPORT Economic Activity Generates Pollution. STATE HAS OVERLAPPING TAX There are likely some adverse local effects from EXEMPTIONS the additional in-state production generated by the program. For example, an expansion of an As described above, the CAEATFA exemption in-state manufacturing facility could increase local overlaps heavily with the partial exemption for or regional air pollution, which can have adverse equipment. health effects. CAEATFA Exemption Narrower Than Partial Exemption. The CAEATFA exemption and the ALLOCATION PROCESS partial exemption both apply to similar types of UNNECESSARILY COMPLEX purchases. The CAEATFA exemption, however, is available to a much narrower set of businesses Extensive Application Process Weakens than the partial exemption. We do not see a Program Incentives . . . As described above, compelling reason to allow CAEATFA-eligible prospective participants in the CAEATFA program businesses to claim larger tax exemptions than must fill out extensive applications and wait for other manufacturers. board approval in order to use the exemption. Other Differences With Partial Exemption As participants in the program, they must submit Present Trade-Offs. As noted above, the CAEATFA periodic reports to CAEATFA. These aspects of program provides a full exemption with an the program make participation more costly, likely aggregate cap. The partial exemption, on the other reducing the effectiveness of the exemption. hand, applies only to the General Fund portion of . . . And Not Needed for Applicant the sales tax rate. It has an individual cap but no Screening . . . Most of the information included in aggregate cap. As shown in Figure 8, these design applications is related to the net benefit calculation. choices all share a common feature: a trade-off As described above, however, the calculation itself between the strength of the investment incentives screens out very few applicants. Instead, staff use provided and the revenue losses incurred by state basic criteria to predict the outcome of the net and local governments. In light of this trade-off, benefit test before the purchaser submits a formal a reasonable case could be made for each of application. The program could achieve similar these design features. However, we see no reason outcomes by dispensing with the formal calculation why the choices should differ between the two altogether and relying on those basic criteria exemptions. instead. . . . But Provides Figure 8 Transparency. CAEATFA lists Trade-Offs Between Economic Incentives and Forgone Revenue information about all of its program participants on its website. This Stronger Incentives and Weaker Incentives and Design Choice Larger Revenue Loss Smaller Revenue Loss degree of transparency is unusual for tax expenditure programs. Full exemption or partial Full exemption Partial exemption In most cases, the public does exemption? Aggregate cap? No aggregate cap Aggregate cap not have access to information Individual cap? No individual cap Individual cap about businesses’ use of tax expenditures. This information can help the Legislature and the public make better policy decisions. It also can help potential applicants track the availability of funds under the $100 million aggregate cap. 14 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT RECOMMENDATIONS AND OPTIONS Main Recommendation to the partial exemption. In particular, if the Legislature views some aspects of the CAEATFA Allow CAEATFA Exemption to Expire. As exemption favorably, it could add those features to discussed above, the CAEATFA exemption the partial exemption. Such changes could include: overlaps heavily with another program—the partial exemption for manufacturing, R&D, and • Make Program More Transparent. As noted electricity-related equipment. We do not see a above, the public has very little information need for the state to administer two separate about use of the partial exemption. The programs that provide similar benefits. Compared Legislature could make the program much to the partial exemption, the CAEATFA exemption more transparent by directing CDTFA is narrower and harder for businesses to use. to publish basic information about the Consequently, we recommend that the Legislature purchasers of exempt equipment. This allow the CAEATFA exemption to sunset as information could help the Legislature and the scheduled under current law. To the extent that public make future policy decisions. some CAEATFA participants would not be eligible • Increase to Full Exemption. As noted above, for the partial exemption, the Legislature could larger exemptions provide stronger investment expand the partial exemption to include them. incentives but also result in larger revenue losses. If the Legislature wants to strengthen Alternative Legislative Actions investment incentives, it could turn the partial If the Legislature renews the CAEATFA exemption into a full exemption. (In this case, exemption, we recommend modifying the program the additional revenue losses would be borne as follows. entirely by local governments.) Streamline Process for Claiming • Eliminate Individual Cap. As described Exemption . . . As described above, the program’s above, each purchaser can apply the partial extensive application process is not worthwhile. We exemption to no more than $200 million recommend that the Legislature make the process worth of purchases per year—equivalent to for claiming the CAEATFA exemption similar to $8 million of tax exemptions. Like the prior the process for claiming the partial exemption: option, this one would strengthen investment filling out a simple form at the time of purchase. incentives but result in larger revenue losses. The state could use the information from these Take Broader Look at Sales Tax Base. In this forms to provide the public with information about report, we have called the CAEATFA exemption businesses’ use of the program, preserving the “narrow.” Indeed, CAEATFA-eligible purchases transparency provided by the current application represent a small share of the business-to-business process. sales that the Legislature reasonably could exempt . . . And Transfer Program to CDTFA. With from the sales tax. The partial exemption is much a more streamlined process for claiming the broader than the CAEATFA exemption, but it also exemption, there would be no reason for CAEATFA represents a small share of business-to-business to administer the program. Instead, the program sales. Instead of continuing this piecemeal could be administered by CDTFA—the department approach, the Legislature could use the sunset of that administers the sales tax. the CAEATFA exemption as an opportunity to think more broadly about what should be included in the Options for Further Legislative Action sales tax base. Consider Changes to Partial Exemption. In addition to the actions described above, the Legislature could consider making some changes www.lao.ca.gov 15 analysis full gutter AN LAO REPORT APPENDIX This Appendix contains three sections. In the comment on the effects of the exemption, including first section, we assess the net benefit calculation the factors identified in statute. In the third section, that the California Alternative Energy and Advanced we list the types of advanced manufacturing Transportation Financing Authority (CAEATFA) uses used by participants in the CAEATFA program, as to evaluate individual applicants and to estimate the required by statute. effects of the program. In the second section, we CAEATFA’S NET BENEFIT CALCULATION Overall Assessment (2010) to estimate the effects of state tax policies on manufacturers’ capital investment. Although Development of Net Benefit Calculation. After this framework is based on some simplifying the Legislature passed Chapter 10 of 2010 (SB 71, assumptions, it is a reasonable starting point for Padilla), CAEATFA hired Blue Sky Consulting to help analyzing the effects of the exemption. Within this CAEATFA implement the new law. In particular, Blue economic framework, the net benefit calculation Sky—in consultation with CAEATFA and others— makes some assumptions about economic developed the scoring system that the authority parameters—the basic quantities that characterize has used to evaluate applicants for the exemption. economic relationships. These assumptions This scoring system is based on the criteria laid match up well with the best evidence available in out by SB 71—in particular, a comparison between 2010, when Blue Sky and CAEATFA developed the “benefit to the state” and the “benefit to the the net benefit calculation. As described later in participating party.” In developing the net benefit this Appendix, we use a modified version of the calculation, Blue Sky and CAEATFA interpreted calculation—incorporating more recent research— “benefit to the state” primarily to mean state and to estimate the effects of the exemption on local fiscal benefits and “benefit to the participating participants’ equipment purchases. party” to mean the amount of the exemption. . . . But Illustrates Inherent Problems With CAEATFA’s Approach Thoughtful . . . Exercise. Statute directs CAEATFA to make an Proponents of tax expenditures often produce up-or-down decision on each application based on estimates based on the assumption that these various criteria, including the “benefit to the state,” policies are responsible for all of the recipients’ which the authority has interpreted primarily in fiscal employment, output, and other economic activity. terms. To meet these requirements, CAEATFA has This assumption is unreasonable. These types developed an approach that distills benefits into a of estimates systematically overstate the effects single point estimate. Unfortunately, available data of such policies—potentially by an enormous and methods cannot support credible estimates amount. In contrast, Blue Sky and CAEATFA have of such benefits to that degree of precision. Put made a serious attempt to estimate the economic another way, different calculations could produce effects—and, relatedly, the fiscal and environmental vastly different point estimates, even if all such effects—of the tax exemption. calculations are based on reasonable assumptions . . . And Provides a Good Starting Point . . . and the best available evidence. The net benefit calculation begins with an estimate Concerns About Certain Assumptions. of the effect of the exemption on a participant’s In addition to our general concerns about the equipment purchases. To obtain this estimate, application of a net benefit calculation in this Blue Sky and CAEATFA use an economic context, we have some concerns about specific framework developed by Chirinko and Wilson 16 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT assumptions embedded into the net benefit equipment purchases includes both effects. calculation used by CAEATFA. We describe However, the calculation further assumes that output some of these concerns below. Some of these and employment increase in direct proportion to assumptions overstate net benefits, while others the entire increase in equipment purchases. This understate them. Overall, they tend to err on the assumption does not properly account for the side of overstatement. substitution effect, leading to overstated increases in participants’ output and employment. Assumptions That Overstate Sales Tax Assumptions. The net benefit Net Benefit calculation estimates the exemption’s effect on sales tax revenue as follows. It starts with the projected Omits Some Fiscal Effects. The net benefit increase in output due to the exemption. It then calculation includes revenue gains from four multiplies this increase in output by: (1) the share major taxes—the personal income tax, the sales of the applicant’s products projected to be sold in tax, the corporation tax, and the property tax— California, and (2) the sales tax rate. This calculation resulting from economic activity generated by the overstates sales tax revenue for two reasons: exemption. This list omits some potentially large fiscal effects of the exemption. For example, the • Assumes Products Would Not Be Made state provides rebates to consumers who purchase Elsewhere. The calculation assumes that the electric vehicles. To the extent that the CAEATFA net worldwide increase in output is equal to exemption increases the number of electric vehicles the increase in output within California. As purchased, it also increases state spending on discussed elsewhere in this report, reductions these rebates. (The calculation also omits some in out-of-state production likely offset a large positive fiscal effects.) share of the increase in in-state production, Omits Opportunity Cost . . . As discussed in so this assumption likely overstates the net the “Assessment” section of the report, the net global increase. effects of a policy depend crucially on the next • Assumes Purchases Do Not Displace Any best alternative use of resources—also known Spending on Other Taxable Goods. The as the “opportunity cost.” In the context of the calculation assumes that all purchases of the CAEATFA exemption, the opportunity cost would applicant’s increased output are net increases be an alternative use of the forgone revenue— in spending on taxable goods. In other words, such as spending on transportation infrastructure. it assumes that if businesses or consumers Alternative uses would generate benefits that could did not purchase these items, they would be compared to the benefits generated by the not have bought other taxable items instead. CAEATFA exemption. This assumption both overstates the net . . . As Directed by Statute. The statute increase in taxable spending and contradicts governing the application process, however, an assumption used to estimate environmental does not direct CAEATFA to consider opportunity benefits, as described below. costs. Instead, it directs the authority to compare the “benefit to the state” to “the benefit to the Assumes That Additional “Green” Goods participating party.” CAEATFA’s net benefit Displace Equal Number of Conventional Goods. calculation follows this statutory direction. As As described above, the net benefit calculation discussed above, however, this comparison does includes an estimate of the additional number of not measure the true net benefit of the exemption. units sold by the participant due to the exemption. The environmental benefits calculation assumes Assumes Proportional Increases in Capital, that, on average, each additional “green” good Labor, and Output. As discussed in the sold by the participant displaces the purchase “Assessment” section of the report, the CAEATFA of a conventional “dirty” good. For example, if a exemption leads to higher capital investment through participant sells 300 additional electric vehicles, two channels: a scale effect and a substitution the calculation assumes that consumers buy 300 effect. CAEATFA’s estimate of the increase in www.lao.ca.gov 17 analysis full gutter AN LAO REPORT fewer conventional gasoline vehicles. For some Ignores Environmental Effects Of Production. consumers, the closest substitute for an electric To the extent that the exemption increases vehicle made by the participant might indeed be a manufacturing activity in California, it increases conventional gasoline vehicle. For other consumers, local pollution. The net benefit calculation does not however, the closest substitute might be an electric account for this effect, resulting in overstatement of or hybrid vehicle made by a different manufacturer. environmental benefits. As a result, this assumption likely overstates the Assumptions That Understate environmental benefits of the exemption. (Either way, the increase in taxable sales is much smaller Net Benefit than assumed in the fiscal part of the calculation.) Omits Indirect Job Creation. CAEATFA Environmental Calculation Assumes application scoring includes two types of jobs. Products Would Not Be Made Elsewhere. The first type consists of employees who work The environmental benefits calculation assumes for the business that purchases the tax-exempt that each additional good produced in California equipment. The second type consists of workers represents a net increase of one additional good involved in the construction of the facility and produced globally. This assumption overstates the the installation of the equipment. The full extent net increase in global production. To the extent of the jobs created by the exemption, however, that the exemption’s environmental benefits are likely extends beyond these two types. The due to higher consumption of these goods, this exemption increases capital investment and output assumption overstates environmental benefits. in manufacturing—a tradable industry. Increased Assumes No Offsetting Emissions Increases economic activity in tradable industries often Due to Policy Interactions. As described in the leads to increased economic activity—including “Assessment” section, interactions with other employment—in other industries, such as local environmental policies—such as cap-and-trade service industries. and the Low Carbon Fuel Standard—could Low Social Cost of Greenhouse Gas negate some of the emissions reductions that Emissions. The net benefit calculation assumes otherwise would result from the exemption. The that the social cost of greenhouse gas emissions net benefit calculation does not account for these is $10 per ton—lower than typical estimates. This interactions, resulting in potential overstatement of assumption likely understates the global benefits environmental benefits. resulting from each ton of emissions avoided due to the program. EFFECTS OF THE CAEATFA EXEMPTION In the “Assessment” section of the report, we as a partial exemption (an average rate cut of summarize the effects of the CAEATFA exemption. 4.6 percentage points) for 80 percent to 90 percent In this section, we provide additional details. of purchases. For the remaining 10 percent to 20 percent—consisting of recyclers and Increase in Equipment Purchases purchases in excess of $200 million—we assume We estimate that the CAEATFA exemption that the program acts as a full exemption (an increases participants’ equipment purchases by average rate cut of 8.5 percentage points). roughly 5 percent to 9 percent. We arrive at this Lower Tax Rate Leads to Higher Equipment estimate as follows. Purchases . . . We assume that a one percentage point reduction in the tax rate on equipment CAEATFA Exemption Reduces Tax Rate on Equipment. Based on recent applications, increases equipment purchases in the state by we assume that the CAEATFA exemption acts 1.0 percent to 1.6 percent. This range of estimates 18 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT is based on the same economic framework used for • Substitution Across Factories. When CAEATFA’s net benefit calculation. This framework the relative price of capital falls, more incorporates three economic parameters: the capital-intensive factories develop a cost importance of equipment in production, the price advantage over less capital-intensive ones. elasticity of demand for output, and the elasticity As a result, capital-intensive factories expand, of substitution between labor and capital. As while factories that rely more heavily on other described below, our assumptions regarding the productive inputs—such as labor—shrink. latter two parameters differ from CAEATFA’s. Global Effects Smaller Than In-State Effects. . . . Resulting in an Increase of 5 Percent Chirinko and Wilson (2008) present evidence to 9 Percent. As described above, we assume suggesting that a large portion of the increase in that the CAEATFA exemption reduces the net tax in-state capital investment resulting from state tax rate on 80 percent to 90 percent of participants’ exemptions is offset by reductions in investment purchases by 4.6 percentage points. Combining in other states. Consequently, we interpret our this assumption with the 1.0 to 1.6 percent range estimates as California-specific effects. The net of investment responses, we estimate that the global effects likely are much smaller. exemption increases these purchases by 5 percent to 7 percent. The 8.5 percentage point reduction Other Effects on the remaining 10 percent to 20 percent of Most Effects Highly Uncertain. The ultimate purchases increases those by 9 percent to economic goal of programs like the CAEATFA 14 percent. The resulting average is an increase of exemption is to increase employment and output 5 percent to 9 percent. not just in a specific industry, but in California’s Price Elasticity of Demand for Output. The economy as a whole. The CAEATFA program has magnitudes of the scale effect and substitution the additional goal of achieving net reductions in effect described in the report depend, in part, on pollution. Unfortunately, available data and methods the price elasticity of demand for the industry’s cannot support credible, precise estimates of the output. Based on Li’s (2018) estimates of electric program’s net effects on jobs, economic activity, vehicle demand, we assume elasticities ranging revenue, or pollution. from -2.1 to -3.4. Number of Businesses in California. As noted Elasticity of Substitution Between Labor and above, statute requires our office to evaluate Capital. The magnitude of the substitution effect the number of businesses that have remained in described in the report depends, in part, on the California or relocated to California as a result extent to which labor and capital are substitutes of the program. We have not found any credible in production—summarized by an elasticity of evidence that speaks to this effect specifically, so— substitution. Based on evidence from Chirinko and like the effects listed above—it is highly uncertain. Wilson (2008), Oberfield and Raval (2014), and Evidence presented by Chirinko and Wilson (2008), Chirinko and Mallick (2017), we assume aggregate however, addresses a closely related effect: the elasticities ranging from -0.54 to -0.85. As noted net change in the number of manufacturers in the by Oberfield and Raval (2014), we should expect state. Based on that evidence, our best estimate a typical manufacturer’s individual response to is that the CAEATFA exemption has had little to be less elastic than the aggregate industry-level no net impact on the number of manufacturers in response. The industry-level response includes two California. (The small net impact could consist of distinct types of substitution: offsetting increases and decreases. For example, • Substitution by Individual Factories. When more equipment intensive-manufacturers could the relative price of capital falls, individual replace less equipment-intensive manufacturers.) factories have an incentive to change their Fiscal Effects. In the “Assessment” section of production processes to use more capital and the report, we claim that a state or local program less of other productive inputs, such as labor. can pay for itself through economic growth only www.lao.ca.gov 19 analysis full gutter AN LAO REPORT if its economic effects are at least six times of spending (or forgone revenue). In other words, as large as a typical program. We obtain this the “multiplier” on the program must be equal to number as follows. In 2016-17, state and local or greater than 11. In contrast, credible estimates revenue accounted for 9 percent of California of state and local fiscal multipliers tend to be in personal income. Assuming that economic growth the range of 1.5 to 2. Consequently, for a program generates revenue at that rate—nine cents on to pay for itself through economic growth, it must the dollar—a program can “pay for itself” through have a multiplier that is at least six times as large macroeconomic effects only if the program as a typical program. generates $11 of personal income for every dollar TYPES OF ADVANCED MANUFACTURING USED In Appendix Figure 1, we list the types of total, CAEATFA has awarded the exemption to advanced manufacturing used by participants in 40 different types of advanced manufacturers. the CAEATFA program, as required by statute. In SELECTED REFERENCES Chirinko, Robert and Debdudal Mallick (2017). Li, Jing (2018). “Compatibility and Investment “The Substitution Elasticity, Factor Shares, and the in the U.S. Electric Vehicle Market.” Mimeo, Low-Frequency Panel Model.” American Economic Massachusetts Institute of Technology. Journal: Macroeconomics 9(4):225-253. Nakamura, Emi and Jon Steinsson (2014). Chirinko, Robert and Daniel Wilson (2008). “Fiscal Stimulus in a Monetary Union: Evidence “State Investment Tax Incentives: A Zero-Sum from U.S. Regions.” American Economic Review Game?” Journal of Public Economics 92:2362-2384. 104(3):753-792. Chirinko, Robert and Daniel Wilson (2010). “State Oberfield, Ezra and Devesh Raval (2014). “Micro Business Taxes and Investment: State-by-State Data and Macro Technology.” Mimeo, Princeton Simulations.” Federal Reserve Board of San University. Francisco Economic Review. Suarez Serrato, Juan Carlos and Philippe Chodorow-Reich, Gabriel (2018). “Geographic Wingender (2016). “Estimating Local Fiscal Cross-Sectional Fiscal Spending Multipliers: What Multipliers.” Mimeo, Duke University. Have We Learned?” Mimeo, Harvard University. 20 LEGISLATIVE ANALYST’S OFFICE analysis full gutter AN LAO REPORT Appendix Figure 1 Types of Advanced Manufacturing Used Since 2010 Total Exemption Amount (Millions of Dollars) Type Awarded Used Aerospace Manufacturing $83.3 $12.9 Metal Forging 14.1 8.6 Biopharmaceutical Manufacturing 24.9 7.8 Medium Density Fiberboard Manufacturing 7.8 4.6 Plastic Recycling 10.1 4.5 Plug-In Hybrid Vehicle Manufacturing 3.2 3.2 Specialty Aerospace Fastener Manufacturing 3.9 2.9 Water Bottling Facility 2.5 2.5 Corrugated Packaging Manufacturing 2.5 2.4 Thin Steel Plate Manufacturing 3.4 2.1 Advanced Food Production 3.3 0.8 Tooling and Metal Stamping 0.8 0.8 Defense and Aerospace Manufacturing 1.4 0.7 Composites Manufacturing 0.7 0.7 Silicon Anode Powder Manufacturing 0.9 0.6 Medical Waste Recycling 3.1 0.5 Carbon Black Production 0.5 0.4 Optical Ferrule Manufacturing 0.7 0.4 Electric Vehicle Battery Manufacturing 1.5 0.4 Food Grade Recycled Packaging Manufacturing 0.9 0.3 Lithium Ion Battery Manufacturing 1.4 0.3 Peptide Pharmaceutical Manufacturing 1.1 0.3 Corn Oil Production 0.4 0.3 Advanced Carpet Recycling 1.4 0.2 Soil Amendments Production 0.3 0.2 Recycled Paper Bottles Manufacturing 0.6 — Electric Vehicle Charging Station Production 0.1 — Specialized Concrete Ring Manufacturing 0.3 — Beverage Production 0.2 — Biomass Processing and Fuel Production 37.2 — Fertilizer Production 9.1 — CNC Machine Manufacturing 6.9 — Aero Engine Ring Forging 4.5 — Multifamily Unit Building Component Manufacturing 4.5 — Additive Manufacturing 0.7 — Turned Part Manufacturing 0.6 — Recycled PET Food Packaging 0.4 — Water Feature Manufacturing 0.4 — Omega Oil Production 0.4 — Advanced Packaging Label Production 0.2 — www.lao.ca.gov 21 analysis full gutter AN LAO REPORT LAO PUBLICATIONS This report was prepared by Seth Kerstein with assistance from Ross Brown, and reviewed by Brian Uhler and Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 22 LEGISLATIVE ANALYST’S OFFICE