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LEAGUE OF WOMEN VOTERS OF CALIFORNIA EDUCATION FUND Nonpartisan In Depth Analysis of Proposition 7 AIR QUALITY IMPROVEMENT. TAX CREDITS.

Initiative Statute

THE QUESTION

Should the state Air Resources Board, or local districts designated by that Board, be authorized to award $218 million in state tax credits yearly, until January 2011, to encourage reduction in emissions of air pollutants either through (1) acquisition, conversion and retrofitting of vehicles and equipment or (2) research or business development of technologies to reduce air pollution?

PROVISIONS

Proposition 7, the California Air Quality Improvement Act of 1998, offers incentives in the form of tax credits to immediately reduce air-pollution emissions. The Act provides $218 million in tax credits each year through 2010. Tax credits would be awarded in specific amounts, to specific categories of projects eligible for the tax credits. Monies would come from the General Fund.

The Act would be administered by the state Air Resources Board (ARB). This Board could also delegate authority to local air districts to award tax credits, and assist in implementing the program.

These are some provisions of the Act:

• The ARB would adopt regulations for selecting projects, and establish priorities and criteria for the reductions of emissions based on specific air quality attainment needs of each district by no later than June l, 1999.

• A manufacturer, distributor, supplier, installer, purchaser, or end user could apply for the tax credit; a tax credit for a single project could be awarded once, and only to a single applicant.

• No project would be eligible if it is already required by the Federal Energy Policy Act of 1992, or by any local, state, or federal air quality statute.

• Participation in the tax credit program would be voluntary.

• Beginning with the 1999-2000 fiscal year and no less frequently than every two years, the ARB would review criteria for projects eligible for tax credit awards.

• In awarding pilot and technology research tax credits, the ARB would give preference to projects that deliver substantial reductions in emissions of air pollutants, and that offer the greatest likelihood of commercial viability.

• The ARB would award tax credits for agricultural waste conversion facilities that would either gasify the waste, convert it to usable chemicals or other products, or utilize it for the generation of electrical energy.

• The ARB would adopt regulations to award tax credits to projects within each project category (see Figure 1). Up to 10 percent of the dollar value of tax credits authorized in each category would be allocated for pilot or technology research projects.

*Note—Chart used with the permission of the Legislative Analyst's Office.

• The Department of Finance could reduce the total amount of tax credits for any fiscal year in which General Fund receipts are lower than receipts of the previous year.

• This act would continue in effect until January 1, 2011; it could be reenacted by majority vote of the legislature.

BACKGROUND

Most areas of California currently fail to meet air quality standards set by both federal and state governments. The Air Quality Improvement Initiative seeks to provide new incentives toward reaching these standards.

In 1997, air pollution standards were strengthened by the federal Environmental Protection Agency (EPA). Public health studies showed that previous standards for ozone and fine particulates did not offer adequate protection. However, most areas in California still fail to meet EPA standards.

According to the Legislative Analyst, mobile sources (cars, buses and trucks, for example) contribute 60 to 70 percent to smog-forming pollution. Sources such as industrial combustion, solvents and pesticides contribute the rest.

The state ARB, and local air districts, are responsible for enforcing regulations to meet air quality standards. Some incentives are already in place, such as tax credits for substituting purchases of rice straw rather than disposing of it by outdoor burning. Also, each county is authorized to establish a Local Transportation Fund for public transportation, funded by a one-quarter percent sales tax (25 cents on a $100 purchase) collected in that county, monies to be used in part for vehicle air pollution reduction. In addition, controlled burns designed to reduce pollution caused by wildfires are conducted in forests and wildlands.

According to the supporters of the initiative, "the short duration of the program is considered to be sufficient to make major progress in bringing California into compliance with the state and federal clean air acts."

Attempts to accomplish the purposes of the initiative through legislation have not been successful .

FISCAL EFFECT

Impact on State General Fund Revenue

Reductions in state income tax revenues are unknown but could be as high as tens of millions of dollars annually depending on the amount of tax credits used. Since unused tax credits could be carried forward, revenue loss might exceed the maximum of $218 million in some years. The reduction in tax revenues could be lessened, possibly by millions of dollars, from savings resulting from taxpayers not claiming other tax credits for which they are currently eligible, according to the Legislative Analyst.

An increase in sales tax revenue would result from additional purchases of vehicles and equipment which would not otherwise have occurred. The actual amount is unknown, but potentially could be several million to tens of millions of dollars each year.

The Legislative Analyst says, "It is likely that, on average, there would be a net state revenue reduction in the tens of millions to over a hundred million dollars annually."

The tax credits would have no impact on the minimum funding for school districts or community colleges as required by Proposition 98 (funding for K-14 education); any General Fund revenue loss would be absorbed by other programs outside the minimum school funding guarantees.

Expenditures from the General Fund are estimated to be $4,350,000 annually to administer the tax credit program and $150,000 to $350,000 to audit and provide various reports.

Impact on Local Sales Tax Revenue

Increase in local sales tax revenue would result from additional purchases of vehicles and equipment which would not otherwise have occurred. The actual amount is unknown but potentially could be several millions of dollars annually.

Potential Savings in Health Care Expenditures

State and local health care costs would probably be reduced if the measure results in improved air quality, since EPA and scientific studies have linked health problems to air pollution.

A YES vote would direct the ARB to administer a new tax credit program, awarding $218 million in tax credits yearly. Tax credits would be awarded in specific amounts, to specified categories of projects to reduce air pollution, through the year 2010. Monies would come from the General Fund.

A NO vote means that the ARB would not establish a new tax credit program designed to reduce air pollution.

SUPPORTERS SAY

• Private sector tax incentives help reduce toxic air emissions and bring the State of California into compliance with state and federal clean air acts.

• Proposition 7 would remove 50,000 tons per year of pollution and soot.

• Reducing air pollution would protect the health of children, the elderly, and people with lung diseases or asthma.

• Proposition 7 cuts no existing programs, and creates no new bureaucracy.

OPPONENTS SAY

• This initiative gives tax breaks to multinational corporations which would receive a guaranteed market for their equipment because the majority of credits would go to large diesel retrofit manufacturers.

• Proposition 7 takes money from other critical programs such as higher education, law enforcement, child protection, and resource protection programs.

• Ordinary taxpayers would pay the costs of polluters.

SUPPORTERS AND OPPONENTS

Official ballot arguments in supports are signed John Balmes, M.D., Co-chair, Clean Air Advisory Group, American Lung Association of California; R. Michael Kussow, President, California Air Pollution Control Officers Association; and Kit Costello, R.N., President, California Nurses Association.

Official ballot arguments in opposition are signed by Dan Aguirre, President, California Association of Professional Scientists; State Senator Quentin L. Kopp; and Lenny Goldberg, Executive Director, California Tax Reform Association.

For more information:
Supporters: www.pcl.org, 916-444-8726 ext. 126
Opponents: www.noon7.org, 916-446-4300

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Last updated: September 8, 1998
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