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Desperate to Stop Industry Exodus, Calif. Considers Major Tax Cuts

'AB 1951 sends an important message: California is serious about retaining and attracting high-quality jobs and production...'

(The Center Square) A bill that would provide a full sales and use tax exemption for purchases of manufacturing and research and development equipment up to $200 million was advanced by Assembly lawmakers.

The bill, which passed the Assembly in a 74-0 vote, expands California’s existing partial sales and use tax exemption for manufacturing and research and development equipment to a full exemption for a period of five years.

Nationwide, California has the highest state sales tax rate in the U.S. After accounting for local rates, sales and use tax rates in California can reach 10.75%, according to the text of the bill. Thirty-eight states provide a full exemption from sales and use tax for manufacturing equipment, the bill notes.

The bill passed the Assembly last week.

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With only the state’s existing partial tax exemption for manufacturing and research and development equipment, “taxpayers pay more to buy equipment in California than they would elsewhere, creating a competitive disadvantage for the state,” according to the bill.

Supporters of the bill said enacting a full exemption will help to maintain California’s status as a hub for innovation and keep manufacturing jobs within the state. 

“Within the California economy, manufacturing plays a crucial and essential role, supporting high wage jobs and small businesses,” Assemblymember Tim Grayson, the bill’s author, said in a statement. “AB 1951 will incentivize long-term investments and fuel growth in the manufacturing industry in California by providing a full state and local sales and use tax exemption for the purchase of manufacturing equipment.”

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Under existing law, a person can receive a partial sales and use and tax exemption for qualified “tangible personal property” that is used primarily for manufacturing and research and development. The exemption is limited to $200 million in qualified purchases in a single calendar year and is set to expire July 1, 2030.

The new measure passed last week would slightly alter this provision by providing a full exemption for purchases of up to $200 million from Jan. 1, 2023, to Jan. 1, 2028. After the five years are up, the state would revert back to the partial exemption until 2030.

Supporters of the bill said the measure would advance innovation and maintain manufacturing jobs within California. Robert Gutierrez, president of the California Taxpayers Association—a co-sponsor of the legislation—said that the bill “will lead to more California-made products on store shelves” and support workers statewide.

Manufacturing jobs currently employ about 1.3 million people in California, and every one manufacturing job “supports at least 2.5 other jobs,” the California Chamber of Commerce said in a statement.

“AB 1951 sends an important message: California is serious about retaining and attracting high-quality jobs and production,” Preston Young, CalChamber policy advocate, said in a statement.

According to a fiscal analysis of the bill, about $695,000 annually would not be added to the state’s coffers due to additional taxpayers “that did not utilize the partial exemption now utilizing the full exemption.” Additionally, local government revenue loss is anticipated to total $533 million for the “change in taxpayer behavior.”

Concerns about the proposal’s ability to “erode the sales tax base” was among the reasons cited for opposition from the League of California Cities. In a statement, the organization praised the intent of the measure, but recommended utilizing the state’s surplus to invest in manufacturing.

“While we support California’s manufacturing economy, local governments can ill afford additional erosion of sales and use tax revenues,” the organization wrote in opposition. “Instead, the Legislature should use the historic state budget surplus to invest in California’s manufacturing economy, incentivize innovation, and spur a manufacturing marketplace that is competitive with nation-wide.”

The measure is now in the Senate Rules Committee. 

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