Newsom Vetoes SUT Exemption for Manufacturing Equipment


Governor Gavin Newsom vetoed legislation September 15 that would have supported California jobs by expanding the sales and use tax exemption for manufacturing and research-and-development equipment (AB 1951, Grayson).

The bill, co-sponsored by CalTax and the California Manufacturers and Technology Association (CMTA), proposed replacing the existing partial manufacturing sales tax exemption with a full exemption until January 1, 2028, at which point the partial exemption would return.

“This change would result in substantial revenue loss to local governments, which impacts essential health, safety, welfare, and transportation services,” Newsom wrote in his veto message. “Assuming there are no changes in taxpayer behavior, local agencies are estimated to lose over half a billion dollars each year.”

It should not be assumed that there will be no changes in taxpayers’ behavior, proponents of AB 1951 stated throughout the bill’s trip through the Legislature. Because taxes and other costs are much higher in California than elsewhere, the lack of a full exemption will continue to encourage businesses to make large equipment purchases in other states, where they also will hire people to operate and maintain the equipment.

“AB 1951 will incentivize businesses to purchase new manufacturing equipment and put it into use in California,” CalTax President Robert Gutierrez wrote in an August 31 letter to Newsom. “When a business buys new equipment for use in California, that equipment brings jobs into local communities and grows the local tax base. AB 1951 results in a net local tax revenue increase because companies will be buying new equipment and placing this equipment into use in local communities, where investments might not otherwise have occurred. This equipment will be subject to local property taxes in perpetuity.”

The CMTA noted that the Economic Strategy Institute reported that AB 1951 would have brought $1.5 billion to $3.5 billion in new investment to California.

AB 1951 cleared the Legislature in August with 100 votes in favor and just three opposed. Many of the “yes” votes came from legislators who previously served as local elected officials. The bill’s author, Assembly Member Tim Grayson, has local government experience as the former mayor of Concord. Senator Robert Hertzberg, the Senate floor manager for AB 1951, is a candidate for the Los Angeles County Board of Supervisors.

The League of California Cities, a taxpayer-funded organization with 62 staff members, praised the veto.

In other action by the governor:

Newsom Vetoes Proposal to Allow FTB to Withdraw Tax-Exempt Status Based on Allegations of Treason or Insurrection. On September 22, Newsom vetoed SB 834 (Wiener), which proposed allowing the Franchise Tax Board to revoke the tax-exempt status of a nonprofit charitable organization if the California attorney general determines the organization has engaged in treason, insurrection, conspiracy, government overthrow, or mutiny by members of the military.

“Without question, extremist groups that participate in anti-government acts such as those that took place during the insurrection on January 6, 2021 should be renounced and investigated for their participation,” Newsom wrote in his veto message. “However, these are issues that should be evaluated through the judicial system with due process and a right to a hearing.”

“I respectfully disagree with the Governor’s rationale for the veto,” Wiener said in a statement. “What the Governor is suggesting – mandatory judicial oversight of tax-exempt status revocation – is unprecedented. Tax-exempt status is a privilege, not a right, and we must be clear on where California stands when it comes to organizations trying to undermine our democratic system. January 6 was a dark day in our nation’s history, and we should do everything in our power to prevent an insurrection from happening again.”

Governor Extends Property Tax Exclusion for Solar Energy Systems, but Adds a Disclaimer. Newsom signed SB 1340 (Hertzberg), extending the existing property tax exclusion for newly constructed, active solar energy systems by two years. In a signing message, Newsom wrote: “California has established aggressive clean energy goals in its broader plan to combat the impacts of climate change. Increasing the number and pace of solar projects brought online is a critical component of this plan. The COVID-19 pandemic and supply chain delays have contributed to project delivery interruptions, including planned solar energy projects. That said, this policy has a direct impact on property tax revenues that support essential services at the local level. I believe this two-year, temporary extension strikes an appropriate balance between ensuring that these delayed solar projects are brought online quickly, while recognizing the impacts to local governments. Further, this year’s budget included $300 million to create the Local Government Budget Sustainability Fund, which provides bridge funding to support county governments who are committed to advancing climate resilient projects that will bolster local revenues and contribute to long-term budget sustainability. In signing this bill, I urge the Legislature to consider the impacts to local agencies before bringing forward another extension of this policy.”

Newsom Approves Extension of Tax Exemption for Zero-Emission Buses. Newsom signed AB 2622 (Mullin), extending a partial sales and use tax exemption for zero-emission technology transit buses until January 1, 2026.

Tax Exemption for Purchase of Hybrid or Zero-Emission Vehicles Signed Into Law. The governor signed SB 1382 (Lena Gonzalez), providing a temporary, partial sales and use tax exemption for the purchase of a plug-in hybrid vehicle or a zero-emission made with an award from the Clean Cars 4 All Program. The new law also requires the California Air Resources Board to take specified actions to improve participation in the program by households living in areas experiencing high levels of air pollution or poverty or that primarily speak a language other than English.