Background:
The U.S. Air Force is looking for a partner for their Advanced Strategic Aircraft Program, a deal worth $55 billion. They are looking to buy up to 100 stealth bombers. In the mix for this deal are Northrop Grumman Corp. and Boeing Co. conjointly with Lockheed Martin Corp. California, seeing the benefits this could provide the state, has approved bills in regards to tax credits and incentives for the corporation that the U.S. Air Force ultimately chooses to form a contract with.
Assembly Bill 2389 & Senate Bill 718:
Initially on July 10, 2014 Governor Brown approved Assembly Bill 2389, which contains two portions that can save potentially up to $420 million in tax breaks for a qualified employer. The first portion relates to the Capital Investment Incentive Program (CIIP), a program formed in 1999 to attract large manufacturing facilities by offering 15 years of property tax rebates. This was previously applicable to a broad range of manufacturers, but is being temporarily narrowed down to North American Industry Classification System (NAICS) codes 3364 (Aerospace Product and Parts Manufacturing) and 3359 (Other Electrical Equipment and Component Manufacturing).
The second portion is more specifically for the actual contract with the U.S. Air Force. It’s an aerospace income tax credit of 17.5% of qualified wages paid or incurred to qualified full-time employees. In order for employees to be qualified they must spend 80% or more of their time working on the advanced strategic aircraft program. However, AB 2389 stated that the employer/taxpayer is a “subcontractor with regard to the manufacture of that aircraft.”
Under that definition, the only “subcontractor” that would qualify for the aerospace tax credit is Lockheed Martin since Northrop Grumman is a prime contractor. Northrop Grumman, the largest aerospace/defense employer in California, complained about favoritism and that it would put them at a disadvantage for winning the contract. However, it appeared as though the government wasn’t aware of the corporation’s interest in this deal until last minute. Consequently, Senate Bill 718 was passed on August 15, 2014. This expanded the bill to include prime contractors, thus creating a fairer playing field for both parties. Only one of these corporations will qualify for the aerospace tax credits and it is contingent upon who receives the contract with the U.S. Air Force and if they build the bombers in California.
Why we should care:
Like other tax credits and incentives, this bill will help create and retain jobs in California. Regardless of which corporation gets the deal, both are anticipating adding more jobs to California’s economy. Northrop Grumman expects that over 1,500 new jobs will come about.
The wording of AB 2389 is in such a way that it can also apply to the efforts of securing Tesla’s well sought-after battery manufacturing plant nicknamed the Gigafactory. The original CIIP did not include NAICS code 3359 (Other Electrical Equipment and Component Manufacturing) which will be applicable to the function of the Gigafactory since they will be making lithium-ion batteries. This battery manufacturing facility is a $5 billion project that will provide up to 6,500 new jobs. The passing of the bill serves as a way for California to be competitive with the other states still vying for Tesla’s business. Tesla’s final choice will be a combination of several factors, including what tax credits and incentives they are offered. California seems like an unfavorable place for businesses due to harsh tax conditions especially in consideration to other states, but an incentive like this might be enticing for the electric car manufacturer.
While most California companies aren’t big enough to warrant specific bills to woo them to come to or stay in the state, there are other incentives offered to the general public. The California Competes Tax Credit is a competitive program which awards companies for increased employment and investment in the state. And the new California Manufacturers’ Exemption provides a partial sales tax exemption to companies placing in service qualified manufacturing and R&D equipment.
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Photo Credit M. Jones Jr Via Flickr
