Brown signs defense industry tax break with hidden Tesla perk

Governor Jerry Brown  signed into law Thursday a special $420 million corporate tax break for defense contractor Lockheed Martin.

If that wasn’t controversial enough, now word has surfaced that the bill also included a hidden perk for electric auto maker Tesla Motors Inc.

According to a report by Juliet Williams of the Associated Press, an overlooked section of the bill included language to provide tax breaks to companies that manufacture batteries:

“The word ‘battery’ never appears in the bill’s language, but is referenced in an analysis prepared by the Senate Appropriations Committee dated July 3, the last legislative business day before the summer break and the same day lawmakers voted on it. The analysis said tax relief would be available to companies that fall under federal NAICS manufacturing code 3359, which includes ‘battery manufacturing’.”

That perk, signed into law on the 157th birthday of the company’s namesake, Nikola Tesla, is designed to persuade the company to build a new $5 billion manufacturing plant in California.

Reducing assessed value by $125 million

Under that neglected section of the bill, battery manufacturers would be eligible for a reduction in the assessed value of a qualified manufacturing facility.

“This bill would, until July 1, 2015, reduce the assessed value threshold for calculating the capital investment incentive amount from $150,000,000 to $25,000,000 and would define ‘qualified manufacturing facility’ to include, among others, facilities operated by certain businesses described in specified provisions of the North American Industry Classification System Manual,” the final version of the bill stated.

That language apparently baffled the bill’s author as well as Senate committee staff, who were unaware of its purpose.

“This tax credit is exactly what the aerospace industry needs to remain competitive for the next decade,” Assemblyman Steve Fox, D-Palmdale, author of Assembly Bill 2389, said of the bill’s purpose. He never acknowledged a second benefit provided to battery manufacturers.

The legislative process was described by one state senator as a “jam job.” State lawmakers weren’t given any information about the project, all while being told they needed to pass the bill before the summer recess. Only one committee analysis made reference to the obscure federal manufacturing code.

“The publicly stated intent of the bill is to support the aerospace industry; consequently, it is unclear why NAICS 3359 is also included,” that Senate Appropriations Committee analysis uncovered by the Associated Press found.

$420 million corporate tax break for defense contractors

Prior to the AP’s report, the debate about Assembly Bill 2389 focused on a special $420 million corporate subsidy to a joint partnership between Lockheed Martin and Boeing. The companies are working to obtain a federal contract to build a fleet of next-generation stealth bombers.

Drafted at the governor’s behest, the tax break is available exclusively to “a major first-tier subcontractor awarded a subcontract to manufacture property for ultimate use in or as a component of a new advanced strategic aircraft for the United States Air Force.”

It’s written so narrowly that even other aerospace companies wouldn’t qualify. If Boeing and Lockheed Martin land the project, it could lead to thousands of quality jobs in California.

“This is a big roll-of-the-dice in a state that has been looking for ways to trim minor expenses to fund its many spending priorities,” wrote UT San Diego columnist Steven Greenhut.

Double benefit: tax credit and deduction

Not only does the bill offer special perks to favored companies, it also contains an unprecedented double counting of tax benefits. Those businesses will be able to receive a tax credit and deduction for the same qualifying act.

“This bill would allow a qualified taxpayer a double benefit: first, a deduction, and then a credit calculated based on the same wages paid by a qualified taxpayer for qualified full-time employees,” according to the Assembly floor analysis of the bill. “Generally, a credit is allowed in lieu of a deduction in order to eliminate multiple tax benefits for the same item or expense.”

As CalWatchdog.com’s Joseph Perkins has previously written, AB2389 is nothing more than government picking winners and losers.

“Lawmakers can debate the prudence of bestowing as much as $840 million in tax subsidies to two of the nation’s largest aerospace companies to bid on an Air Force contract,” Perkins wrote earlier this week. “But all can agree that, if the state is going to award tax credits, it should not pick winners and losers among competing companies.”

In the State Assembly, Democrats Mike Gatto and Mark Stone opposed the bill. In the State Senate, six Democrats — Noreen Evans, Cathleen Galgiani, Loni Hancock, Ben Hueso, Mark Leno and Bill Monning — withstood intense pressure from corporate lobbyists.

It passed anyway.