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News in Depth Subsidizing Pollution: LB/L.A. Lawmakers Alan Lowenthal & Betty Karnette Pushed Industry-Backed Bill Exempting High-Polluting Ship "Bunker Fuel" From CA Sales/Use Tax...Despite Estimated Multi-Million Dollar Annual Taxpayer Cost And Subsequent Acknowledged Health Impacts
CA Air Resources Board Chair Nichols: "It Would Be A Nice Thing To Repeal That Legislation"; LB Councilwoman Schipske Raised Issue Publicly With Sen. Lowenthal Last Year
(Aug. 16, 2007) -- While U.S. Senator Barbara Boxer (D., CA) and multiple local Congressmembers promote legislation to require foreign ships to use cleaner fuels and cleaner engines in U.S. ports -- a measure backed by LB Mayor Bob Foster, L.A. Mayor Antonio Villaraigosa and the Executive Directors of the Ports of LB and L.A. -- California taxpayers are continuing effectively to subsidize the use of high-polluting "bunker fuel" burned by ships in ports by exempting it from CA sales and use tax.
The tax break results from industry-backed legislation advanced in 2003 two LB lawmakers -- State Senator (then-Assemblyman) Alan Lowenthal (D., LB-SP-PV) and Assemblywoman (then State-Senator) Betty Karnette (D., LB) -- at a CA taxpayer cost estimated by Sacramento in 2001 to be roughly [figures vary widely] $20-$30 million annually.
The story was first reported by LBReport.com in October 2005 when CA Air Resources staff proposed rules to curtail the use of "bunker fuel" as threat to residents' health...with no subsequent legislative response from LB lawmakers Lowenthal or Karnette on the bunker fuel tax exemption they co-authored with the support of industry interests.
In November 2006, LB Councilwoman Gerrie Schipske publicly confronted Sen. Lowenthal about the pollution-subsidizing policy at a Nov. 2006 CSULB conference. Sen. Lowenthal indicated he'd think about it...and nearly a year later, the tax exemption remains.
On August 9, 2007 Sen. Boxer held a hearing on her cleaner ship fuel legislation at the Port of Los Angeles...and supportive witnesses included the LB/L.A. Mayors, the LB/L.A. Port Exec. Directors...and Mary Nichols, recently named by CA Gov. Arnold Schwarzenegger to chair CA's Air Resources Board. CARB chair Nichols commended Sen. Boxer for her approach but didn't mention CA's bunker fuel tax break...so LBReport.com asked her about it when she exited the hearing room.
CARB chair Nichols nodded immediately indicating her familiarity with CA's bunker fuel sales/use tax exemption and told us, "I think it would be a nice thing to repeal that legislation." Chair Nichols indicated she was expressing her personal view, not necessarily that of the Schwarzenegger administration on the matter.
LBReport.com also asked LB Mayor Bob Foster about the issue on Aug. 9, and on indicating a lack of familiarity with the legislation allowed him an opportunity to familiarize himself on the matter; his response remains pending.
[L.A. Mayor Villaraigosa exited quickly after being hounded for days by reporters asking about his extra-marital relationship with now-suspended KVEA-TV news anchor Mirthala Salinas.]
The current exemption from CA's sales and use tax for bunker fuel purchased in CA and consumed in CA waters was enacted (extending prior bunker fuel sales tax exemptions) under 2003 legislation sought by shipping interests, co-authored by two veteran LB lawmakers, backed by a LB Councilman and passed in a last-minute maneuver that avoided otherwise-required hearings and serious public discussion.
In September 2003, then-state Senator, now Assemblywoman, Betty Karnette (D, LB), with the support of then-Assemblyman, now state Senator, Alan Lowenthal (D., LB-SP-PV), used a procedure known in Sacramento as "gut and amend" to take a bill that's already passed normally required committee hearings, strip it of its language and insert entirely new language (in this case the bunker fuel sales tax exemption) before bringing it to the floor for final passage.
The recorded votes in both the state Senate and Assembly -- which LBReport.com posts below -- were nearly unanimous.
In October 2003, the Pacific Merchant Shipping Association (PMSA) applauded the legislature's action and praised then-Gov. Gray Davis (at the time facing recall) who signed the measure into law. "This legislation is good for the state of California and good for California workers," said PMSA VP John Berge in a 2003 written release, adding "The governor is to be commended for his foresight in signing a measure that will help keep our state’s maritime economy strong."
The 2003 action used SB 808 to reinstate (effective in 2004) and extend for ten years an exemption from CA sales and use tax for bunker fuel purchased by ships in CA for use outside state waters, leaving ships only required to pay sales tax on the high-polluting fuel consumed in CA waters.
Shipping interests argued that without the tax break, large ships (which can travel thousands of miles between bunkering stops) would arrange their bunkering decisions to buy the fuel outside CA. At the same time however, shipping interests sought extension of the CA tax break which had been in effect until the state legislature repealed it effective July 15, 1991.
In 1992, state lawmakers voted [AB 2396 (Elder)] to reinstate the exemption effective in 1993, and in 1998 reauthorized the exemption [AB 366 (Havice)] for five more years.
But the 1998 legislation also required the independent Legislature Analyst's Office to submit a report to the Governor and legislature on the exemption's economic impact.
That report, issued in Jan. 2001, concluded that the decline in the bunker fuel industry in CA resulted from a variety of factors. These included economic recession, reduced refining capacity in the L.A. area, elimination of the sales tax exemption for bunker fuel during 1991 and 1992, development of bunker fuel facilities elsewhere in the world, technology changes in shipping and fuel capacity of ships.
The LAO report -- which didn't address health-related economic costs and effects -- said in pertinent part:
Although precise estimates are not possible, the available evidence and economic theory suggests that removal of the bunker fuel exemption in 1991 probably resulted in some reduction in bunker fuel industry activity. It is likely that the revocation of the SUT exemption resulted in a reduction in industry employment on the order of 100 to 200 jobs annually, and increased state-local SUT revenues in the range of $20 million to $30 million...Due to technological and economic changes in the industry, revoking the exemption at the current time would likely result in a somewhat greater employment response and generate less revenue than it did in the past. Ongoing improvements in ship fuel capacity as well as the development of new bunkering facilities would tend to increase the impact that small
differences in bunker fuel prices can have on port activities...On tax-policy grounds, a strong argument can be made for the current partial exemption. Generally, items purchased in California that are subject to the SUT are presumed to be used in the state, while sales for export are usually exempt from the SUT. Bunker fuel purchases fall somewhere in between, since bunker fuel purchases are used both outside of and within state boundaries, suggesting that a partial SUT bunker fuel exemption constitutes appropriate treatment...Based on our findings, we recommend that the Legislature remove the existing sunset for the current partial SUT
exemption for bunker fuel sales, and make the exemption permanent. This would result in the SUT being levied in the future only on the portion of the fuel purchased in California which is consumed between California and the first out-of-state destination (as is currently the case). This action would result in treating bunker fuel sales similarly to
other export sales and place California ports on par with other U.S. out-of-state ports.
A legislative analysis of SB 808 (as gutted-and-amended) said:
The fiscal effect of the bunker tax exemption has been the subject of great controversy. At issue is the degree to which the imposition of sales tax on bunker fuel causes water common carriers to fuel out-of-state rather than in California. An analysis of this bill was not available from the State Board of Equalization (BOE) at the time this committee analysis was prepared [Sept. 2003]. However, in an analysis of a similar bill, SB 145 (Perata), from the 2001-02 Legislative Session, BOE estimated that repealing the sunset date on the bunker fuel exemption would result in a total state and local sales and use tax loss of between $22 and $36 million (between $13.5 and $21.5 million General Fund losses and between $8.9 and $14 million local revenue losses). The range in BOE's estimates reflects uncertainty over the degree to which the sales tax causes water common carriers to fuel out-of-state.
According to this bill's proponents, the bill should result in relatively minor sales tax revenue losses, because the taxation of bunker fuel suppresses sales at California ports. This bill's proponents also assert that the imposition of sales tax on bunker fuel reduces overall economic activity at California ports. They argue that restoring the sales tax exemption will bolster economic activity, both by increasing sales of products purchased by
vessels that choose to bunker and by reversing employment losses among businesses that serve bunkering ships (e.g., ports, pilots, barge operators, boom operators, and marine suppliers).
SUPPORT : (Per Assembly Revenue and Taxation Committee analysis)
American Marine Corporation
American Waterways Operators
Bunkerfuels (10 individual letters from different employees)
California Independent Oil Marketers Association
Carlson Mechanical, Inc.
Chemoil Corporation
China Shipping Container Lines Co., Ltd.
China Shipping Development Co., Ltd.
Clean Coastal Waters, Inc.
Compania Chilena de Navegacion Interoceanica
Dan Baker, Councilmember, City of Long Beach
Don Breazeale and Associates, Inc.
Environmental Maritime Services
Evergreen America Corporation (Los Angeles Office)
GP Resources, Inc.
Hapag Lloyd Container Line
International Council of Cruise Lines
Jacobsen Pilot Service, Inc., Los Angeles and Long Beach Harbors
K Line America, Inc.
Marine Chartering Co., Inc.
Marine Energy, United Arab Emirates
Matson Navigation Company, Inc.
Millennium Maritime, Inc.
MOL (America) Inc.
Ngenia, LLC
Northern California District Council - ILWU
Overseas Wiborg Chartering Company
Pacific Horizon Petroleum Services, Inc.
Pacific Merchant Shipping Association
Pan Pacific Surveyors, Inc.
Petro Diamond Incorporated
Port Hueneme Chamber of Commerce
Port of Sacramento
Premier Marine Fuels Ltd.
Princess Cruises and Princess Tours
Public Service Marine, Inc.
Riley Marine Survey and Consultancy
Sailors' Union of the Pacific
San Francisco Bar Pilots
Sanko Steamship Co., Ltd.
Sea Bunkering Americas LLC
Solar International Shipping Agency, Inc.
Star Shipping, Inc.
Timothy Parker, Maritime Consultant
Tom Flahive Trans-Tec Services, Inc. (8 individual letters from different employees)
Weiss Jones
Westar Marine Services
Westoil Marine Services, Inc.
Westport Petroleum, Inc.
Westport Petroleum, Inc. (27 individual letters from different employees)
World Fuel Services Corporation
Yang Ming (America) Corp.
Zim-American Israeli Shipping Co., Inc.
Perhaps due to the fast-track "gut and amend" maneuver, which circumvented usual hearings, there was no listed opposition.
The votes on passage were:
SENATE FLOOR:
VOTES - ROLL CALL
MEASURE: SB 808
AUTHOR: Karnette
TOPIC: Sales and use taxes: exemptions: bunker fuel
DATE: 09/12/2003
LOCATION: SEN. FLOOR
MOTION: Unfinished Business SB808 Karnette
(AYES 40. NOES 0.) (PASS)
AYES:
Aanestad Ackerman Alarcon Alpert
Ashburn Battin Bowen Brulte
Burton Cedillo Chesbro Denham
Ducheny Dunn Escutia Figueroa
Florez Hollingsworth Johnson Karnette
Knight Kuehl Machado Margett
McClintock McPherson Morrow Murray
Oller Ortiz Perata Poochigian
Romero Scott Sher Soto
Speier Torlakson Vasconcellos Vincent
NOES:
[None]
******************
ASSEMBLY FLOOR
VOTES - ROLL CALL
MEASURE: SB 808
AUTHOR: Karnette
TOPIC: Sales and use taxes: exemptions: bunker fue
DATE: 09/11/2003
LOCATION: ASM. FLOOR
MOTION: SB 808 Karnette Senate Third Reading By Lowenthal
(AYES 76. NOES 1.) (PASS)
AYES
****
Aghazarian Bates Benoit Berg
Bermudez Bogh Calderon Campbell
Chan Chavez Chu Cogdill
Cohn Corbett Correa Cox
Daucher Diaz Dutra Dutton
Dymally Frommer Garcia Goldberg
Hancock Harman Haynes Jerome Horton
Shirley Horton Houston Jackson Keene
Kehoe Koretz La Malfa La Suer
Laird Leno Leslie Levine
Lieber Longville Lowenthal Maddox
Maldonado Matthews Maze McCarthy
Montanez Mullin Nakanishi Nakano
Nation Negrete McLeod Nunez Oropeza
Pacheco Parra Pavley Plescia
Reyes Richman Ridley-Thomas Runner
Salinas Samuelian Simitian Spitzer
Steinberg Strickland Vargas Wiggins
Wolk Wyland Yee Wesson
NOES
****
Canciamilla
ABSENT, ABSTAINING, OR NOT VOTING
*********************************
Firebaugh Liu Mountjoy
Following the 2003 legislative action extending the bunker fuel sales tax exemption, PMSA VP Berge said in a written release, "[H]istory has shown very clearly that this particular exemption actually increases revenues for the state, not decreases them. Senator Karnette demonstrated a great deal of courage by introducing this important legislation."
The bunker fuel sales tax exemption is slated to continue until 2014...unless the state legislature revisits the issue and acts to modify or repeal the currrent bunker fuel sales tax exemption.
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