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    News In Depth / Perspective

    CA Lawmakers Voted In 2003 For Industry-Backed Bill Exempting High-Polluting "Bunker Fuel" Burned By Ships in CA Ports From CA Sales Tax, Despite Estimated Multi-Million Dollar Annual Taxpayer Cost

    (Oct. 26, 2005) -- While CA Air Resources staff has recently proposed rules to curtail the use of high-polluting "bunker fuel" burned by ships in CA Ports as a threat to residents' health, CA residents are currently subsidizing (and thereby effectively encouraging) the use of bunker fuel at an annual taxpayer cost estimated in 2001 to be roughly $20-$30 million.

    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 comittee 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 bunker fuel sales tax exemption's 2003 listed supporters included LB Councilman Dan Baker, whose district includes the Port of LB.

    The recorded votes in both the state Senate and Assembly -- which 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.

    Although 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, shipping interests eagerly 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 before CA Air Resources Board staff proposed curtailing bunker fuel use as a major cause of health-harming in-port emissions, found 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:

    MEASURE:	SB 808
    AUTHOR:	Karnette
    TOPIC:	Sales and use taxes:  exemptions:  bunker fuel
    DATE:	09/12/2003
    MOTION:	Unfinished Business SB808 Karnette
    (AYES  40. NOES   0.)  (PASS)
    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
    MEASURE:	SB 808
    AUTHOR:	Karnette
    TOPIC:	Sales and use taxes:  exemptions:  bunker fue
    DATE:	09/11/2003
    MOTION:	SB 808 Karnette  Senate Third Reading  By Lowenthal
    (AYES  76. NOES   1.)  (PASS)
    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
    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.

    Related coverage:

    CA Air Resources Bd. Proposes Rule Requiring Ships To Use Less-Polluting Fuel While In Port Or Adopt Alternative Emission Strategies

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