California Green Tax Breaks in Question

In just a year, a little-noticed state panel created with bipartisan legislative support worked briskly to authorize $104 million in tax breaks to help "green" companies in California buy equipment and add jobs.

But the program was halted last month following the bankruptcy of Solyndra, a Fremont solar company that received $25 million in state tax breaks and, more notoriously, a $528 million federal loan guarantee despite its precarious financial state. The Solyndra debacle is being investigated by Congress.

The California program has been frozen to new applicants amid questions about how the recipients were chosen.

Sen. Alex Padilla, D-Los Angeles, sponsored the bill creating the program, which allows qualified companies to waive the state sales tax when purchasing manufacturing equipment in California. He's holding a hearing Wednesday in Sacramento to answer questions about how recipient companies were vetted and whether the program is spurring job creation and cleaning up the environment or is just giving away taxpayer money. The program, scheduled to run for another decade, could get overhauled.

Just as Congress is asking whether the loan guarantee program is worth the risk to Americans, the state is asking if its tax break program is worth the risk to Californians.

"We want to ask the questions: What happened in the Solyndra example? And could we, should we have done anything different?" Padilla said.

California is one of a few states that require businesses to pay sales tax on manufacturing equipment, which business and manufacturing groups say puts the state at a competitive disadvantage.

Then-Gov. Arnold Schwarzenegger signed Padilla's bill in March 2010, when he was in the midst of an ambitious push to move California to the forefront in developing clean energy jobs.

Padilla's bill authorized the California Alternative Energy and Advanced Transportation Financing Authority to approve sales tax exemptions on the design and manufacture of advanced transportation or alternative energy products. The five-member authority is chaired by state Treasurer Bill Lockyer. Other members include the controller, state finance director, and the heads of the Public Utilities Commission and the Energy Commission.

Lockyer requested the suspension last month, saying he wanted the board to review its application process and see if regulations or law needed to be changed before more companies are approved.

"In light of recent events, we owe it to taxpayers to see if there is more we can do to make sure we don't give their money to companies headed for a fall, or companies that take California's money and run to other states to create jobs," Lockyer said in a statement.

The authority began accepting applications in October 2010. It has approved 33 worth $104 million in estimated sales tax exemptions. As of Sept. 1, 11 of those companies have claimed $31.4 million in exemptions. According to the treasurer's office, a handful of applications were denied, another four withdrew after being approved and six were put on hold — including one from Tesla Motors — while the state reviews the program.

Once approved, applicants have three years to claim the tax exclusion.

Most of the approved exemptions were for manufacturing equipment purchased by alternative energy companies to build solar panels, to capture gas from the breakdown of organic materials and to develop lithium batteries.

The authority is charged with evaluating a project based on how much it will help the environment and how much economic activity it could generate in the state. Staff scored each application based on fiscal and environmental benefits.

Applicants were required to disclose whether they faced lawsuits or investigations that might impact their financial viability.

But the bill did not ask the authority or its staff to evaluate the overall financial health of a company. Padilla said that might have to change.

Conducting a thorough financial analysis of each company may not be feasible, said Tom Dresslar, Lockyer's spokesman.

"The idea that any state agency is better equipped than the market to determine the financial viability of a company, most folks would laugh at that suggestion," Dresslar said.

He said while the state should do everything it can to minimize the risk to taxpayers, part of the intent of the program is to take a chance on smaller startups. They are the ones that need the most help and may have the potential to grow fast.

In addition to Solyndra, Padilla said, 10 other companies have claimed tax breaks and they are still running. He wants to know whether the state needs to do more to lure more manufacturing investment after at least two startups decided to build out of state.

San Jose-based Stion Corp qualified for $9.5 million in tax exemptions but has since decided not to claim them while reviewing its next business steps. Stion recently opened a manufacturing plant in Mississippi. It may reapply for California's program in the future.

Frank Yang, Stion's vice president of business development, is scheduled to testify at the hearing. He suggested the state enlist a third-party to do further reviews instead of leaving it all in the hands of government workers.

"You always have to be careful to strike the perfect balance between examining a company and making something so cumbersome that it inhibits companies from making investments," Yang said.

The law also requires recipients to show how many jobs are expected to be created. According to the authority, the state's $104 million exemption is estimated to generate 653 jobs and help fund infrastructure projects and improvements that could lead to thousands more jobs.

So far, it is unclear how many jobs actually have been created — the tally will be made public next year when annual reports from the companies are due.

Some companies contacted by The Associated Press confirmed the tax breaks allowed them to add jobs.

Dave Pearce, chief executive of solar company NuvoSun Inc., said the company claimed $750,000 in tax breaks and added 20 jobs in Milpitas in the past six months. Pearce said hiring will continue "considerably" as they expand operations early next year.

First Solar Inc., the largest thin-film solar panel maker, has claimed $3.2 million in exemptions. Alan Bernheimer, a spokesman for the Temp, Ariz.-based company said First Solar has met its expectation of adding 17 jobs in manufacturing engineering.

"First Solar supports programs like this that encourage capital investment in California and creates jobs, especially manufacturing jobs," Bernheimer said.