Should Tax Breaks Help Clean Air?

SACRAMENTO —  The scenario is familiar: You are stuck in traffic and just ahead is an old diesel truck belching noxious clouds of exhaust with seeming impunity.

You inhale the fumes, curse and wonder, yet again, how such obvious polluters of the air can get away with it.

Californians like you are exactly who the drafters of Proposition 7 had in mind when they wrote the Air Quality Improvement Act and put it on the Nov. 3 ballot.

The measure would award about $2.3 billion in tax credits over the next 11 years as an inducement for private industry to intensify the technological fight against smog, especially cleaning up old diesel trucks and buses.

Tax credits also would be handed out for reducing other emissions, including pollution from locomotives, ships, heavy construction machinery, agricultural burning, power lawn mowers and fireplaces. Research and development costs also would qualify.

The initiative states that unless these sources of pollution are attacked with new vigor, current anti-smog requirements “will not be sufficient to clean up California’s air quickly enough to protect public health.”

A relatively low-budget measure, Proposition 7 is sponsored by the environmentalist Planning and Conservation League. It is backed by members of the clean air industry, electric power companies, the American Lung Assn. and environmental protection organizations.

It is opposed by Taxpayers Against Corporate Welfare, a campaign organization of mostly public employee unions who warn that Proposition 7 threatens funding for other programs dealing with tax relief and environmental, law enforcement and higher education programs.

Opponents also say that the initiative would require California taxpayers to subsidize via the tax credits a variety of questionable clean air remedies advocated by the same industry interests who paid to put Proposition 7 on the ballot.

“This is about getting tax breaks, if you pay,” said Lenny Goldberg, director of the opposition campaign. “These are 16 narrow categories of tax breaks specifically designed for [pro-Proposition 7] campaign contributors.”

Goldberg noted that virtually all the $630,000 contributed to the initiative through June 30 came from industry sources, including fireplace product makers, electric utilities, a waste-to-energy company and a business that manufactures a product that “eats” harmful ozone.

He says the proposition’s complex provisions are written in such a way that businesses would be able to claim tax credits for up to 100% of their costs, an allegation denied by proponents.

Gerald Meral, the Planning and Conservation League’s executive director, not only concedes that industry members are the campaign’s chief financial backers but boasts, “We’re proud of them.

“We want them to be more in the business and increase their level of sales,” Meral said. “Keep in mind that the people who ultimately benefit from this are the people who are not going to die from air pollution.”

Proposition 7 supporters note that old trucks and buses are major air polluters, but are beyond the reach of recent anti-smog requirements imposed on newer vehicles.

Incentives to the Industry

Diesel emissions result in a disproportionate amount of air pollution, experts say. Diesels represent only 4% of the motor vehicles in California, but emit 40% of the nitrogen oxide, a chief ingredient of smog, and 60% of particulate waste.

The Legislature recently approved a $25-million program by Assembly Speaker Antonio Villaraigosa (D-Los Angeles) and Sen. Jim Brulte (R-Rancho Cucamonga) to encourage the retrofit or purchase of low emission heavy-duty engines.

But Meral dismisses the legislation as a weak alternative to the more comprehensive Proposition 7, charging that the Legislature lacks the political will to regulate dirty old trucks and agricultural burning in a meaningful way.

The initiative was drafted, in effect, to buy cleaner air by making the fight against smog more economically attractive to private industry, Meral said. “We have to deal with the problem” through incentives, Meral said.

Supporters say the tax incentives could lead to a 50,000-ton reduction in diesel soot and other air pollutants each year.

Under the initiative, the tax credit would be roughly equivalent to the difference between the higher cost of new clean air technologies and their less clean alternatives.

For example, a truck or bus company could receive a credit on its state tax bill if it purchased a clean-operating electric or natural gas vehicle instead of one powered by diesel fuel.

A business also could seek tax breaks if it converted or retrofitted its older vehicles to burn fuel more cleanly.

The tax credits would be awarded competitively on a “cost effective” basis by the state Air Resources Board, or local air districts. Eligible applicants would include manufacturers, suppliers and purchasers of clean air products.

The credits also would apply to a variety of other air pollution sources, including power landscaping tools, locomotives, fireplace inserts and agricultural burning of rice straw and orchard clippings.

Alternative Systems

In all, $218 million in tax credits would be made available each year until the program expired in 2010. More than half the yearly credits, $114 million, would be earmarked for cleaning heavy duty trucks and buses, construction machinery and for alternatives to agricultural burning.

But Goldberg objects to the tax advantages being mandated every year, regardless of whether the remedies were effective in cleansing the air.

He contends that granting tax breaks on the basis of cost-effectiveness would be unworkable because the categories are so narrow that comparable alternatives could not be considered. “There are all kinds of scams that can be run with this thing,” Goldberg said.

But Meral countered that the state air board is “literally the world’s expert” in evaluating the effectiveness of clean air strategies and would not reward boondoggle schemes with tax breaks.

Proposition 7 also has drawn criticism from the independent California Budget Project, a nonpartisan research organization that monitors fiscal issues. It warned that tax credits would be awarded for anti-pollution programs that, in many cases, have been mandated by the government but are not yet in effect.

“Proposition 7 provides a public subsidy for pollution reduction efforts that would occur [in the future] in the absence of the credits,” the organization said.

The overall financial impact of Proposition 7 on California eluded a precise estimate by Legislative Analyst Elizabeth Hill, the Legislature’s nonpartisan fiscal advisor.

In an analysis, Hill said Proposition 7 may result in a revenue loss to the state ranging from tens of millions to more than $100 million each year.

To the extent that the initiative resulted in cleaner air, long-term state and local health care costs probably would be reduced, Hill said. She said the amount was “unknown.”

Potential Budget Buster

Proposition 7 also caught the attention of Gov. Pete Wilson and the Legislature as a potential budget buster when they were writing the state budget last summer.

They concluded that the budget could not finance both the tax credits proposed by Proposition 7 and the tax relief the governor and lawmakers wanted to give other businesses.

As a result, they made the award of $52.4 million worth of business tax breaks contingent on the defeat of Proposition 7 by the voters.

At stake are tax breaks such as extending manufacturing investment credits to software developers, increasing credits for research and development, exempting certain teleproduction equipment from sales taxes, and reducing the minimum tax small start-up businesses must pay.

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The Prop. 7 Pollution Plan

What it would do: Through 2010, provides $218 million a year in tax credits to private industry to develop, manufacture and sell products that produce less air pollution; targets heavy-duty trucks and buses.

Arguments for: Intensifies the battle against air pollution; uses tax incentives as a tool to reduce smog; protects the health of Californians.

Arguments against: Narrowly written and will benefit businesses that put Proposition 7 on the ballot; threatens funding for other programs; awards tax credits for clean air projects already required but not yet in effect.

Supporters: California Farm Bureau Federation, Air Pollution Control Officers Assn., Southern California Gas Co., California Chamber of Commerce, California Trucking Assn., California Energy Biomass Alliance, Sierra Club, Clean Air Now, Howard Jarvis Taxpayers Assn., California Transit Assn.

Opponents: California Professional Firefighters, Assn. of Professional Scientists, Service Employees International Union, California Tax Reform Assn., California Labor Federation, AFL-CIO.