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BILL # HB 2670 |
TITLE: international operations centers |
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SPONSOR: Gowan |
STATUS: As Amended by House APPROP |
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PREPARED BY: Hans Olofsson |
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Current law provides a sales tax exemption on electricity and natural gas sold to businesses primarily engaged in manufacturing or smelting operations. HB 2670 would provide the same sales tax exemption to a business certified by the Arizona Commerce Authority as an “International Operations Center” (IOC).
Laws 2014, Chapter 8 provides an individual and corporate income tax credit for investments in new renewable energy facilities that produce energy that is used for self-consumption if the power is used primarily in manufacturing operations. HB 2670 would expand this credit program to include certified IOCs. The requirements to qualify for the credit, however, would be lower for an IOC than a manufacturer, as described in more detail below.
To be certified by the Arizona Commerce Authority, the owner or operator of the IOC is required to meet both of the following investment requirements: (1) a minimum annual investment of $100 million in new capital assets in each of 10 consecutive taxable years and (2) at least $1.25 billion in total new capital investments on or before the 10th anniversary of certification.
To qualify for the renewable energy investment credit, an IOC must also: (1) invest at least $100 million in new renewable energy facilities, (2) use at least 51% of the energy produced at the facility for self-consumption by the 5th year of operation, and (3) use the power primarily for the IOC. The current credit requirements for manufacturing operations (minimum investment of $300 million in renewable energy facilities and at least 90% of energy produced used for self-consumption) would not change under the bill.
HB 2670 would also increase the credit amount from $1 million to $5 million per year (for 5 years) for each renewable energy facility. This change would apply to both manufacturing operations and IOCs. As under current law, HB 2670 limits the credit to $5 million per taxpayer per year. The total amount of credits claimed by an IOC is capped at $25 million. The program’s overall annual credit cap would remain unchanged at $10 million.
Estimated Impact
The IOC electricity and natural gas sales tax exemption is estimated to result in a direct General Fund revenue decrease of $(1.3) million in FY 2017. If an IOC would not have opened in Arizona in the absence of the bill, this impact would be considered foregone revenue.
Expanding the existing renewable energy investment credit program (enacted in 2014) to include IOCs is not expected to have any direct General Fund revenue impact. In line with Chapter 8, the JLBC Baseline already includes a $10 million “set-aside” for the credit program, beginning in FY 2016. The bill does not change the aggregate cap.
Insofar as the bill’s incentives induce economic activity that would not occur otherwise, there would also be some offsetting revenue generated. Due to the uncertainty associated with such estimates, however, this analysis does not incorporate any potential, secondary revenue impacts from induced economic activity.
Laws 2014, Chapter 7 created a sales tax exemption on electricity and natural gas sold to businesses primarily engaged in manufacturing or smelting operations. As noted above, HB 2670 would provide the same exemption for an IOC.
(Continued)
As has been reported in the media recently, a large U.S. corporation has indicated that it will convert a 1.3 million square-foot manufacturing facility in east Mesa into an International Operations Center. This company will also reportedly build a renewable energy facility (“solar farm”) to power the IOC.
Although some general information has been released with respect to expected capital investment levels and number of jobs created, that information does not contain enough detail to calculate a precise estimate of the bill’s fiscal impact. This analysis assumes that the company in question will meet all the requirements of an IOC. Additionally, for the purpose of quantifying the bill’s potential fiscal impact, the following assumptions were made with respect to the planned center: (1) 500,000 square feet and fully operational in FY 2017, (2) maximum power load is 37.5 megawatts (MW), (3) power consumption is 310,430 megawatt hours (MWh) per year, and (4) average price per MWh is $95.3.
The assumptions above are based on a prototypical data center included in a 2013 analysis prepared for the Arizona Data Center Coalition by Jones Lang LaSalle, a commercial real estate and investment management firm. The assumptions contained in the 2013 analysis have been prorated to reflect a 500,000 square-foot center. (The size of the prototypical center included in the Jones Lang LaSalle analysis was 100,000 square feet.)
Under the assumptions outlined above, the 500,000 square-foot center would incur an annual electricity cost of $29.6 million [310,430 MWh x $95.3 per MWh]. Under current law, such an amount of electricity use would generate a total of $1.5 million [$29.6 million x 5%] in state sales tax revenue, of which $1.3 million would be retained by the General Fund. Thus, the General Fund revenue loss under the bill’s proposed sales tax exemption could be as high as $(1.3) million. The impact will depend on how much of the energy used is self-supplied rather than purchased from an outside utility company.
To qualify for the electricity exemption, a company must also meet the IOC renewable energy credit requirement that 51% of energy produced must be used for self-consumption by the 5th year of operation. This suggests that as the company’s facility over time generates a larger share of the energy it consumes, the fiscal impact would be reduced.
HB 2670 does not modify the requirements for the electricity and natural gas sales tax exemption already provided to manufacturers and smelting operations. Thus, apart from the IOC, the bill would not increase the number of business entities that could qualify for the exemption.
Laws 2014, Chapter 8 created the income tax credit program for investments in new renewable energy facilities that produce energy that is primarily used for self-consumption in manufacturing operations. At the time Chapter 8 was enacted, the assumption was that the credit program would be used up to its statutory cap of $10 million in FY 2016. (Although credit became effective from July 24, 2014, no credit was assumed to be used in FY 2015.) Since no credit information is available yet, the FY 2016 Baseline assumes that the $10 million credit usage is ongoing. This bill expands the credit to include IOCs and increases the credit per renewable energy facility from $1 million to $5 million. Since the Baseline sets aside $10 million, the $5 million for the new IOC would not constitute a revenue loss.
As noted above, HB 2670 provides lower thresholds for IOCs to qualify for the renewable energy investment credit than for manufacturers. Although these changes could have the effect of increasing credit use relative to current law, such cost increase would still remain within the Baseline’s $10 million “set-aside” amount. For this reason, these changes would not increase the cost over and above the amount already included in the Baseline.
Local Government Impact
State sales tax revenues are shared with local governments and any reduction in these collections will result in decreased distributions to cities and counties. Under HB 2670, local governments would receive up to a $(0.2) million reduction in state sales tax distributions in FY 2017. If the establishment of an IOC occurred as a result of the bill, this revenue loss would be considered foregone revenue.
2/23/15