Newsom vetoes tax exemption bill for manufacturing equipment

A bill that would have offered a full sales and use tax exemption on manufacturing equipment was vetoed by Gov. Gavin Newsom Thursday evening.

Newsom vetoed Assembly Bill 1951 Thursday night, a measure that would have made California’s existing partial sales and use tax exemption for manufacturing and research and development equipment into a full exemption for up to $200 million through 2028. In a veto message, Newsom raised concerns about revenue loss for local governments, which a fiscal analysis estimated could total $533 million in sales and use tax revenue losses annually.

“As a strong supporter of California's business climate and manufacturing industry, I agree with the intent of this bill to invest in California's economy, incentivize innovation, and spur a manufacturing marketplace that is competitive nationwide,” Newsom wrote. “However, we cannot ask our local governments to bear this loss in revenue.”

California’s state-level sales tax rate is the highest in the nation. Sales and use tax rates can reach up to 10.75% once local rates are accounted for, according to the text of AB 1951.

Dozens of other states already fully exempt manufacturing equipment from sales and use tax, meaning “taxpayers pay more to buy equipment in California than they would elsewhere,” the bill states.

The veto was met with disappointment by the California Manufacturers & Technology Association, who supported the measure. If the measure was signed into law, CMTA President and CEO Lance Hastings said it would have brought California into alignment with 38 other states that already exempt manufacturing equipment from sales tax.

“Now we continue to remain an outlier in that space, and that is a hard proposition for someone like me to be able to promote California as a great manufacturing state when we have this differential tax treatment from some of the other states,” Hastings told The Center Square.

Hastings said CMTA plans to remain in dialogue with the governor’s office about the bill and addressing underlying concerns that remain about funding mechanisms. He also hopes to have a broader conversation about how California “taxes itself.”

“If a local government is so concerned about lost revenue based on an investment that a business is willing to make in its community, that underscores to me the disconnect between what we need in the 21st century versus what we've had in the 20th century with our tax policy. It's misaligned,” Hastings said.

In his veto message, Newsom wrote that he looks forward to “working with the Legislature and stakeholders to propose something on this topic next year.”

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