The California High-Speed Rail Authority says it wants a sales tax exemption on in-state purchases, a first-ever move for the project that could tighten timelines and save money but also mean fewer dollars returning to state revenue pools.
The rail authority told The Fresno Bee that a sales tax exemption would decrease the project’s overall costs on in-state materials and equipment purchases and could also help build the train faster by removing some financial barriers.
Though state agencies are generally not exempt from paying sales tax, the concept is not entirely new in California, where the law allows such exemptions for qualified manufacturers — typically private firms — in the greenhouse gas reduction space.
“We’re just saying, ‘Keep the money in the project,’ “ Henry R. Perea, a rail authority board member from Fresno, told The Bee in a phone interview.
It’s not immediately clear how much of the sales tax normally imposed in the state would be exempted under the plan. The agency told The Bee it cannot yet talk specifics about what it is seeking or how much money it expects to save. The rail authority said it’s still discussing a proposal it sent to California’s Legislature for next year’s session.
Sales in California are taxed at a minimum of 7.25%. According to the California Department of Tax and Fee Administration’s website, 6% of that generates revenue that pays for statewide programs and resources, such as public safety and other core government responsibilities. The other 1.25% goes to the cities and counties where a sale takes place, and local governments can also add and collect more sales tax.
The rail authority’s argument is that the exemption would prevent “shuffling” of state money within state accounts. Because state dollars are paying for the project, California sales tax collected on purchases effectively causes the rail authority to return some of those dollars to the state, Perea said.
Tax exemption push amid new material purchasing strategy
The push for a sales tax exemption, announced by rail authority CEO Ian Choudri during an August board meeting, comes as part of the agency’s list of new cost-cutting and time-saving strategies requiring the state’s approval. It also comes as the agency battles the Trump administration — which has long criticized California high-speed rail’s history of delays and cost increases — in court over a decision to pull $4 billion of the project’s federal money.
California voters approved $9.95 billion in bonds in 2008 to help fund a railway from San Francisco to Los Angeles by 2020. The state estimated then that the entire system would cost $45 billion to build. But today the focus is a 171-mile Merced-to-Bakersfield line that could be operational by 2032 and cost $36.75 billion — if things go according to plan.
The rail authority this year secured $1 billion annually through 2045 for the project from the state’s Cap-and-Invest program, which generates public dollars from companies that buy credits at state auctions to offset their greenhouse gas emissions. The agency is hoping to lay the Central Valley’s first tracks next year and has moved toward buying materials straight from manufacturers rather than from contractors to save money and time.
In August, the rail authority moved to start taking bids from manufacturers who want to supply the rail materials — such as poles, tracks and ballast — for the 119-mile segment between Shafter and Madera. The $507.1 million budget for the rail materials is 100% state-funded.
It’s not yet known how many of those purchases will be made in-state or whether the rail authority can obtain a sales tax exemption before it starts buying the materials for the Shafter-to-Madera stretch.
“They’re giving us $1 billion dollars a year, and we’re going to be using monies to purchase these products,” he said. “Why charge us tax and cause us to give it back to the state when it’s really money the state has already given us to continue the project?”
CA tax exemptions for alternative energy, transportation manufacturing
H.D. Palmer, spokesperson for California’s Department of Finance, said in a statement to The Bee that there is a history of manufacturers receiving sales tax exemptions through the California Alternative Energy and Advanced Transportation Financing Authority (CAEATFA).
That program, based on a competitive application process, allocates up to $100 million in sales tax exemptions each year to manufacturers that work on clean energy and transportation products, he said.
Christina Sarron, executive director of the CAEATFA, said the exemption is available to manufacturers for “qualified property.” That includes machinery and equipment, information technology, and also personal property required for infrastructure improvements to the manufacturing facility.”
She said a public entity could qualify, but the project would need to meet the eligibility requirements and compete with other applicants to the program.
“Companies experience the benefits immediately,” Sarron said. “This immediate financial relief can improve cash flow, encourage quicker decision-making, and make capital investments more attractive.”
Palmer said that outside of this program, the state “has generally not provided sales tax exemptions to specific projects.” But he said the state does provide partial sales tax exemptions for certain types of goods, including manufacturing and farming equipment.