BILL ANALYSIS AND FISCAL IMPACT REPORT	Page 1 of  2

DATE: February 17, 2001	Submitted by: TAXATION AND REVENUE DEPT.       
	T. GLENN ELLINGTON, SECRETARY
BILL NUMBER:  HB-741

SPONSOR:  Representative Garcia

BILL SHORT TITLE:  Tax Exemption for Alternative Fuel Vehicles

CONFLICTS, DUPLICATES, COMPANIONS:  SB-18

DESCRIPTION:  This bill provides an exemption from the Motor Vehicle Excise Tax for alternative fuel vehicles.  Alternative fuel vehicle is defined as either a bi-fuel or single dedicated fuel configuration.
 
EFFECTIVE DATE:  July 1, 2001

FISCAL IMPACT (Thousands of dollars)   Parenthesis ( ) indicate a revenue loss:

Estimated Impact on Revenues	Recurring or		
			Nonrecurring	Funds	
	(FY 2001-2002)	(FY 2002-2003)	     Impact     	Affected	
	(*)	(*)	Recurring	State General Fund (MVX)	
	*	*	Recurring	State General Fund (GRT)	
	*	*	Recurring	Local Governments (GRT)	

Sections 7-9-22 and 7-9-23 exempt motor vehicles from the Gross Receipts Tax and the Compensating Tax when the Motor Vehicle Excise Tax has been paid.  The State General Fund revenue loss from the 3% Motor Vehicle Excise Tax would more than be made-up by the General Fund’s 3.275% or 5% share of Gross Receipts Tax and Compensating Tax Revenue.  Local governments would realize a windfall from local option and state shared taxes amounting to something in excess of a 2% tax rate.  Presumably, the revenue impact would not be large, since this disincentive would result in few alternative fuel vehicles being sold.

Assuming the technical issue regarding gross receipts tax is addressed, the fiscal impact depends almost entirely on interpretation of the term bi-fuel (see Technical Issues).  If bi-fuel means multiple types of alternative fuel, the fiscal impact would be small.  If bi-fuel means gasoline/alternative fuel, significantly large revenue losses could be expected.

TECHNICAL ISSUES:
•	Sections 7-9-22 and 7-9-23 exempt motor vehicles from the Gross Receipts Tax and the Compensating Tax when the Motor Vehicle Excise Tax has been paid.  By exempting alternative fuel vehicles from the Motor Vehicle Excise Tax, the bill effectively imposes the Gross Receipts Tax and Compensating Tax on these vehicles.

•	Section 1, Subsection F (on page 2, lines 18, 19 and 20 of the bill) states “Vehicles that operate exclusively on alternative fuel, whether with a bi-fuel capability or dedicated engine configuration …”.  Use of the term “bi-fuel” should probably be clarified.  The most common bi-fuel engine configuration involves gasoline and some other alternative fuel.  However, the bill requires vehicles to operate “exclusively” on alternative fuel.  The department would interpret “bi-fuel” to mean two alternative fuel types.  The exemption would not be allowed for gasoline/alternative fuel engines.  The public may find this distinction confusing.

ADMINISTRATIVE IMPACT:  A moderate negative administrative impact on the Motor Vehicle Division would result from computer system changes and manual procedures required to exempt alternative fuel vehicles from Motor Vehicle Excise Tax during the titling process.  These changes can be accomplished with existing resources, but will present a significant opportunity cost to other initiatives and improvements to the division’s computer systems.

OTHER IMPACTS AND ISSUES:

•	It is important to note the excise tax exemption is allowed for both “bi-fuel” and “dedicated” alternative fuel vehicles.  The interpretation of  “bi-fuel” is of utmost importance in this bill.  Last year Arizona passed an extensive incentive for alternative fuel vehicles which, while being successful in stimulating alternative fuel (bi-fuel) vehicle purchases, resulted in almost catastrophic revenue losses and revealed a number of schemes designed to exploit the tax incentive which may not have been originally intended.  This bill does not provide any subsidy even approaching the Arizona law which created such turmoil but if the term bi-fuel means gasoline/alternative fuel engines then use of the tax exemption could be significant.

•	Assuming the Gross Receipts Tax exemption flaw is corrected in the bill, the Motor Vehicle Excise Tax exemption for alternative fuel vehicles may be insufficient to promote widespread purchase of these vehicles by the public.  If one assumes an alternative fuel vehicle installed by the original manufacturer costs $400 to $800 more than a similar conventional fuel vehicle, in order for the difference to be offset by excise tax savings the taxable portion of the cost of the vehicle would have to be from $13,500 to $26,000 or more.  In many cases, the taxable portion of the cost (price less trade-in value) would not justify the increased cost attributable to alternative fuel equipment.

•	The lack of alternative fuel infrastructure in the state (or in other states) is probably a significant impediment to widespread acceptance of dedicated alternative fuel vehicles.  How to effectively contribute to the development of such infrastructure presents a very difficult policy challenge.  Presumably the infrastructure should develop as demand for these fuels increases and some particular alternative fuel emerges as the “industry standard”.  The demand may not develop, however, until some infrastructure is in place.