BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 15XXX|
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THIRD READING
Bill No: AB 15XXX
Author: Krekorian (D)
Amended: 2/14/09 in Senate
Vote: 21
WITHOUT REFERENCE TO COMMITTEE
ASSEMBLY FLOOR : Not available
SUBJECT : State budget: revenue and tax provisions
SOURCE : Author
DIGEST : Senate Floor Amendment s of 2/14/09 deletes the
prior version of the bill expressing the intent of the
Legislature to make statutory changes relating to the
Budget Act of 2008.
This bill now provides the necessary statutory changes to
provide fiscal stimulus through changes in taxation.
ANALYSIS : This bill enacts the fiscal stimulus revenue
provisions of the 2009-10 Special Session Budget Agreement.
Specifically, this bill:
1. Provides a tax incentive to small businesses to hire
full-time employees. This bill, for taxable years
beginning on or after January 1, 2009, allows a
qualified employer to claim an income tax credit of
$3,000 for each additional full-time employee hired by
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the employer during the taxable year. The credit will
be available through the 2010 tax year, subject to a
cap, as explained below. The amount of credit is
prorated if the employee works fewer than 12 months
during the employer's tax year. The credit is only
available to a business that has 20 or fewer employees
on the first day of the taxable year. The credit is
allowed only if it is claimed by the employer on a
timely filed original return received by the Franchise
Tax Board (FTB) on or before any cut-off date
established by the FTB. The cut-off date for claiming a
credit will be the last day of the calendar quarter
within which the FTB estimates that the aggregate amount
of credit claimed pursuant to this bill, under both the
Personal Income Tax and the Corporation Tax laws, will
have reached $400 million. The FTB is required to
notify taxpayers periodically by posting a notice on its
website regarding the amount of the credit claimed on
returns received by the board. Credits claimed for 2009
and 2010, or prior to the cut-off date if one is
established, that exceed the qualified employer's tax
liability in that year, may be carried over to reduce
the tax in the following eight taxable years, if
necessary.
2. Allows most multi-state businesses to apportion income
to California using only their percentage of sales in
California as an alternative to using the current
apportionment methodology, which averages a business's
proportion of sales, property, and payroll in California
(with the sales factor double-weighted). This provision
will be effective starting in tax year 2011 and is
permanent. Businesses that derive more than 50 percent
of their gross receipts from agriculture, extractive
business, savings and loans, or banks and financial
activities currently are limited to a single-weighted
sales factor and will continue to use three-factor
apportionment. The ability to apportion based solely on
the sales factor will reduce California taxes for firms
with significant employment and property in the state,
but most of whose sales are outside the state. The
estimated annual revenue loss will be approximately $700
million, eventually growing to $1.5 billion. The
measure also includes the following provisions necessary
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to clarify and appropriately apply apportionment of
business income using only sales:
A. Economic Nexus . Since sales is the easiest factor
for firms to manipulate for tax purposes (by choosing
the location of the transaction or setting up shell
buyers, for example). The bill amends Revenue and
Taxation Code Section 23101 to clarify and specify
that companies that operate in the state or make
sales in the state are doing business in California
and subject to California tax. The amendment also
includes de minimus exemptions. However, because of
federal law, nexus does not currently, and would not
under this measure, extend to companies whose only
connection is that they sell tangible property in the
state.
B. Clarifies the Term Gross Receipts . As used in the
calculation of the sales factor, this term will
include all gross amounts received for goods or
services, or for use of property to produce business
income, but will explicitly exclude purely financial
corporate transactions (such as corporate Treasury
function or hedging transactions to reduce the
taxpayer's risk on its own operations).
C. Clarifies Treatment of Unitary Groups . Requires
the sales factor to include all sales of a unitary
group (the Finnegan rule) and to include sales of the
group that are not subject to apportionment to any
other state (known as the "throwback" rule). This
prevents gaming by structuring sales among related
entities or manipulating the location of sales to
places without tax.
D. Apportions Sales of Services Based on the Extent
of Benefit Provided in California . This provision
provides fair treatment of companies that provides
accounting, engineering, or any other services.
Currently, the location at which the service is
performed is used in the calculation of the sales
factor. The bill also provides similar treatment for
sales of intangible property.
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3. Establishes a motion picture production tax credit. The
bill requires the California Film Commission (CFC) to
administer a motion picture production tax credit
allocation and certification program.
A. Qualifying taxpayers would claim the credit on
their tax return filed with the FTB under either the
Personal Income Tax or Corporation Tax. Taxpayers
will first apply to the CFC for a credit allocation,
based on a projected project budget. Upon receiving
an allocation, the project must be completed within
30 months. The taxpayer must then provide the CFC
with verification of completion and documentation of
actual qualifying expenditures. Based on that
information, the CFC will issue the taxpayer a credit
certificate up to the amount of the original
allocation.
B. The tax credit is equal to 20 percent of the
qualified expenditures attributable to the production
of a qualified motion picture, or 25 percent of the
qualified expenditures attributable to the production
of a television series that relocated to California,
or an independent film, which is defined as a film
with a budget between $1 million and $10 million
produced by a non-publicly traded company which is
not more than 25 percent owned by publicly traded
companies. Qualified motion pictures must be
produced for general distribution to the public, and
include feature films with budgets between $1 million
and $75 million; Movies of the Week with a minimum
budget of $500,000, and new television series with a
minimum production budget of $1 million. To be
eligible, 75 percent of the production days must take
place within California or 75 percent of the
production budget is incurred for payment for
services performed within the state and the purchase
or rental of property used within the state. The
credit would not be available for commercial
advertising, music videos, motion pictures for
noncommercial use, news and public events programs,
talk shows, game shows, reality programming,
documentaries, and pornographic films.
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C. The bill specifies that the commission will
allocate $100 million of credit authorizations each
year during the period 2009-10 through 2013-14 on a
first-come, first-served basis, with 10 percent of
the allocation reserved for independent films. Any
unallocated amounts and any allocation amounts in
excess of certified credits may be carried over and
reallocated by the commission.
D. Taxpayers may use certified credits in a number of
ways. They may claim it directly, they may assign it
to another member of their unitary group, they may
sell the credits to other taxpayers, or they may
elect to apply the credit against their sales and use
tax liability.
Comments
Small business jobs credit . Existing state law provides
four distinct programs offering tax incentives to taxpayers
that employ qualified individuals within geographically
targeted economic development areas (Enterprise Zones,
Local Agency Military Base Recovery Areas, Manufacturing
Enhancement Areas, and Targeted Tax Areas). Specifically,
state law provides employers a hiring credit equal to 50
percent of qualified wages in the first year of employment,
40 percent in the second year, 30 percent in the third
year, 20 percent in the fourth year, and 10 percent in the
fifth year. Federal law, in turn, provides a "work
opportunity credit" for wages paid by employers who hire
from certain targeted groups of hard-to-employ individuals.
Generally, the federal credit is equal to 40 percent of
the first $6,000 in qualified wages paid to each member of
a targeted group during the first year of employment.
This bill creates a temporary tax credit of $3,000 for each
new full-time job created by a business with 20 or fewer
employees. In this way, it differs significantly from the
state hiring credits described above. First, the proposed
credit is specifically limited to small businesses (those
with 20 or fewer employees). Second, the credit is
available statewide and is not limited to employers located
in specific geographic regions. Third, the credit is not
contingent upon hiring employees from certain targeted
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groups. Finally, the credit is specifically tied to net
job creation. Proponents of similar hiring credits argue
that the credits promote economic development by
encouraging businesses to hire. Opponents, on the other
hand, argue that these credits have little or no impact on
hiring decisions and simply provide a tax break for hiring
individuals that would be hired without the credit, while
failing to address the issue of job retention.
Business Income Apportionment . California may only tax a
portion of the income earned by businesses that also
operate in other states (or nations) in addition to
California. That amount is determined by an apportionment
formula. California currently uses a three-factor formula
that is based on the proportion of a company's sales,
payroll, and property that is located in California. For
example, if one-third of a company's sales, one-third of
its payroll, and one-third of its property are in
California, then one-third of its total earnings are
subject to California Corporation Tax.
Double-Weighted Sales Factor . For most types of
businesses, the sales factor is double-weighted-given twice
the importance of the other two factors. For example,
assume that a company has 75 percent of its property and of
its payroll in California, but only makes 10 percent of its
sales in this state. Under equal weighting of the three
factors, 53.3 percent of this company's income would be
subject to California tax, but the double-weighted sales
factor reduces this to 42.5 percent. Double-weighting of
the sales factor does not apply to businesses in
agriculture, extractive industries (e.g., oil and as
producers), or banks or other financial businesses.
Companies with substantial employment and facilities in
California, but which primarily sell their products
nationally or internationally argue that the current
apportionment method penalizes them for expanding in
California by increasing their California tax
apportionment, but rewards them for expanding outside the
state because doing so reduces their California property
and payroll factors without necessarily changing their
sales factor. In particular, California high-tech and
biotech companies have made this argument. The argument
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has gained weight as approximately 20 other states have
converted to using sales as the only apportionment factor
(called the "Single Sales Factor" approach).
This bill addresses the issue by establishing sales as the
sole apportionment factor (Single Sales Factor) for
California. The change would be effective starting with
the 2011 tax year. This change will reduce taxes for
companies that have significant payroll and facilities in
California, but make the bulk of their sales outside the
state. Companies doing business only in California will
see no change in their taxes. Companies that have few
employees or facilities in California, but that make
substantial sales here will pay more tax. The overall
impact will be a revenue loss to the General Fund. Over
time, proponents would argue, this loss may be offset by
additional revenue from employment and property due to
improved business retention, expansion, and location in the
state. Approximately 20 states have now adopted
single-sales-factor apportionment (or something similar).
The motion picture production credit language includes a
provision that any reduction in the $100 million annual
credit authorization provided to the CFC shall be deemed a
tax increase under Article XIIIA of the California
Constitution.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
As shown in the table below, this bill will result in an
estimated General Fund revenue loss of $2.1 billion over
the five-year period from 2008-09 through 2012-13, with
additional and growing losses in subsequent years.
Revenue Impact of AB 15XXX
(Millions of dollars)
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|Tax Provision | | | | | | |
| |Effective |2008-09 |2009-10 |2010-11 |2011-12 |2012-13 |
| |Date | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
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|Elective |Permanent | $0| $0| -$225| -$700| -$750|
|single sales |beginning in | | | | | |
| |tax year 2011 | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|Film credit |Allocated | $0| $0| -60| -175| -120|
| |2009-10 | | | | | |
| |through | | | | | |
| |2013-14, | | | | | |
| |claimed | | | | | |
| |beginning in | | | | | |
| |2011 tax year | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|Hiring credit |Tax years | -15| -330| -50| -25| -15|
| |2009 and 2010 | | | | | |
|--------------+--------------+--------------+--------------+--------------+--------------+--------------|
|Total | | -$15| -$330| -$335| -$900|-$885 |
| | | | | | | |
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To the extent that these tax provisions have positive
effects on employment and investment, a portion of these
revenue losses may be offset.
DLW:mw 2/14/09 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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