BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 15 X3
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          (  Without Reference to File  )

          AB 15 X3 (Krekorian)
          As Amended  February 14, 2009
          Majority.  Tax levy
          |ASSEMBLY:  |     |(January 12,    |SENATE: |     |February 14,   |
          |           |     |2009)           |        |     |2009           |
               (vote not relevant)                (vote not available)
           Original Committee Reference:    RLS.
           SUMMARY  : Enacts the fiscal stimulus revenue provisions of the  
          2009-10 Special Session Budget Agreement. 

           The Senate amendments  delete the Assembly version of this bill,  
          and instead:

          1)Provide a temporary 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 the employer during the taxable  
            year. The credit will be 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 the 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 prior to the cut-off date, 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.


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          2)Allow 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% 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.  This measure  
            also includes provisions that 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 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)   Clarify 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)   Clarify 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  


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               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; and

             d)   Apportion 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 measure also provides  
               similar treatment for sales of intangible property.

          3)Establish a motion picture production tax credit. The measure  
            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 Franchise Tax Board (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% of the qualified  
               expenditures attributable to the production of a qualified  
               motion picture, or 25% 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% 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% of the production days must take place  
               within California or 75% of the production budget is  


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               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;

             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% of the allocation reserved for  
               independent films. Any unallocated amounts and any  
               allocation amounts in excess of certified credits may be  
               carries over and reallocated by the commission; and, 

             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.  

          4)  Take immediate effect as a tax levy.

           FISCAL EFFECT  : As shown in the table below, this bill would  
          result in an estimated General Fund revenue loss of $2.5 billion  
          over the five-year period from 2008-09 through 2012-13, with  
          additional and growing losses in subsequent years.

          Revenue Impact of SB 15 X3
          (Millions of dollars)

          |  Tax   | Effective |2008-0|2009-1|2010-11|2011-12|2012-1|
          |Provisio|   Date    |9     |0     |       |       |3     |
          |   n    |           |      |      |       |       |      |
          |Elective|Permanent  |    $0|    $0|   -$50|  -$650| -$750|
          | single |beginning  |      |      |       |       |      |
          |sales   |in tax     |      |      |       |       |      |
          |        |year 2011  |      |      |       |       |      |
          |Film    |Allocated  |      |      |    -60|   -175|  -120|
          |credit  |2009-10    |      |      |       |       |      |


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          |        |through    |      |      |       |       |      |
          |        |2013-14,   |      |      |       |       |      |
          |        |claimed    |      |      |       |       |      |
          |        |beginning  |      |      |       |       |      |
          |        |in 2011    |      |      |       |       |      |
          |        |tax year   |      |      |       |       |      |
          |Hiring  |Tax years  |   -15|  -330|    -50|    -25|   -15|
          |credit  |2009 and   |      |      |       |       |      |
          |        |2010       |      |      |       |       |      |
          |Total   |           |  -$15| -$330|  -$160|  -$850|-$885 |
          |        |           |      |      |       |       |      |

          To the extent that these tax provisions have positive effects on  
          employment and investment, a portion of these revenue losses may  
          be offset.

           COMMENTS  :

          1)Small business jobs credit.

             a)   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% of qualified wages  
               in the first year of employment, 40% in the second year,  
               30% in the third year, 20% in the fourth year, and 10% 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% of the first  
               $6,000 in qualified wages paid to each member of a targeted  
               group during the first year of employment. 

             b)   This measure 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  


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               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  
               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. 
          2)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.

             a)   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% of its property and of its  
               payroll in California, but only makes 10% of its sales in  
               this state.  Under equal weighting of the three factors,  
               53.3% of this company's income would be subject to  
               California tax, but the double-weighted sales factor  
               reduces this to 42.5%.  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.

             b)   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  


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               biotech companies have made this argument. The argument has  
               gained weight as approximately 20 other states have  
               converted to using sales as the only apportionment factor  
               (called the "Single Sales Factor" approach).

             c)   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. Around 20  
               states have now adopted single-sales-factor apportionment  
               (or something similar).

          3)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.

           AS PASSED BY THE ASSEMBLY  , this bill expressed the intent of the  
          Legislature to make statutory changes relating to the Budget Act  
          of 2008.

           Analysis Prepared by:  Daniel Rabovsky / BUDGET / (916) 319-2099

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