BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 508 - Dutton
Amended: May 5, 2009
Hearing: May 13, 2009 Tax Levy Fiscal: Yes
SUMMARY: Enacts a Tax Credit to Employers for Wages Paid
to Veterans, Parolees, a Person on Probation, and
Individuals who Received Unemployment of CalWORKs
Benefits
EXISTING LAW provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
EXISTING LAW provides special tax incentives for
taxpayers located in enterprise zones and other
geographically targeted economic development areas
(GTEDAs), including:
An income or corporate tax credit equal
to 50% of an employee's wages in the first year
of employment, up to 150% of the minimum wage,
for employees meeting specified criteria,
diminishing by 10% of wages each year until
expiring after the fifth year of employment. The
credit is not refundable, but may be carried
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forward.
An income or corporate tax credit on the
sales and use tax paid on qualified equipment in
the year the equipment was purchased. For
personal income taxpayers, the credit may be
taken on sales tax paid on qualified equipment
with a cost up to $1,000,000 that year. For
corporate taxpayers, the credit may be taken on
sales tax paid on qualified equipment with a cost
up to $20,000,000 that year. The credit is not
refundable, but may be carried forward.
A credit for lenders equal to the net
interest on loans made to taxpayers doing
business in an enterprise zone.
Net operating losses (NOLs) and business
expense deductions, although the Legislature
enacted these benefits before providing enhanced
NOLs and business expense deductions for all
taxpayers, so now these benefits afford taxpayers
less benefits than taxpayers outside the zone.
THIS BILL enacts a new tax credit for taxpayers for
hiring a qualified employee beginning in the 2009 tax year.
Taxpayers inside or outside a geographically targeted
economic development area may claim the credit. A
qualified employee is a CalWORKs recipient, a parolee, a
person on probation, a veteran, or a person who previously
received unemployment benefit. The taxpayer may claim a
credit equal to:
25% of wages paid or incurred by the
taxpayer during the taxable year for each
qualified employee who worked between 125 and 400
hours during the taxable year.
40% of wages paid or incurred by the
taxpayer during the taxable year for each
qualified employee who worked at least 400 hours
in the taxable year.
THIS BILL provides that the credit applies only to the
first $6,000 in wages, and the taxpayer may carry over the
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credit to future tax years; however, the taxpayer must
apply the credit to the earliest tax years possible.
Taxpayers must reduce deductions by the amount of the
credit. Taxpayers must receive a certification from the
Employment Development Depart that the employee is eligible
for the credit, and must retain a copy of the certification
and provide it upon request to the Franchise Tax Board
(FTB). The measure also applies provisions of law to limit
a taxpayer from double-claiming the credit or sharing a
credit within the commonly controlled group, determine
proportional shares of a credit by using each taxpayer's
share of wage expenses, and clarifying eligibility when
another employer acquires a firm but the employee keeps his
or her job.
FISCAL EFFECT:
According to FTB, SB 508 results in revenue losses of
$1.5 million in 2009-10, $1.9 million in 2010-11, and $2.5
million in 2011-12.
COMMENTS:
A. Purpose of the Bill
According to the author: California, like the rest of
the nation, is in the midst of a severe economic downturn.
The latest unemployment rate is 10.1%, the highest it has
been in over a decade, and economists estimate that in
2009, economic output will fall for the first time since
1991. Something needs to be done to stimulate economic
growth and get California out of this viscous economic
cycle.
Establishing the Work Opportunity Tax Credit (WOTC)
Program will not only stimulate the economy, but it will
also help the state's budget, as it will reduce state
expenditures for CalWORKs and unemployment benefits, while
increasing revenues as previously unemployed persons become
taxpayers
SB 508 - Dutton Page 5
B. Tax Expenditures
California foregoes nearly $50 billion in revenue each
year due to tax expenditures. While some are as American
as apple pie, such as the exclusion from income for pension
contributions and social security benefits, others are
subsidies for other types of economic behavior deemed
preferable by the Legislature, such as the mortgage
interest deduction to spur homeownership, the research and
development credit to stimulate high-paying jobs and new
exciting consumer products and services, and Geographically
Targeted Economic Development Area credits to help
hard-to-hire employees and businesses in economically
distressed areas. Tax expenditures evoke passionate and
complicated debates, chiefly regarding whether state
legislative action to forego tax revenues from specified
taxpayers provides superior benefits than commensurate
direct spending programs or general tax reductions. One
of America's top state and local tax scholars, Richard
Pomp, suggests evaluating tax expenditures as such,
stating:
"A tax expenditure can be viewed as if the taxpayer
actually paid the full amount of tax owed in the
absence of the special provision and simultaneously
had received a grant equal to the savings provided by
the special provision ? a tax expenditure is just one
of a number of ways of providing governmental
assistance and should be reexamined periodically using
traditional budgetary and funding criteria"<1>
SB 508 seeks to expand opportunities for hard-to-hire
individuals by allowing a tax credit for employers hire
individuals who are either veterans, parolees, or recently
received public assistance. The state already invests
toward these goals, such as job-training programs, welfare
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<1> Pomp, Richard D. "Rethinking State Tax Expenditure
Budgets," in Public Budgeting and Financial Management
5(2), 337-351 (1993).
SB 508 - Dutton Page 5
to work programs, and GTEDA tax credits. Are these
programs effective? Why or why not? How will SB 508
complement existing efforts, or should it supplant these
programs because tax credits will better accomplish public
goals? The Committee may wish to consider the efficacy and
efficiency of existing efforts of federal, state, and local
agencies to assist the targeted population obtain
employment before further straining its finances by
allowing a credit that may be duplicating current programs.
Quite different from direct spending measures, the
Legislature may only limit, reduce, or eliminate tax
credits by 2/3 vote of each house of the Legislature, the
Committee may wish to consider a sunset provision for SB
508, and subsequently inserting a sunset should the measure
advance from the Committee's suspense file.
C. Kind of Like Enterprise Zones But Not
California's GTEDA program allows the Department of
Housing and Community Development (HCD) to designate 42
enterprise zones for fifteen year terms, two manufacturing
enhancement areas, one targeted tax area, and eight Local
Area, Military Base Reuse Agencies, where employers within
the designated area may claim hiring credits, and sales and
use tax credits, and banks may claim deductions on the net
interest of loans made in the area. Proponents of the
program point to studies showing that census tracts within
enterprise zones showed lower unemployment and poverty
rates compared to tracts without zones,<2> while critics
point to research showing that larger businesses benefit
mostly from tax credits, and the program does not increase
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<2> Imrohoroglu, Ayse, and Swenson, Charles. Do Enterprise
Zones Work? Department of Finance and Business Economics,
Marshall School of Business, University of Southern
California, February, 2007.
SB 508 - Dutton Page 5
employment.<3> Others state that enterprise zones cover
more than impoverished areas, taxpayers abuse the program,
and that businesses that apply tax credits do not hire hard
to employ individuals.<4>
SB 508 borrows eligibility criteria from the
enterprise zone program, but allows the credit for any
business in the state that employs a qualified employee.
The bill's tax credits are also much smaller, applying only
to the first $6,000 in wages whereas GTEDA credits are 50%
wages in the first year (less 10% for every year thereafter
ending in the fifth year of employment) and may be claimed
on wages up to 150% of the minimum wage, around $20,000.
Taxpayers must also receive a certification; however, in
GTEDAs, taxpayers apply to the zone administrator, and SB
508 gives EDD this responsibility. In both cases,
taxpayers have unlimited amounts of time to claim the
certification, which allows them to claim credits for wages
paid to employees hired in past years, although SB 508
credits would not apply for wages paid to employees before
the 2009 tax year. Additionally, SB 508 allows employers
within an enterprise zone to claim this credit in addition
to GTEDA credits. Should the measure advance from the
suspense file, the Committee may wish to consider setting a
deadline for taxpayers to obtain certification to ensure
that taxpayers are changing decision making based on the
credit, instead of receiving a retroactive reward, and
requiring employers to choose between a GTEDA credit and an
SB 508 credit.
D. Suggested Amendments
To ensure that only wages of California workers apply
------------------------
<3> Neumark, David and Kolko, Jed. Do Enterprise Zones
Create Jobs? Evidence from California's Enterprise Zone
Program National Bureau of Economic Research, Working
Paper 14530 (2008)
<4> California Budget Project. California Enterprise Zones
Miss the Mark (2006)
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toward the credit, FTB suggest the following amendments:
On page 2, after line 22 insert:
(3) "Wages" means the amount of wages subject to Chapter 6
(commencing with 13000) of Part 6 of Division 6 of the
Unemployment Insurance Code.
On page 3, line after line 31, insert:
(3) "Wages" means the amount of wages subject to Chapter 6
(commencing with 13000) of Part 6 of Division 6 of the
Unemployment Insurance Code.
Support and Opposition
Support:Metal Finishing Association of Southern
California
Metal Finishing Association of Northern
California
California Probation, Parole, and Correctional
Association-If Amended
California Small Business Association
Oppose:California Tax Reform Association
California School Employees Association
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Consultant: Colin Grinnell
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