BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 974 - Steinberg
Amended: May 3, 2010
Hearing: May 12, 2010 Tax Levy Fiscal: Yes
SUMMARY: Enacts the Career Pathways Investment Credit;
Repeals TEA Criterion for Enterprise Zone Hiring
Credits, and Requires Taxpayers to Submit
Applications for Certification for All Qualified
Employees Within 21 Days of Hire Date.
I. Career Pathways Investment Credit
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.
THIS BILL enacts the Career Pathways Investment Credit
(CPIC), administered and allocated by the California
Department of Education (CDE) to qualified taxpayers to
apply against liabilities for five taxable years under the
Sales and Use Tax, Personal Income Tax, and Corporation
Tax. CDE allocates the credit to taxpayers over five
years; however, the taxpayer may apply for CPIC in the
sixth year after the first allocation of the credit.
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Taxpayers may carryover the credit until exhausted.
THIS BILL provides definitions for its terms, and
states legislative findings and declarations to support its
provisions.
Application Process:
THIS BILL states that beginning on January 1, 2011,
CDE calculates the annual CPIC ceiling, and may reserve a
portion for subsequent fiscal years. CDE shall allocate
the CPIC on a regular basis, but at least twice per year.
CDE must also establish a procedure for qualified taxpayers
to file applications for the tax credit, including
deadlines, maximum amount of CPIC ceiling, and the
approximate date of allocations. CDE may contract with
other entities to aid in the processing and review of
applications, and consult with the Treasurer and the
California Tax Credit Allocation Committee, which shall
assist CDE if requested. CDE must develop and provide forms
for the purpose of informing qualified taxpayers of the
purposes of the credit.
THIS BILL requires CDE to develop and provide forms
for use by qualified taxpayers and adopt uniform procedures
to submit and review applications. Applications must
include:
A copy of the contract or MOU between the
qualified taxpayer and the local education agency
that includes a clear and comprehensive plan for
each middle school or high school program that
creates career pathways.
Details about the strength and relevance
of the education plan to the needs of the
industry for qualified technical education
applicable to the economic development needs of
the region in which the local education agency
and partnering private entity are located.
Projections of program participant
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enrollment
The method by which accountability and
program participant enrollments and outcomes will
be maintained. Outcomes shall include pathway
completion rates, high school graduation rates,
percentages of students attaining an industry
certification, percentages of students
transitioning successfully to postsecondary
education, and employment and earnings after high
school
THIS BILL requires that the copy of the contract
submitted with the application to include a description of
the nature and value of the qualified taxpayer's support
for career exploration activities, curriculum and
professional development programs, and middle school or
high school programs that create career pathways that
integrate academic and technical learning to prepare pupils
for both college and careers, including:
Equipment and instructional materials
Employees to provide instruction in
partnership with credentialed teachers employed
by the school district, at the school site
Opportunities for pupils to be mentored
by, or to shadow employees at a partnering
private entity
Paid or unpaid internships
Paid jobs
Teacher externships
Contributions to programs administered by
postsecondary institutions that provide support
to middle or high school programs that create
career pathways. This support may include, but
shall not be limited to, teacher training,
curriculum development, and other forms of
technical assistance.
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Allocation Criteria:
THIS BILL requires CDE to prioritize CPIC allocations
to qualified taxpayers with a contract or memorandum of
understanding with a local education agency that:
Have lower unemployment rates than the
statewide average
Have lower high school graduation rates
than the statewide average
With proportions of private funding
support that exceed the one-to-one match.
Are articulated with postsecondary
certificate and degree programs
CDE must also give priority CPIC allocation to
qualified taxpayers serving socioeconomically diverse areas
to the maximum extent practicable, but shall not preference
any application based solely on the date of submission,
except to break a tie.
CDE must additionally adopt allocation criteria that
award CPIC to qualified taxpayers that demonstrate that
either the taxpayer or the local educational agency:
Provides at least a one-to-one match of
private to public investment in middle school and
high school programs that create career pathways
or similar programs.
Shows program effectiveness for preparing
students for productive, high-wage employment in
growing or high-need sectors in California.
Applicants demonstrate effectiveness by measuring
pathway completion rates, high school graduation
rates, percentages of students attaining an
industry certification, percentages of students
transitioning successfully to postsecondary
education, and employment and earnings after high
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school.
Invests, oversees, and is able to
leverage and sustain current career pathways
programs and current career technical education
programs.
Awarding the Credit:
THIS BILL directs CDE to allocate credits only to
qualified taxpayers that enter into contracts with local
education agencies to comply with the terms of the bill.
The contract shall also provide for legal action to obtain
specified performance or monetary damage for breach of
contract, including programmatic audits. Additionally, the
measure specifies that CDE certifies each qualified
taxpayer the amount of the CPIC ceiling allocated to it for
the taxable year. The certificate shall include the amount
of the credit allocation that may be distributed and
applied by the qualified taxpayer against tax liability for
each of the five taxable years.
Program Administration:
THIS BILL allows CDE to charge a fee to for submitting
applications for the CPIC ceiling in the current year or
the following year, and for monitoring the compliance of
qualified taxpayers. Fee revenues must be sufficient to
reimburse the Franchise Tax Board (FTB), and the Board of
Equalization (BOE) for each agency's administrative costs.
THIS BILL creates the CPIC Fee Account, into which all
fee revenues shall be deposited. The Legislature may
appropriate fee revenues for reimbursements above. CDE may
borrow moneys to administer the CPIC program; however, any
loan shall be repayable solely from appropriations to CDE
and do not constitute a general obligation of the state.
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THIS BILL allows CDE to prescribe rules and
regulations to carry out the program and assess the fee.
CPIC Credits:
THIS BILL allows taxpayers a credit against the
Personal Income Tax and Corporation Tax an amount equal to
CDE's allocation, commencing in taxable years on or after
January 1, 2011. Taxpayers may apply the credit over each
of the next five years as provided in the certification,
but must attach a copy of the certification provided to the
taxpayer by CDE.
THIS BILL caps the amount of credits that CDE may
award to $16 million in 2010-11 fiscal year, $65 million in
2011-12 fiscal year, and $95 million in the 2012-13 fiscal
years. Each fiscal year thereafter, FTB shall increase the
$95 million baseline amount to reflect the rate of
inflation or deflation from the previous date that the
baseline was established by measuring change in the
Consumer Price Index or other measure deemed accurate by
FTB. CDE may allocate the unused credit allocation amount
from previous years, known as the "credit ceiling."
THIS BILL allows taxpayers to also make an
irrevocable election to apply the credit to its sales and
use tax reimbursements paid and use taxes paid to a
retailer by the qualified taxpayer. Taxpayers must submit
a form prescribed by BOE on or before the date the taxpayer
would first be allowed to claim the credit against Personal
Income Tax or Corporation Tax liability that includes:
The credit amount,
The sales tax reimbursement and use taxes
paid during the taxable year for which the credit
is claimed,
A copy of the certification
THIS BILL also allows taxpayers to elect to obtain a
refund of sales and use taxes paid during the taxable year
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for which the credit is claimed. Taxpayers must file a
claim for refund with the irrevocable election described
above, and the refund amount cannot exceed the credit
amount. No interest shall be paid on the refund, but any
remaining credit amount that exceeds the refund amount may
be carried over and applied against future sales and use
taxes paid until exhausted. BOE may seek deficiency
judgments for credits erroneously claimed administratively
or judicially. BOE shall provide annual listing to CDE and
FTB of taxpayers choosing to apply the credit to sales and
use taxes.
II. Enterprise Zone Program
EXISTING LAW provides special tax incentives for
businesses located in enterprise zones (including
accelerated depreciation, 100% net operating loss
carryover, wage credits, and credits for sales tax on
equipment purchased for use in the zone). The law allows
the governing body of a city or county to request the
Department of Housing and Community Development (HCD) to
designate qualified areas as enterprise zones from
applications received from the governing bodies. Zones are
designated for 15 years with the exception of zones
designated prior to 1990 that may have their designation
period extended to 20 years.
EXISTING LAW allows four kinds of Geographically
Targeted Economic Development Areas: Enterprise Zones,
Local Agency Military Base Recovery Areas (LAMBRAs),
Manufacturing Enhancement Areas (MEAs), and Targeted Tax
Areas (TTAs). While some differences exist among the tax
incentives for each, taxpayers generally have access to
each form of preferable tax treatment. The law currently
limits the number of enterprise zones that may be
designated to 42 and HCD has currently designated either
conditionally or finally 40 zones. State law allows eight
LAMBRAs, two MEAs, and one TTA, all of which are
designated.
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EXISTING LAW allows employers inside an enterprise
zone to claim a tax credit of 50% of the wages paid to a
qualified employee in the first year, 40% in the second
year, 30% in the third year, 20% in the fourth year, and
10% in the fifth year, up to 150% of the minimum wage.
Qualified employees include individuals:
Eligible for job training programs
Eligible for most social welfare programs
Economically disadvantaged
A "dislocated worker," as defined
A disabled individual who is eligible or
enrolled in a state rehabilitation plan
Service connected veteran
Ex-offender
Member of a federally recognized Indian tribe
EXISTING LAW also allows employer to claim the
enterprise zone hiring credit for residents of Targeted
Employment Areas (TEAs) in addition to the criteria listed
above. Enterprise Zones may draw TEAs to contain census
tracts where 51% or more of the individuals are low or
moderate income, meaning 80% of the area wide, or
countywide, median. In other words, TEAs can be drawn to
include communities where only half of the residents are
actually or somewhat low-income, but qualify employers for
a tax credit for anyone living within the TEA. TEAs need
not be contiguous, and they need not be drawn within the
borders of the Enterprise Zone.
THIS BILL repeals the TEA criterion.
EXISTING LAW provides that taxpayers must obtain
certification for an employee's eligibility for the hiring
credit from the local Job Training Partnership Act Office,
the Employment Development Department, the local county
GAIN office, or the local government administering the
zone, but does not specify a deadline.
THIS BILL requires the taxpayer to obtain
certification within 21 days of the employees' commencement
date of employment. The certifying agency cannot certify
an employee whose employment commenced more than 21 days
before the taxpayer requests certification.
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FISCAL EFFECT:
If the measure is amended to incorporate the changes
in Comment G, SB 974 has no net revenue effect. Repealing
TEA and retro-vouchering provisions increase revenue by $20
million in 2010-11, $75 million in 2011-12, and $100
million in 2012-13, an amount entirely offset by granting
the CPIC.
COMMENTS:
A. Purpose of the Bill
According to the Author, "SB 974 is before the Senate
Revenue and Taxation Committee today because it establishes
a new tax credit in state law, the Career Pathways
Investment Credit. This bill reflects my priorities in tax
policy: first, that we pay for any new tax credits or
expenditure that we authorize - which is essential, given
our budget situation - and second, that we critically
evaluate the tax credit programs we already have on the
books, to make sure that are maximizing the program
benefits of our tax credits. SB 974 funds the new Career
Pathways Investment Credit by repealing two parts of the
Enterprise Zone program."
B. Not so EZ.
California's enterprise zone program, the result of
collaboration between former Assemblymembers Pat Nolan and
Maxine Waters (AB 40 and 514, 1984, respectively), has
evolved from a well-intentioned legislative effort to use
tax credits to draw investment into depressed rural and
urban areas into an almost half-billion tax credit program
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referred to as California's best economic development
program. Passionately defended by business interests and
local administrators as the state's best tool for economic
development, the program is not without detractors who
state that the program offers a poor return on the state's
investment due to its statutory design. Administered by
the Department of Housing and Community Develop (HCD),
which took over responsibility for the EZ Program from the
now-defunct Trade and Commerce Agency in 2003, the program
allows five different tax benefits for taxpayers doing
business in one of the state's 42 zones.
For many years, the program resulted in revenue losses
of less than $10 million. However, beginning in 1998, the
program began to significantly grow in cost, due largely to
an industrious cottage industry of accounting firms and tax
credit consultants that found the program could be marketed
under contingency arrangements to taxpayers who were
unaware of its generous benefits, especially the hiring
credit, which can be worth up to $37,444 to an employer
over five years if qualified wages reach the cap of 150% of
the minimum wage. Additionally, some of these accounting
firms and tax credit consultants pushed local zone
administrators to issue certifications qualifying employees
for the hiring credit using questionable interpretations of
statute and scant documentation, including
"cross-jurisdictional vouchering," where an enterprise zone
manager for one zone would certify employees employed in a
different zone, among others.
HCD's vouchering regulations eliminated or limited
many sources of abuse in 2007; however, accounting firms
and tax credit consultants unsuccessfully brought suit to
enjoin the regulations (Cyntron Payroll Solutions v.
Department of Housing and Community Development), and
attempted to disqualify the Franchise Tax Board from
auditing enterprise zone tax credits at all, arguing that
the Government Code placed local zone administrators as the
sole arbiters of whether an employee is qualified under
criteria in the Revenue and Taxation Code. The BOE
affirmed FTB's role in The Appeal of Deluxe (Dec. 12, 2006,
No. 297128) 2006 Cal. Tax Lexis 432, but FTB's authority
was subsequently weakened by the Second Court of Appeal in
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Dicon Fiberoptics v. Franchise Tax Board (Case B202997,
2009) by stating that while FTB is legally authorized to
audit EZ credits, the voucher constitutes prima facie
evidence that the taxpayer is entitled to the credit.
Enterprise zone advocates cite accounts from taxpayers
who state that they locate in California largely because of
enterprise zone program incentives, which overcome
disadvantages posed by California's tax and regulatory
system. Enterprise zone supporters state that the
incentives draw investment into economically distressed
communities and provide avenues for hard-to-hire
individuals to find employment.
At the Committee's Enterprise Zone Oversight Hearing
on March 10, 2010, the Committee from proponents and
opponents of the program. The Committee also received oral
and written testimony from several academic experts on the
subject:
Dr. Charles Swenson, whose work shows
that enterprise zones have decreased unemployment
and poverty rates in California census tracts
within zones<1>
David Neumark, whose paper states that
California's enterprise zones have no effect upon
employment and business formation in zones,<2>
and zones which have lower share of manufacturing
and where managers perform more marketing
activities have more favorable effects on
employment, and zones that devote more time to
helping firms claim tax credits eliminate any
--------------------
<1> "Government Programs Can Improve Local Labor Markets:
Evidence from State Enterprise Zones, Federal Empowerment
Zones, and Federal Enterprise Communities," by John Ham,
Ayse Imrohoroglu, and Charles Swenson, February 2009.
<2> "Do Enterprise Zones Create Jobs?" by David Neumark and
Jed Kolko, Journal of Urban Economics, June 2010
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positive benefit.<3>
Eileen Norcross of the Mercatus Center at
George Mason University, who stated that
enterprise zones have failed to produce the hoped
for benefits of economic revitalization and
robust economic growth because the policy is
discriminatory and introduces complexity and
gamesmanship into the tax code and business
decisions. Norcross recommends that the state
should instead set rules that encourage
entrepreneurship without regard to firm size or
business activity.
The Legislative Analysts' Office, which
recommends the program be eliminated or
restructured.
C. Targeted Employment Ares and Retro-Vouchering
SB 974 makes two important changes to the enterprise
zone program: repealing the targeted employment area
criterion, and ending retro-vouchering.
Targeted Employment Areas : An individual meeting any
one of the existing criteria qualify an employer in an
enterprise zone for a tax credit; however, the TEA
criterion is the only one that allows an individual to
qualify an employer for a tax credit not based on who they
are, but where they live. Zone administrators issue
vouchers based solely on residence within a zip code range
listed on his or her employment records. Enterprise Zones
draw TEAs according to census data, and anyone inside
regardless of individual economic disadvantage or barrier
of employment qualifies their employer for a tax credit.
Until AB 1550 (Lowenthal, 2006), TEAs were based on the
---------------------
<3> "Do Some Enterprise Zones Create Jobs?" by Jed Kolko
and David Neumark. Journal of Policy Analysis and
Entrepreneurship, Vol 29, No. 1, 5-38 (2010).
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census data at the time the zone was formed, not the most
recent census data available. TEA opponents state that the
criterion allows tax credits for individuals who would be
hired anyway; proponents say that TEAs are necessary
because qualifying employees under other criteria requires
invasive questioning of an employee's economic
circumstances, and encourage local hiring.
Retro-Vouchering : Under current law, taxpayers can
receive a certification qualifying an employee for an
enterprise zone hiring credit at any time. Taxpayers may
certify employees who worked for them in past years, then
submit claims for refunds for previous taxes paid to FTB
based on those certifications under California's general
four year statute of limitations for amending past returns.
Opponents of retro-vouchering state that employers are
essentially getting a check from the state for hiring done
years prior, undermining the intent of an incentive
program. In practice, retro-vouchering constitutes a
non-means tested grant program to businesses based on past
behavior. Proponents state that retro-vouchering helps
taxpayers previously unaware of tax credits get benefits to
which they're lawfully entitled, and the attendant tax
refunds can be reinvested in productive capital and
additional employees. Proponents also state that
retro-vouchering is necessary because small businesses that
hire qualified workers may not be profitable, and therefore
not have a tax liability, for several years; however, this
argument is not valid because enterprise zone hiring
credits have infinite carry-forward periods, meaning that
the taxpayer can apply the credit in any future taxable
year. SB 974 merely requires the taxpayer to seek
certification 21 says after hiring a qualified employee
instead of waiting for up to four years after the hire
date.
Taxpayers use the TEA criterion and retro-vouchering
together to check payroll records for zip codes of
employees employed in the last four years to identify
qualified employees, apply for certifications to the local
zone administrator, and then file claims for refunds with
the state. Often times, this process will be performed by
payroll companies, accounting firms, or tax credit
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consultant who are paid on contingency arrangements based
on a percentage of the taxpayer's refund amount.
D. Tax Credit in Lieu of Program Funding
SB 974 enacts the Career Pathways Investment Credit
intended to draw additional investment into career pathways
programs, where taxpayers invest individually in programs
that provide middle and high school job skills relevant to
the modern economy. Currently, taxpayers invest in these
programs because they enhance the future labor pool from
which these firms will draw, resulting in the attendant
public benefit of providing superior education and helping
enhance California's competitive advantage of an educated
workforce. SB 974 complements the existing investments in
these programs by granting a tax credit, likely leading to
increased investment in career pathways programs.
According to the Senate Education Committee, "Regional
Occupational Centers and Programs (CROCP) conducted by the
School Improvement Research Group at the University of
California, Riverside and funded by the CDE, ROCP students
improve their high school grade point averages at a greater
rate than comparison students, enroll in post-secondary
education in large numbers, earn higher wages than
comparison group peers, have more success in securing
raises and promotions on the job, prefer ROCP classes over
other subjects, and question the value and relevance of
many of their high school courses. A 2010 study conducted
by the Career Academy Support Network finds that, after
more than four decades of development and three decades of
evaluation, career academies (small learning communities
that provide a college-preparatory curriculum with a
career-related theme) have been effective in improving
outcomes for students during and after high school and
declares them a proven strategy to prepare high school
students for college and careers.
While funding career pathways programs lead to reduced
drop out rates and a more educated workforce, are tax
credits the appropriate tool to use? In a time of less
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fiscal stress, the state could provide a match of
private-sector investment or direct investments in the
program instead of the inherently inefficient means of
using the tax system to achieve policy goals.
Additionally, CPICs may be awarded to firms that would make
investments in these career pathways programs anyway
because they already see a tangible return on investment
given the success of current programs.
E. For Those About to Swap
Legislative Counsel keyed SB 974 as a majority-vote
bill because it repeals portions of one tax credit, which
increases taxes, and grants a new tax credit, that fully
offsets the revenue gained from the repealed portions. The
Legislative Counsel key serves as an interpretation of that
office regarding the meaning of Section 3 of Article XIIA
of the State Constitution, which states that "any changes
in state taxes for the purposes of increasing revenues
collected pursuant thereto whether by increased rates or
changes in method of computation" must be approved by 2/3
vote of each house of the Legislature. However, no statute
or case law exists that provides any clarity about what the
passage actually means. The Legislature has enacted two
measure this year by majority vote that increased some
taxes whilst decreasing others, SB 401 (Wolk) the federal
tax conformity bill, and ABx6 6 (Committee on Budget) which
eliminated the sales tax on gasoline but commensurately
increased the gasoline excise tax, but neither has yet been
challenged on the basis that the Constitution required a
2/3 vote for the bills. While the Legislative Counsel key
allows the Legislature to enact "revenue neutral tax swaps"
today by majority vote, the Legislature should proceed with
caution because a Court could subsequently interpret the
Constitution in a way that conflicts with Legislative
Counsel's determination.
F. Join the Party
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Enterprise Zones are but one of four kinds of
Geographically Targeted Employment Area. State law allows
almost identical tax credits for employers in Manufacturing
Enhancement Areas, Local Agency Military Base Recovery
Areas, and Targeted Areas. SB 974 only affects Enterprise
Zones, but leaves the others out. Other than having to
change six other parts of statute (a personal income tax
and corporation tax section for each), thereby pushing the
bill's length to around 100 pages, is there a good reason
to allow TEAs and retro-vouchering for these areas but not
EZs? The Committee may wish to consider amending the
measure to ensure consistency in the law.
G. Squaring the Circle
To achieve revenue neutrality, SB 974 must be amended
in the following ways:
Eliminate the sales and use tax credit provisions;
Revise the annual allocation to $78 million in year
1, and $100 million thereafter;
Define the allocation period as a calendar year
versus a fiscal year;
Eliminate the 5 year spread for applying the credit
(allow the entire allocated credit in the year of
allocation);
H. Suggested Amendment
Committee Staff recommend the following additional
amendments:
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Specify that CDE shall allocate the credit on Page
6, Line 2
Delete all references to "Committee."
Replace references to "qualified taxpayer" to
applicant in sections detailing the application
process.
Replace the prohibition on zones certifying tax
credits after 21 days with 28 days to account for
changes to the federal Work Opportunity Tax Credit.
Extend the time for taxpayers to obtain a credit
from 21 days to 42 days to allow sufficient time for
zones to verify eligibility documentation.
Committee Staff and FTB recommend additional
amendments:
For purposes of eliminating retro-vouchering,
clarify that the bill applies to employees hired after
January 1, 2011.
Require the taxpayer to provide FTB with the CPIC
certification from DOE upon request.
Instead of requiring all taxpayers to submit the
CDE certificate to FTB, direct CDE to annually provide
FTB with a list of certified CPIC taxpayers and the
relevant taxpayer identification numbers.
Replace Revenue and Taxation Code references to
"taxable year" with "fiscal year."
Support and Opposition
Support:California Association of Regional
Occupational Centers and Programs, California Association
of School Business Officials
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Oppose:California Association of Enterprise Zones,
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Consultant: Colin Grinnell