BILL ANALYSIS Senate Appropriations Committee Fiscal Summary Senator Christine Kehoe, Chair 974 (Steinberg) Hearing Date: 05/27/2010 Amended: 05/19/2010 Consultant: Dan Troy Policy Vote: ED 8-0, Rev & Tax 3-1 _________________________________________________________________ ____ BILL SUMMARY: SB 974 would eliminate an existing Enterprise Zone (EZ) hiring tax credit and establish a new Career Pathways Investment Credit (CPIC) administered by the California Department of Education (CDE) to business entities that partner with local education agency (LEA) programs to develop and support career pathways, as specified. _________________________________________________________________ ____ Fiscal Impact (in thousands) Major Provisions 2010-11 2011-12 2012-13 Fund Hiring credit changes ($20,000) ($75,000) ($100,000)General New CPIC credit $20,000 $75,000 $100,000 General CDE regs & startup $150 to $225, repaid in future fiscal year General by CPIC applicant fees FTB administration Initial costs unknown, ongoing costs General covered by CPIC applicant fees Staff notes that the bill authorizes CDE to charge a fee on CPIC applicants that is reasonably sufficient to cover CDE and FTB administrative costs. It is unclear whether an appropriate fee level can be established to fully offset costs to develop and administer the CPIC program. Initial costs would be paid from the General Fund until sufficient fees are collected to reimburse CDE for startup costs. _________________________________________________________________ ____ STAFF COMMENTS: SUSPENSE FILE. Current law provides various tax credits in order to incentivize certain behaviors. To this end, current law provides special tax incentives (e.g., wage credits, accelerated depreciation, etc.) for businesses located in enterprise zones, as specified. Local governments may request the Department of Housing and Community Development to designate areas as enterprise zones (EZ), with the intention of encouraging business investment into depressed areas. These areas are capped statewide at 42 and tax credits from the program total close to $500 million, annually. Included among the EZ incentives is a Targeted Employment Area (TEA) wage credit for the employment of residents in a targeted area within the EZ. These TEAs cover census tracts where at least 51 percent of the residents are low or moderate income, as defined. While other EZ wage credits are awarded for the employment of individuals that qualify due to personal experiences or circumstances (e.g., military veterans, individuals eligible for job training or public assistance, dislocated workers, etc.), the TEA credit awards wage credits based on a qualifying employee's zip code. Page 2 SB 974 (Steinberg) 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 the Franchise Tax Board (FTB) based on those certifications under California's general four year statute of limitations for amending past returns. This is sometimes referred to as retro-vouchering. This bill would eliminate the TEA wage credit and require applications for certification for qualified employees be submitted to a certifying agency within 28 days and obtained from the certifying agency within 42 days of the employee's first day of work for the qualified taxpayer. This bill would also establish the Career Pathways Investment Credit (CPIC) to be administered by the Department of Education (CDE). The CPIC is intended for allocation to businesses that partner with local education agencies to support the development and implementation of career pathways programs, defined as instructional programs provided by high schools, alternative schools, county offices of education, or public other schools that integrate academic and technical learning to prepare pupils for both postsecondary instruction and careers in high-growth or high-need sectors of the economy. For calendar years beginning on or after January 1, 2011, CDE would be required to: 1) Determine and allocate the investment credit ceiling, as specified. 2) Allocate the credit on a regular basis consisting of two or more periods in a calendar year in which applications may be filed or considered. 3) Establish a procedure for applicants to file an application for the allocation of the tax credit and establish application filing deadlines. 4) Give priority in allocating the credits to applicants that have entered into a memorandum of understanding (MOU) or contract with an LEA that meets specified criteria including specified unemployment and high school graduation rates, or serving of socioeconomically diverse student populations. 5) Adopt allocation criteria that award credits to applicants that demonstrate specified elements in their application, including the provision of a one-to-one match of private to public investment in programs that create career pathways and the effectiveness of the program toward preparing students for productive, high-wage employment. 6) Develop and provide forms to describe the purpose of the credit and certify the amount of the allocated tax credits. 7) Develop an application that requires the submission of the contracts or MOUs that would include the career pathways plan, a description of the applicant's support (e.g., equipment, employees to provide instruction in partnership with credentialed teachers, internships, etc.), contributions to postsecondary institutions that provide teacher training or other support to high schools or middle schools that provide career pathways, and the method by which program accountability will be maintained. Page 3 SB 974 (Steinberg) The bill specifies that the aggregate amount of credits that may be allocated in a calendar year are $78 million in 2011, $100 million in 2012 (baseline), with the baseline thereafter increased by the rate of inflation or deflation, as measured by the Consumer Price Index or other method which the FTB deems reliable. Successful applicants would receive a certification from CDE for use as a credit against the taxpayer's net corporate or personal income tax. The bill allows any excess credits to be carried over to reduce the net tax in any subsequent year. The bill would authorize CDE to prescribe rules and regulations to implement CPIC and to consult with the Treasurer and the California Tax Credit Allocation Committee regarding the allocation of tax credits. CDE would also be authorized to impose a fee on applicants sufficient to carry out the costs of administering the program. CDE would be further authorized to borrow funds for the purpose of meeting necessary administrative. According to the FTB, repealing the TEA and retro-vouchering provisions increase revenue by $20 million in 2010-11, $75 million in 2011-12, and $100 million in 2012-13. These amounts would be entirely offset by granting the CPIC, so the credit provisions of the bill would be revenue neutral. CDE reports initial administrative costs of between $150,000 and $225,000 to establish the program. These costs would ultimately be recovered through applicant fees. Also, the FTB indicates that it would also incur administrative costs, though no estimate has yet been provided. These administrative costs would also be covered by applicant fees. While the bill defines aggregate annual credit amounts, staff notes that the bill does not establish a clear manner for determining a qualifying credit amount for an individual CPIC applicant. Should this determination by left to CDE regulations?