BILL ANALYSIS ------------------------------------------------------------ |SENATE RULES COMMITTEE | SB 1391| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ UNFINISHED BUSINESS Bill No: SB 1391 Author: Yee (D) Amended: 8/20/10 Vote: 21 SENATE REVENUE & TAXATION COMMITTEE : 3-1, 5/12/10 AYES: Wolk, Alquist, Padilla NOES: Ashburn NO VOTE RECORDED: Walters SENATE APPROPRIATIONS COMMITTEE : 6-3, 5/24/10 AYES: Kehoe, Alquist, Corbett, Leno, Wolk, Yee NOES: Cox, Walters, Wyland NO VOTE RECORDED: Denham, Price SENATE FLOOR : 22-11, 6/3/10 AYES: Alquist, Calderon, Cedillo, Corbett, DeSaulnier, Ducheny, Florez, Hancock, Kehoe, Leno, Liu, Lowenthal, Negrete McLeod, Padilla, Pavley, Price, Romero, Simitian, Steinberg, Wolk, Wright, Yee NOES: Aanestad, Ashburn, Cogdill, Correa, Denham, Dutton, Harman, Hollingsworth, Strickland, Walters, Wyland NO VOTE RECORDED: Cox, Huff, Oropeza, Runner, Wiggins, Vacancy, Vacancy ASSEMBLY FLOOR : Not available SUBJECT : Income tax: business tax incentives SOURCE : California Nurses Association CONTINUED SB 1391 Page 2 DIGEST : This bill requires a taxpayer claiming a new business tax incentive to report annually, for taxable years beginning on or after January 1, 2011, the number of employees employed by the taxpayer in the state for the current and preceding taxable years. Provides that the new business tax incentive may be recaptured by the state if the taxpayer has a "net decrease" in the number of full-time equivalent employees, as specified. Assembly Amendments delete from the Senate version of the bill provisions which made Legislative Counsel key the bill as a tax levy. ANALYSIS : 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 disallows certain credits that reduce taxes if the taxpayer fails to achieve specified employment requirements. This bill: 1. Requires a taxpayer doing business in the state claiming any new business tax incentive, as specified, under either the Personal Income Tax Law or the Corporation Tax Law to include annually, for tax years beginning on or after January 1, 2011, on the timely filed original return, in the form and manner prescribed by the Franchise Tax Board (FTB), the number of full-time employees, part-time employees, and temporary employees, as defined, employed by the taxpayer in the state for the current and preceding taxable years. 2. Exempts from these reporting requirements taxpayers with 25 or fewer employees that have net business income, as SB 1391 Page 3 defined, of less than $500,000 for the taxable year. 3. Applies only to a business tax incentive that is allowed by an act that takes effect beginning on or after January 1, 2011, and is enacted with the purpose of creating new jobs in the state. 4. Provides that, if a "disqualifying event" occurs before the close of the "recapture period," the business tax incentive claimed by the taxpayer will be subject to recapture and the "recapture amount" will be added to the taxpayer's taxable income or tax, as specified, with interest. 5. Defines "disqualifying event" as a net decrease in the number of full-time equivalent employees, calculated as of the last day of the current taxable year. 6. Defines" recapture period" as the first full taxable year beginning after the close of the taxable year in which the business tax incentive reduces either the taxpayer's taxable income or tax, plus four succeeding taxable years. 7. Defines "recapture amount" as an amount computed by multiplying the amount of business tax incentive allowed to the taxpayer in the current tax year, plus any amount previously allowed in prior taxable years, by a fraction, the numerator of which is the net decrease in full-time equivalent employees and the denominator of which is the cumulative increase in the full-time equivalent employees, as specified. Excludes from the calculations any previously recaptured amounts. 8. Specifies that the "net decrease" in full-time equivalent employees shall be determined, on and after January 1, 2014, by subtracting the total number of full-time equivalent employees employed by the taxpayer in the current taxable year from the average number of full-time equivalent employees employed by the taxpayer during the three preceding taxable years. The average number is calculated by dividing the total number of full-time equivalent employees in the three preceding taxable years by three. Excludes from these SB 1391 Page 4 calculations employees who were employed in any trade or business sold by a taxpayer. 9. Defines "full-time equivalent" as either of the following: A. In the case of a full-time employee paid hourly qualified wages, "full-time equivalent" means the total number of hours worked for the taxpayer by the employee (not to exceed 2,000 hours per employee) divided by 2,000. B. In the case of a salaried full-time employee, "full-time equivalent" means the total number of weeks worked for the taxpayer by the employee divided by 52. 10.Specifies that all employees of the trades or businesses that are treated as related under either Internal Revenue Code Section 267, 318, or 707 shall be treated as employed by a single taxpayer. 11.Provides that the amount of business tax credits recaptured shall include the credits reported by the taxpayer on previous tax returns and interest computed using the adjusted annual rate, as specified. 12.Defines "business tax incentive" as a credit, deduction, exclusion, exemption, or any other tax benefit, added to either Part 10 or Part 11 of the Revenue and Taxation Code (RTC) by an act that takes effect beginning on or after January 1, 2011, and allowed to taxpayers engaged in or carrying on any trade, business, profession, vocation or calling, or commercial activity in the state. 13.Defines "full-time employee" as an employee who works an average of 35 hours in a week, calculated monthly. 14.Defines "part-time employee" as an employee who works less than an average of 35 hours in a week, calculated monthly. 15.Defines "temporary employee" as an employee who works SB 1391 Page 5 less than 120 days per year. 16.Specifies that, in the case of any business tax incentive that is allowed to be sold or transferred under the provisions of RTC Part 11, the seller must expressly agree to provide to the buyer and the FTB any necessary information to calculate whether a disqualifying event has occurred with respect to the seller. Provides that, if a disqualifying event has occurred, then the buyer is required to include in its net income or tax the amount of any required recapture. 17.Declares that this bill does not limit FTB's authority to audit the information reported by taxpayers on their tax returns. 18.Provides that Chapter 3.5 (commencing with Section 11340) of Part 1 of Division 3 of Title 2 of the Government Code does not apply to any standard, criterion, procedure, determination, rule, notice, or guideline established or issued by the FTB pursuant to the provisions of this bill. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: No According to the Assembly Appropriations Committee, unknown, potentially significant increase in future revenues to the extent that business tax incentives are disallowed due to job losses. SUPPORT : (Verified 8/25/10) California Nurses Association (source) Alliance of Californians for Community Empowerment American Federation of State, County, and Municipal Employees, AFL-CIO American Federation of Teachers Local 1521 California Alliance for Retired Americans California Church Impact California Conference Board of the Amalgamated California Conference of Machinists California Federation of Teachers California Hunger Action Coalition SB 1391 Page 6 California Labor Federation, UFCW 1428 California Nurses Association California Professional Firefighters California Public Interest Research Group California Tax Reform Association California Teamsters Public Affairs Council Health Access California International Association of Theatrical and Stage Employees International Longshore and Warehouse Union Ironworkers Local 118, Local 155, and Local 377 Longshore and Warehouse Union Napa Solano Building Trades Council Northern California District Council - International San Mateo Building Trades Council, Plumbers and Service Employees International Union Sierra Club California Steamfitters Local 159, Local 6 and Local 94 Transit Union United Food and Commercial Workers Unite-HERE International Union Western Center on Law and Poverty Western States Council OPPOSITION : (Verified 8/25/10) BIOCOM California Aerospace and Technology Association California Bankers Association California Chamber of Commerce California Grocers' Association California Manufacturers and Technology Association California Taxpayers Association Irvine Chamber of Commerce TechAmerica ARGUMENTS IN SUPPORT : According to the author, "SB 1391 brings much needed transparency and accountability to corporate tax expenditures. This bill will allow the state to recoup, or 'clawback,' any future tax expenditures given to a corporation that fails to meet employment or investment commitments. Specifically, this bill would require corporations to annually submit to the Franchise Tax Board specified information relating to how they used the tax credits they received to retain or create jobs. SB 1391 Page 7 Corporations receiving tax expenditures will be required to payback the entire amount of any assistance to the state if the corporation has a net decrease in the number of full-time employees. Clawback provisions make tax expenditures more effective, transparent, and accountable. This bill will set clear expectations for corporations and guarantee that the state's investment will yield measurable results in the form of job retention and creation." ARGUMENTS IN OPPOSITION : The opponents believe the reclamation provision of the bill is "problematic because it creates uncertainty for employees, and the reliability of the investment credits is what allows employers to make decisions that help the state in the long run. For example, an employer might decide to employ someone in a growing department, anticipating that this job would qualify for a relevant credit. If later in the year the employer decides that another department is over-staffed based on its current needs, this bill would consider that cut to nullify the value of the earlier hire, and would require the employer to return the other investment credit - nevermind that such a cut might enable the employer to hire someone new in another department next year. Investment incentives are not beneficial to the state only if they result in a net increase in jobs. In addition, hiring decisions are made based on long-term goals, not strictly within the fiscal tax cycle." DLW:mw 8/25/10 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****