BILL ANALYSIS                                                                                                                                                                                                    



                                                                       



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          |SENATE RULES COMMITTEE            |                  SB 1391|
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                              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





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           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  







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             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  







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             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  







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             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 







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          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. 







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          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

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