BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 246 HEARING: 7/3/12
AUTHOR: Wieckowski FISCAL: Yes
VERSION: 6/26/12 TAX LEVY: Yes
CONSULTANT: Miller
INCOME TAXES: CREDIT: HIRING
Redefines "qualified employer" for purposes of the hiring
credit to include veteran enterprises, a disadvantaged
business, a microbusiness or a small business.
Background and Existing Law
Current law allows 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. The Legislature
typically enacts such tax incentives to encourage taxpayers
to do something but for the tax credit, they would
otherwise not do. California has two credit primarily
directed at increasing employment:
The Jobs Tax credit, equal to $3,000 per full time
employee hired for an employer that employs fewer than
20 employees (AB 3x 15 (Krekorian)/SB 3x 15
(Calderon), 2009). The Legislature capped the credit
at $400 million for all taxable years and allocated by
the Franchise Tax Board (FTB). The credit remains in
effect until the total amount is exhausted.
Geographically Targeted Employment Area tax
credits, such as enterprise zones. Employers inside
of one of California's 42 enterprise zones may claim a
tax credit based on the wages paid to employees
meeting specified criteria or living in a designated
neighborhood. The credit is equal to 50% of wages in
the first year, diminishing 10% per year until
exhausted after the fifth year, up to 150% of the
minimum wage.
Existing law also defines many terms used in this bill. A
"disabled veteran business enterprise" as a business
certified by the administering agency as meeting all of the
following requirements:
AB 246 -- 6/26/12 -- Page 2
It is a sole proprietorship at least 51% owned by
one or more disabled veterans or, in the case of a
publicly owned business, at least 51% of its stock is
unconditionally owned by one or more disabled
veterans; a subsidiary that is wholly owned by a
parent corporation, but only if at least 51% of the
voting stock of the parent corporation is
unconditionally owned by one or more disabled
veterans; or a joint venture in which at least 51% of
the joint venture's management, control, and earnings
are held by one or more disabled veterans;
The management and control of the daily business
operations are by one or more disabled veterans. The
disabled veterans who exercise management and control
are not required to be the same disabled veterans as
the owners of the business; and,
It is a sole proprietorship, corporation, or
partnership with its home office located in the United
States, which is not a branch or subsidiary of a
foreign corporation, foreign firm, or other
foreign-based business.
A "disadvantaged business enterprise" is a business that is
all of the following:
A "disadvantaged business" as that term is used in
Section 23.62 of Title 49 of the Code of Federal
Regulations,
An individual proprietorship, partnership,
corporation, or joint venture; and,
Organized for profit, with a place of business
located in the United States (U.S.) and which makes a
significant contribution to the U.S. economy through
payment of taxes or use of American products,
materials, or labor.
A "microbusiness" is a small business which, together with
affiliates, has average annual gross receipts of $2,500,000
or less over the previous three years, or is a
manufacturer, as defined, with 25 or fewer employees.
A "small business" is an independently owned and operated
business that is not dominant in its field of operation,
the principal office of which is located in California, the
officers of which are domiciled in California, and which,
AB 246 -- 6/26/12 -- Page 3
together with affiliates, has 100 or fewer employees, and
average annual gross receipts of $10,000,000 or less over
the previous three years, or is a manufacturer, as defined,
with 100 or fewer employees.
Proposed Law
Assembly Bill 246 modifies the existing hiring credit to
change the definition of a "qualified full-time employee,"
"qualified employer," and "annual full time equivalent" as
follows.
A "qualified full time employee" for taxable years
beginning on or after January 1, 2012, is limited t only to
individuals who were unemployed for the 30 days immediately
prior to being hired. AB 246 also provides that the
credit's current definition of a "qualified employer"
(i.e., a taxpayer that, as of the last day of the preceding
taxable year, employed 20 or fewer employees) shall only
apply for taxable years beginning on or after January 1,
2009, and before January 1, 2012.
Beginning on or after January 1, 2012, AB 246 redefines a
"qualified employer" as a taxpayer that, as of the last day
of the preceding taxable year, was any of the following as
defined above:
A "disabled veteran business enterprise";
A "disadvantaged business enterprise;
A "microbusiness"
A "small business"
The bill also lowers the total hour threshold, from 2,000
hours to 1,820 hours, for calculating an "annual full-time
equivalent" in the case of full-time employees paid on an
hourly basis.
This bill takes immediate effect as a tax levy.
State Revenue Impact
According to the FTB, this bill will result in a revenue
losses in the first two years of $150 million in 2012-13,
$46 million in 2-13-14 and have a revenue gain of $16
AB 246 -- 6/26/12 -- Page 4
million in 2014-15.
Comments
1. Purpose of the bill . According to the author: "The
2009 tax credit applies only to businesses with 20 or fewer
employees. This credit was too narrowly defined and does
not include a wide range of business in California. AB 246
will expand a 2009 tax credit to Small, Micro, Disabled
Veteran, and Disadvantaged Businesses to stimulate the
economy and promote hiring in California. Businesses with
less than 100 employees comprise more than 98.3 percent of
all businesses, and are responsible for employing more than
57.9 percent of all workers in the state. Expanding this
credit will allow a greater number of businesses to receive
the tax credit, and get more Californians back to work."
2. Will it work ? Governments across the world are
changing public policies in the hopes of increasing
employment during the current economic recession. Reducing
taxes by allowing employers tax credits for hiring people
should lead to higher employment levels. Because tax
credits lead to lower supply costs, each additional
employee has a lower marginal cost than without the tax
credit, so employers should hire more. Recently, Daniel
Wilson, assistant director of the Center for the Study of
Innovation and Productivity at the Federal Reserve Bank of
San Francisco, attempted to answer this question. In a
paper co-authored with Robert Chirinko of the University of
Illinois at Chicago, Wilson examined the period between
January 1990 and August 2009, and found that, among states
where employers could qualify for credits immediately after
enactment of the credit legislation, there was a slight
employment increase of 0.12%. By contrast, states that
offered the credits retroactively actually saw a slight
decline of 0.06% in employment. These findings would
suggest that hiring credits, at least at the state level,
are a blunt tool for stimulating job growth.
While taxes always matter, the lack of a connection between
taxes and employment rates suggests that other factors have
a greater effect. States such as California rode the
housing market and the housing construction wave more than
many others, and suffered more when it collapsed.
California is a top tourist destination, but in a global
AB 246 -- 6/26/12 -- Page 5
depression, fewer people have the dispensable income
necessary to travel. The Committee may wish to consider
whether redefining the terms of an existing,
undersubscribed tax credit will achieve the desired
increases in employment, and worth the budgetary sacrifices
necessary to pay for it in the short term as more
utilization now increases the revenue.
3. How much longer ? The FTB reports that over 6,994
personal income tax and business entity returns had been
filed, with cumulative hiring credits totaling only $45.3
million. At this rate, it could take several years for the
existing $400 million cap to be reached absent significant
growth in the economy. By expanding the pool of businesses
that would qualify for this credit, this bill would likely
accelerate usage of the existing credit allocation, thereby
providing greater short-term benefits. At the same time,
however, this bill actually narrows the credit's definition
of a "qualified employee" to cover only those individuals
who were unemployed for the 30 day period immediately
preceding the date of hire. While this revision is
designed to specifically target the hiring of unemployed
individuals, it could potentially create an unintended
barrier to credit utilization in some cases.
4. Have we met before ? There have been multiple attempts
to redefine the terms of the Hiring Credit in the 2011-12
legislative session, two by the same author, all of which
have failed:
AB 234 (Wieckowski) modified the credit to allow a
credit of $4,500 or $9,000, expanded the definition of
a qualified employer and changed the definion of a
qualified employee. It was very similar to AB 246.
The bill was held on suspense in Assembly Revenue &
Taxation.
AB 11 (Portantino) would reduce the cap for the
existing small business hiring credit from roughly
$400 million to roughly $200, and would allow a new
credit equal to 20% of annual workers' compensation
premiums paid by qualified taxpayers. The total
amount of the new credit, in turn, would be capped at
roughly $200 million. AB 11 was held on the Assembly
Revenue & Taxation suspense file
AB 236 (Swanson) would expand the existing small
business hiring credit to encourage the employment of
specified ex-offenders and the chronically unemployed.
AB 246 -- 6/26/12 -- Page 6
AB 236
AB 304 (Knight) would allow a credit of $3,000 or
$5,000 to an employer with 20 or more employees that
mores or establishes a headquarters within California.
AB 304 was held on the Assembly Revenue & Taxation
suspense file.
AB 1195 (Allen) would, among other things, expand
the definition of a "qualified employer" to mean a
taxpayer with 40 or fewer employees as of the last day
of the preceding taxable year. AB 1195 is currently
pending on this Committee's suspense file.
SB 156 (Emmerson) would expand the existing small
business hiring credit to cover employers with up to
50 employees. SB 156 is currently pending in the
Senate Committee on Appropriations.
AB 1009 (Wieckowski) was almost identical to this
bill and was held on the Assembly Revenue & Taxation
suspense file.
Assembly Actions
Not applicable to this version of the bill.
Support and Opposition (6/28/12)
Support : Small Business California; Coalition of Small and
Disabled Veteran Businesses ; National Federation of
Independent Business(NFIB).
Opposition : Unknown.