BILL ANALYSIS Ó
AB 1009
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Date of Hearing: May 16, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1009 (Wieckowski) - As Amended: April 28, 2011
VOTE ONLY
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Income tax: credits: full-time employees: hires
SUMMARY : Modifies and recasts the existing hiring credit for
small businesses. Specifically, this bill :
1)Modifies the credit's definition of a "qualified full-time
employee" to apply, for taxable years beginning on or after
January 1, 2012, only to individuals who were unemployed for
the 30 days immediately prior to being hired.
2)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. For taxable years beginning
on or after January 1, 2012, a "qualified employer" is defined
as a taxpayer that, as of the last day of the preceding
taxable year, was any of the following:
a) A "disabled veteran business enterprise" as defined in
Military and Veterans Code Section 999(b)(7);
b) A "disadvantaged business enterprise" as defined in
Public Contract Code Section 2051(f);
c) A "microbusiness" as defined in Government Code Section
14837(d)(2); or,
d) A "small business" as defined in Government Code Section
14837(d)(1).
3)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.
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4)Deletes duplicative sections of the Revenue and Taxation Code
as a housekeeping matter.
5)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices.
2)Provides for the following geographically targeted economic
development areas (G-TEDAs): Enterprise Zones, Manufacturing
Enhancement Areas, Targeted Tax Areas, and Local Agency
Military Base Recovery Areas. Special tax incentives are
provided to taxpayers conducting business activities within a
G-TEDA. These incentives include a hiring credit equal to a
percentage of wages paid to qualified employees.
3)Allows a credit for taxable years beginning on or after
January 1, 2009, to qualified employers equal to $3,000 for
each net increase in qualified full-time employees hired
during the taxable year. The credit is limited to small
businesses (i.e., taxpayers with 20 or fewer employees as of
the last day of the preceding taxable year). The credit is
capped at roughly $400 million for all taxable years.
4)Defines a "disabled veteran business enterprise" as a business
certified by the administering agency as meeting all of the
following requirements:
a) 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;
b) The management and control of the daily business
operations are by one or more disabled veterans. The
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disabled veterans who exercise management and control are
not required to be the same disabled veterans as the owners
of the business; and,
c) 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.
5)Defines a "disadvantaged business enterprise" as a business
concern that is all of the following:
a) A "disadvantaged business" as that term is used in
Section 23.62 of Title 49 of the Code of Federal
Regulations;
b) An individual proprietorship, partnership, corporation,
or joint venture; and,
c) 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.
6)Defines a "microbusiness" as 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.
7)Defines a "small business" as 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, 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.
FISCAL EFFECT : The Franchise Tax Board (FTB) is in the process
of revising its revenue estimate based on recent filing trends.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
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This bill will expand a 2009 tax credit to Small, Micro,
Disabled Veteran, and Disadvantaged businesses to stimulate
the economy and promote hiring in California. California's
dominance in many economic areas is based, in part, on the
significant role small businesses play in the state's $1.8
trillion economy. 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 to Small,
Micro, Disabled Veteran, and Disadvantaged businesses will
allow a greater number of businesses to receive the tax
credit, and get more Californians back to work.
This bill will also stipulate that in order to receive the
tax credit, the individual that was hired must have been
unemployed for at least 30 days prior to being hired. The
hiring of un-employed individuals will reduce the
expenditures of the unemployment fund. In tough economic
times it is imperative that any funds we use to create
hiring incentives are used to hire unemployed individuals,
because it is the most cost-effective.
2)FTB notes, "The bill would allow a credit for employers that
fall into several specific types of entities but fails to
require that certification be provided to the department that
the criteria has been met. Typically, credits involving areas
for which the department lacks expertise are certified by
another agency or agencies that possess the relevant
expertise. The certification language would specify the
responsibilities of both the certifying agency and the
taxpayer."
3)Committee Staff Comments:
a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960's, U.S.
Treasury officials began arguing that these features of the
tax law should be referred to as "expenditures," since they
are generally enacted to accomplish some governmental
purpose and there is a determinable cost associated with
each (in the form of foregone revenues). This bill would
modify an existing tax expenditure program known as the
small business hiring credit to specifically incentivize
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the hiring of unemployed individuals.
a) How is a tax expenditure different from a direct
expenditure? : As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. This can offer taxpayers greater certainty, but it
can also result in tax expenditures remaining a part of the
tax code without demonstrating any public benefit. Second,
there is generally no control over the amount of revenue
losses associated with any given tax expenditure.<1>
Finally, it should also be noted that, once enacted, it
generally takes a two-thirds vote to rescind an existing
tax expenditure absent a sunset date. This effectively
results in a "one-way ratchet" whereby tax expenditures can
be conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority
vote.
b) Do hiring credits actually produce jobs? : With the
national unemployment rate hovering around 9%, some have
advocated job creation tax credits as a means of
revitalizing the struggling economy. The question,
however, is whether such credits actually work. 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.
c) How would this bill effect the existing small business
--------------------------
<1> This is not so in the case of the existing small business
hiring credit, which is capped at roughly $400 million for all
taxable years.
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hiring credit program? : The FTB reports that, as of April
2, 2011, 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.
d) Related Legislation : Committee staff notes the
following related bill introduced in the current
Legislative Session:
i) 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 is currently pending on this Committee's suspense
file.
ii) AB 236 (Swanson) would expand the existing small
business hiring credit to encourage the employment of
specified ex-offenders and the chronically unemployed.
AB 236 is currently pending on this Committee's suspense
file.
iii) 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.
iv) SB 156 (Emmerson) would expand the existing small
business hiring credit to cover employers with up to 50
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employees. SB 156 is currently pending in the Senate
Committee on Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098