BILL ANALYSIS Ó
AB 1596
Page A
Date of Hearing: April 9, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1596 (Cook) - As Introduced: February 6, 2012
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: New Jobs Tax Credit
SUMMARY : Expands the existing New Jobs Tax Credit for small
businesses. Specifically, this bill :
1)Expands the existing credit's definition of a "qualified
employer" to include taxpayers that, as of the last day of the
preceding taxable year, employed 50 or fewer employees
(instead of 20 or fewer employees per current law).
2)Provides that the above modification shall apply to taxable
years beginning on or after January 1, 2012.
3)Requires the Franchise Tax Board (FTB) to report to the
Legislature, on or before January 1, 2015, the number of
employers that were allowed a credit and the amount of credits
utilized and carried over for taxable years beginning on or
after January 1, 2012, and before January 1, 2014. Provides
that, to the extent possible, the FTB shall also report the
average number of employees that were hired by taxpayers that
claimed the credit, and aggregate data and compare whether
there were more employers claiming the credit year to year.
4)States that it is the Legislature's intent to compare this
data with general economic trends to determine if the New Jobs
Tax Credit increased employment overall in the state and
specifically for small businesses.
5)Deletes duplicative sections of the Revenue and Taxation Code
as a housekeeping matter.
6)Corrects erroneous cross-references in existing law.
7)Takes immediate effect as a tax levy.
EXISTING LAW :
AB 1596
Page B
1)Allows various tax credits under both the Personal Income Tax
(PIT) Law and the Corporation Tax Law. These credits are
generally designed to provide relief to taxpayers who incur
specified expenses or to encourage socially beneficial
behavior, including business practices.
2)Establishes 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 New Jobs Tax 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.
FISCAL EFFECT : The FTB estimates that this bill would reduce
General Fund (GF) revenues by $80 million in fiscal year (FY)
2012-13, and by $31 million in FY 2013-14. The FTB estimates
that this bill would increase GF revenues by $11 million in FY
2014-15.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
We need to get people back to work. One way to create jobs
is by incentivizing employers to hire new workers; AB 1596
will do this by expanding access to the New Hire Tax Credit
Program.
2)Opponents state:
The hiring credit has proven to be a failure. Your bill
would represent an expansion of the state's existing hiring
tax credit, which appears to have had little effect on
employment and has generated little interest among
employers. While the existing tax credit is capped, your
AB 1596
Page C
bill would accelerate the revenue losses of the existing
tax credit, something the state cannot afford given our $40
billion plus budget deficit. It would be best if the
amount allocated for the credit were not used, and would
revert to the general fund.
3)The FTB notes the following implementation concern in its
staff analysis of this bill:
Under the terms of this bill, a report would be required no
later than January 1, 2015, on the utilization, generation,
and carryover of the New Jobs Tax Credit for taxable years
beginning on or after January 1, 2012, and before January
1, 2014. Because of the timing of when returns are filed
and processed, some of the returns for taxable year 2013
would not be filed until late in 2014 and would not allow
that report to include data from the 2013 taxable year. If
it is the author's intention that the report provided
should include complete information for the 2013 taxable
year, the author may wish to revise the report due date.
4)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 1960s, 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 New
Jobs Tax Credit.
b) 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
AB 1596
Page D
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.
c) How would this bill alter the existing New Jobs Tax
Credit program? : The FTB reports that, as of March 3,
2012, 13,958 PIT and business entity returns had been filed
claiming the New Jobs Tax Credit, with the cumulative
credit amount totaling only $88 million. At this rate, it
could take several years for the existing $400 million cap
to be reached absent significant growth in the economy.
This bill seeks to modify the New Jobs Tax Credit by
expanding the pool of small businesses eligible for the
credit to include those with up to 50 employees (instead of
20 employees). As such, this bill would likely accelerate
usage of the existing $400 million credit allocation.
d) Do hiring credits actually produce jobs? : With the
national unemployment rate hovering above 8%, 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%. These findings would suggest that hiring credits,
at least at the state level, are a blunt tool for
stimulating job growth.
e) Does the New Jobs Tax Credit provide an incentive or a
reward? : At this Committee's recent oversight hearing on
--------------------------
<1> This is not so in the case of the existing New Jobs Tax
Credit, which is capped at roughly $400 million for all taxable
years.
AB 1596
Page E
tax expenditure programs, Professor Suzanne O'Keefe of
Sacramento State University addressed the question of
whether the New Jobs Tax Credit actually encourages job
creation. Professor O'Keefe began by noting that the
program provides small businesses with a $3,000 credit for
each net increase in full-time employees. However, she was
quick to point out that any new full-time hire costs
his/her employer a minimum of $21,000 per year, assuming an
$8 minimum wage and other legally required benefits. Thus,
a $3,000 credit represents, at most, only 14% of the cost
of hiring a new full-time employee. Professor O'Keefe
testified that the New Jobs Tax Credit only serves to tip
the scales in favor of hiring for relatively few small
businesses. It would seem that, in the majority of cases,
the New Jobs Tax Credit serves to reward small businesses
for hiring decisions they would have made even without the
credit. Thus, it seems fair to ask whether the remaining
New Jobs Tax Credit allocation could be put to better use.
f) What function would the FTB report serve? : As noted
above, this bill would require the FTB to issue a report on
both the number of employers that were allowed a credit and
the amount of credits "utilized and carried over" for
taxable years beginning on or after January 1, 2012, and
before January 1, 2014. It should be noted, however, that
the FTB already posts information on its web site showing
both the total number of PIT and business entity returns
claiming the credit and the aggregate amount of credits
claimed. Thus, these reporting requirements appear to be
somewhat redundant.
This bill also requires the FTB to report, to the extent
possible, the average number of employees hired by
taxpayers claiming the credit, and states the Legislature's
intent to compare this data with general economic trends to
determine whether the New Jobs Tax Credit increased
employment. It is unclear to Committee staff, however, how
such data could be used to establish a causal link between
the New Jobs Tax Credit and increased hiring in California.
g) Related legislation : Committee staff notes the
following related bills introduced in the 2011-12
Legislative Session:
AB 1596
Page F
i) AB 11 (Portantino) would have reduced the New Jobs
Tax Credit allocation from roughly $400 million to
roughly $200 million, and allowed 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 have been capped at roughly $200 million.
AB 11 was held in this Committee.
ii) AB 234 (Wieckowski) would have modified and expanded
the existing New Jobs Tax Credit by, among other things,
providing a credit of $9,100 for each net increase in
qualified full-time employees paid more than $16 per
hour. AB 234 was held in this Committee.
iii) AB 236 (Swanson) would have reallocated $50 million
from the New Jobs Tax Credit to establish a new credit
designed to encourage the hiring of the chronically
unemployed. AB 236 was held in the Assembly
Appropriations Committee.
iv) AB 246 (Wieckowski) would modify and expand the
existing New Jobs Tax Credit by, among other things,
providing a credit of $9,100 for each net increase in
qualified full-time employees paid more than $16 per
hour. AB 246 has been referred to the Senate Committee
on Governance and Finance.
v) AB 248 (Perea) would have reallocated $150 million
from the New Jobs Tax Credit to establish a credit equal
to 25% of the value of qualified medical services
personally provided by a physician during the taxable
year. AB 248 was held in the Assembly Appropriations
Committee.
vi) AB 304 (Knight) would have allowed a tax credit,
under both the PIT Law and the Corporation Tax Law, for
each "qualified employee" employed by a "qualified
employer," as specified. AB 304 was held in this
Committee.
vii) AB 643 (Davis) would have reallocated $300 million
from the New Jobs Tax Credit to establish a state New
Markets Tax Credit program designed to stimulate economic
development. AB 643 was held in the Assembly
AB 1596
Page G
Appropriations Committee.
viii) AB 1009 (Wieckowski) would have recast the existing
New Jobs Tax Credit by, among other things, modifying the
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. AB 1009 was held in
this Committee.
ix) AB 1195 (Allen, Perea, and Wieckowski) would have
expanded the New Jobs Tax Credit's definition of a
"qualified employer" to include taxpayers that, as of the
last day of the preceding taxable year, employed 50 or
fewer employees (instead of 20 or fewer employees per
current law). AB 1195 was held in the Senate
Appropriations Committee.
x) AB 2037 (Davis) would reallocate $300 million from
the New Jobs Tax Credit to establish a state New Markets
Tax Credit program designed to stimulate economic
development. AB 2037 has been double-referred to both
the Committee on Jobs, Economic Development, and the
Economy, and this Committee.
xi) SB 156 (Emmerson) would have modified the New Jobs
Tax Credit by allowing the credit to employers with up to
50 employees. SB 156 failed passage out of the Senate by
the constitutional deadline.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
AB 1596
Page H