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