BILL ANALYSIS Ó
REVISED (3/21/11)
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 156 HEARING: 3/23/11
AUTHOR: Emmerson FISCAL: Yes
VERSION: 3/15/11 TAX LEVY: Yes
CONSULTANT: Miller
JOBS CREDIT
Expands the Jobs Tax Credit to taxpayers that employ 50 or
fewer employees
Background and Existing Law
The February, 2009 Budget Agreement included a Jobs Tax
credit beginning in the taxable year 2009 of $3,000 per
full time employee hired for an employer that employs fewer
than 20 employees (AB 3x 15, Chapter 10, Statutes of 2009 &
SB 3x 15, Chapter 17, statutes of 2009). The credit is
capped 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. The bill
requires the FTB to disallow credits claimed on returns
filed after the end of the calendar quarter in which the
FTB believes the cap will be reached. Any credits not used
in the taxable year may be carried forward up to eight
taxable years.
Current law also contains anti-abuse laws that prevent a
company from qualifying as "first commencing business in
the state" if the company only changes structures. For
example, if Gracie Mae Kids Clothes changes from a sole
proprietorship to an S-Corporation, it would not be
considered a new business.
Proposed Law
This bill changes the current requirement that taxpayers
have 20 or fewer employees to qualify for the credit to 50
or fewer employees.
This bill also repeals the anti-abuse laws described above.
SB 156 -- 3/15/11 -- Page 2
State Revenue Impact
This bill expands an existing capped and allocated credit
but does not expand it, so there is no revenue impact or
state cost associated with it.
Comments
1. Purpose of the bill . In 2009, $400 million was set
aside in the budget to allow small businesses with 20 or
fewer employees to earn a $3,000 tax credit for every new
employee hired. To date, less than $40 million has been
utilized for this program, leaving over $360 million still
available. SB 156 would not increase the funding available
in the existing tax credit but would simply expand the
number of businesses that would be eligible for this tax
credit to those that have 50 or fewer employees. This
expansion is intended to help spur job creation and
expedite California's economic recovery.
2. Too Late? The bill enacting the credit requires the
FTB to disallow credits claimed on returns filed after the
end of the calendar quarter in which the FTB believes the
cap will be reached. The FTB currently projects that the
existing Jobs Tax credit will be exhausted during the 2011
taxable year based on historic trends of credit usage. If
so, there will be no available credits on January 1, 2012
when this bill takes effect which may make this bill
unnecessary.
3. What a way to make a living. This credit has been in
effect since 2009 and there is little evidence that it has
affected unemployment in this state. California
experienced steep employment declines during the recent
recession and the state's unemployment rate is persistently
higher than the national average. Academic literature
suggests that no state tax policy can affect high
unemployment in this state. A recent study by David
Neumark at the Public Policy Institute of California (PPIC)
suggests two direct job creation policies: hiring credits
and worker subsidies such as the federal Earned Income Tax
Credit. At the February 16th hearing of this committee,
Mr. Neumark presented his findings. He argues that hiring
credits act to increase the demand for labor and are the
SB 156 -- 3/15/11 -- Page 3
best policy response to spur a recovery from the recession.
He suggests that hiring credits should focus broadly on
the recently unemployed and establish incentives for new
hires rather than increases in the work hours of existing
employees. In order to be effective, the credits would
need to be between $9,100 to $75,000 per employee so state
funding would contribute only modestly at best to the
credit.
4. Enterprise Zones: Most other states' hiring credits
look more like California's enterprise zones than a
stand-alone per employee credit. Florida, New York, and
Illinois all offer credits within these zones. Proponents
of the Enterprise Zone program state that it is the state's
best tool for economic development and decreasing
unemployment, citing accounts from taxpayers who say that
they locate in California largely because of enterprise
zone program incentives, which overcome disadvantages posed
by California's tax and regulatory system. Supporters
argue that the tax credits draw investment into
economically distressed communities and provide incentives
for firms to employ hard-to-hire individuals. However,
detractors state that the program offers a poor return on
the state's investment, especially the Targeted Employment
Area (TEA) criterion, and the practice of
"retro-vouchering."
5. Pro-abuse? This bill repeals the existing anti-abuse
laws that do not allow companies a new business advantage
when changing corporate structures from a sole
proprietorship to an LLC for example.
The committee may wish to reinstate these rules as they
ensure that taxpayers do not "double dip" on any business
incentives. If the committee wishes to amend the bill, the
language on page 7, lines 28-31 of the bill, would be
reinstated.
6. Technical Amendment: The author has agreed to take a
technical amendment on page 13, line 36, to strike out (f)
of section 17276 and insert "(g) of section 24416."
Support and Opposition (3/21/11)
Support : None received.
Opposition : American Federation of State, County and
Municipal Employees (AFSCME), California Tax Reform
SB 156 -- 3/15/11 -- Page 4
Association.