BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 640 HEARING: 7/6/11
AUTHOR: Runner FISCAL: Yes
VERSION: 5/12/11 TAX LEVY: Yes
CONSULTANT: Grinnell
EMPLOYMENT TAX CREDIT
Enacts a credit equal to $500 for each formerly unemployed
person a taxpayer employs.
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.
Proposed Law
Senate Bill 640 enacts the California Employment Recovery
Act of 2011, a capped and allocated credit under the
SB 640 -- 5/12/11 -- Page 2
Personal Income Tax and Corporation Tax of $500 for each
month a qualified taxpayer employs a qualified employee in
a qualified job, multiplied by the number of consecutive
months the taxpayer employs the employee in the qualified
job up to 12 months. A qualified taxpayer is an employer
that employs 50 or fewer employees as of the last date of
the preceding taxable year. The measure specifies that the
12 consecutive month limitation may include two periods
when an employee worked two weeks in a month and made at
least $750. To qualify:
The taxpayer must hire an employee who actively
received unemployment insurance benefits for not less
than the last six months immediately prior to the
first time the taxpayer hired the employee.
The taxpayer must employ the employee for a
non-seasonal, full-time job in the state that would
qualify for unemployment insurance benefits.
The taxpayer must pay the employee at least $1,500
for any month that the taxpayer seeks to apply the
credit.
The taxpayer may carry over the credit for five taxable
years. The bill prevents a taxpayer claiming its tax
credit from applying another one for the same employee.
The taxpayer must include with the timely filed original
return the title of the qualified job and the amount of
wages he or she pays the employee.
The measure caps the credit at $50 million, and directs the
Franchise Tax Board to allocate the credit on timely filed
original returns until the cutoff date, which is the last
day of the calendar quarter within which FTB estimates that
$50 million in credits have been allocated. FTB shall
periodically provide notice on its website with respect to
the amount of the credit claimed on timely filed original
returns.
The bill states that the date the return is received shall
be determined by the FTB, and any determinations with
respect to the cutoff date, the day the return is received,
and whether a return is timely filed cannot be reviewed in
any administrative or judicial proceeding. FTB's
disallowance of any credit under this subdivision shall be
treated as mathematical errors, and can assess any tax
resulting from the disallowance as a deficiency assessment.
FTB may issue rules, guidelines, or procedures exempt from
SB 640 -- 5/12/11 -- Page 3
the Administrative Procedures Act to administer the credit
and prevent the avoidance of the purposes of the section
through split-ups, shell corporations, partnerships, tiered
ownership structure, or otherwise.
State Revenue Impact
According to FTB, SB 640 results in revenue losses of $44
million in 2011-12, $18 million in 2012-13, and $9.7
million in 2013-14.
Comments
1. Purpose of the bill . According to the Author, "Senate
Bill 640, or the California Employment Recovery Act of
2011, provides a tax credit for a taxpayer who employs
qualified employees. Specially, beginning on or after
January 1, 2012, this bill would allow a tax credit in an
amount equal to $500 per month for each qualified employee
employed in a qualified job by the taxpayer. The maximum
total amount of the credit that could be allowed may not
exceed $6,000 for any qualified employee. The bill allows
unused credits to be carried over for six years. SB 640
will provide a tax incentive to encourage employers to hire
individuals receiving unemployment insurance benefits."
2. Sure, but will it work ? Governments across the world
are changing public policies in the hopes of increasing
employment during the current economic recession.
Theoretically, 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.
Demonstrating the empirical link between state taxes and
employment is much more difficult; no clear data exists
demonstrating the positive effect of lower state tax rates
on state employment. The ten states with the highest rates
of employment include some of the highest tax states,
lowest tax states and middling tax states. Nevada has the
nation's highest unemployment rate, but has no corporate or
personal income tax. California has one of the nation's
highest unemployment rate and ranks 12th in state and local
SB 640 -- 5/12/11 -- Page 4
tax revenue collected per capita, according to the United
States Department of the Census and the Bureau of Economic
Analysis.
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
depression, fewer people have the dispensable income
necessary to travel. The Committee may wish to consider
whether enacting a tax credit will achieve the desired
increases in employment, and worth the budgetary sacrifices
necessary to pay for it.
3. Of one-handed economists . SB 640's general approach is
not without heavyweight academic support, albeit with
warnings. 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 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.
Unlike SB 640, Neumark suggests the credits equal to $9,100
to $75,000 per employee to achieve the desired effect.
Even then, Neumark cautions that state funding would
contribute only modestly to unemployment rates. Neumark
additionally warns that research shows that even the most
well-designed tax credits have 92-95% "deadweight loss,"
when a taxpayer gets a tax credit for hiring someone they
would've without the credit. The Committee may wish to
consider that even though a credit may have some merit,
there are significant drawbacks to enacting it.
4. Rebalancing the portfolio . To the extent that state
taxes do influence employment, research shows that what
California's primary program to spur economic development
and job growth doesn't work. Jed Kolko and Neumark found
SB 640 -- 5/12/11 -- Page 5
that California's enterprise zones have no effect upon
employment and business formation in zones, and Joel Elvery
of Cleveland State found no evidence that EZs increase
employment of zone residents, although Charles Swenson of
USC shows that unemployment rates are lower in census
tracts in enterprise zones than those that aren't. The
Legislative Analysts' Office has long recommended that the
Legislature repeal the program, which was proposed as part
of Governor Brown's 2010-11 Budget released in January.
Should the Committee believe that SB 640 will create jobs,
it may wish to consider substituting it for a program that
doesn't.
5. Working it . As introduced, SB 640 enacted a tax credit
of $500 for each month a taxpayer employed a person that
received unemployment benefits for not less than the last
six months. The measure allowed credits for any employer
until the first calendar year after the first year in which
California's unemployment rate fell below 10%. The May
12th, 2011 amendments changed the credit in the following
way:
Limited the credit to taxpayers employing less than
50 employees.
Capped the credit to $50 million.
Required taxpayers to include the title of the job
and the wages paid to the employee qualifying the
taxpayer for the credit.
Restricted the credit to original returns.
Imported procedural requirements from the Small
Business Jobs Tax Credit to assist FTB to administer
the credit.
6. Stay tuned . As part of the May Revision, the Governor
proposed expanding and extending the jobs tax credit by:
Increasing the number of employees that a taxpayer
can employ from 20 to 50 to qualify for the credit,
the same threshold that SB 640 includes. The
Committee approved SB 156 (Emmerson) earlier this year
which makes an identical change.
Enhance the credit amount from $3,000 to $4,000 per
employee.
Sunset the credit in 2012, instead of allowing it
to sunset when the $400 million allocation expires.
7. Amendments Needed . FTB and Committee Staff recommend
the following technical amendments.
SB 640 -- 5/12/11 -- Page 6
On Page 2, lines 35 and 36, and page 5, lines 15
and 16, strike out "in which a qualified taxpayer
seeks to apply the credit authorized" and insert "for
which the credit is allowed."
Support and Opposition (06/22/11)
Support : Unknown.
Opposition : California Tax Reform Association.