BILL ANALYSIS Ó
SB 1179
Page A
Date of Hearing: July 2, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
SB 1179 (Walters) - As Amended: June 21, 2012
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SENATE VOTE : 39-0
SUBJECT : Income taxes: credit: manufacturers
SUMMARY : Allows a $3,000 credit for each net increase in
"qualified full-time employees" hired during the taxable year by
a "qualified employer." Specifically, this bill :
1)Applies to taxable years beginning on or after January 1,
2013.
2)Defines a "qualified full-time employee" as an employee who is
a disabled veteran, as defined in Military and Veterans Code
Section 999, who was either:
a) Paid qualified wages during the taxable year by the
qualified employer for services of not less than an average
of 35 hours per week; or,
b) A salaried employee and was paid compensation during the
taxable year for full-time employment, within the meaning
of Labor Code Section 515, by the qualified employer.
3)Provides that a "qualified full-time employee" shall not
include an employee:
a) Certified as a qualified employee in an enterprise zone;
b) Certified as a qualified disadvantaged individual in a
manufacturing enhancement area;
c) Certified as a qualified employee in a targeted tax
area;
d) Certified as a qualified disadvantaged individual or a
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qualified displaced employee in a local agency military
base recovery area (LAMBRA); or,
e) Whose wages are included in calculating any other
credit.
4)Defines a "qualified employer" as a taxpayer that is primarily
engaged in the lines of business classified in Code 339113 of
the North American Industry Classification System (NAICS).
5)Provides that credits must be claimed on timely filed original
returns received by the Franchise Tax Board (FTB) on or before
the "cut-off date." The "cut-off date" shall be the last day
of the calendar quarter within which the FTB estimates it will
have received timely filed original returns claiming credits
that cumulatively total $25 million.
6)Provides that Government Code Section 11340 et seq.,
pertaining to administrative regulations and rulemaking, shall
not apply to any standard, criterion, procedure,
determination, rule, notice or guideline established by FTB
for this credit.
7)Sunsets the credit provisions on December 1 of the calendar
year following the year of the cut-off date.
8)Provides that no addition to tax shall be made, as specified,
with respect to any underpayment of an installment to the
extent that the underpayment was created or increased by the
disallowance of the credit under the "cut-off date" rules.
9)Takes immediate effect as a tax levy.
EXISTING LAW :
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 LAMBRAs. Special
tax incentives are provided to taxpayers conducting business
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activities within a G-TEDA. These incentives include a hiring
credit equal to a percentage of wages paid to qualified
employees, including disabled veterans.
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.<1>
4)Defines a "disabled veteran" as a veteran of the military,
naval, or air service of the United States (U.S.), as
specified, who has at least a 10% service-connected disability
and who is domiciled in the state.
FISCAL EFFECT : The FTB estimates that this bill would reduce
General Fund revenues by $200,000 in fiscal year (FY) 2012-13,
by $600,000 in FY 2013-14, and by $800,000 in FY 2014-15.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Members of our nation's military are true American Heroes.
The brave men and women who serve our country have placed
themselves in harm's way to defend our freedom, and the
least we can do in return, is make an effort to ensure a
smoother transition home for our returning veterans.
SB 1179 is a narrowly crafted manufacturers' tax credit
designed to encourage the hiring of disabled veterans in
the surgical appliance and device manufacturing industries.
This bill is a small way for us to honor the service of
California's veterans by providing employers with tax
credits to encourage their hiring.
2)Proponents note:
---------------------------
<1> Demand for this credit has been relatively low. The FTB
reports that, as of June 3, 2012, only $117 million in credits
had been claimed.
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Disabled veterans are truly America's heroes. These brave
military professionals have served their country well and
defended our freedom by placing themselves in harm's way
thousands of miles from their homes and families. But when
they return home, they often face serious challenges as
they search for employment.
Enactment of SB 1179 will honor the service of these proud
veterans by providing companies who hire them with tax
credits. This meager gesture toward these brave men and
women who sacrificed so much for their country is long
overdue and helps us honor those who serve.
3)The FTB notes the following policy concern in its staff
analysis of this bill:
This bill specifies any deduction otherwise allowed for
qualified wages shall not be reduced by the amount of the
credit allowed by this bill. As a result, a taxpayer could
claim the credit proposed by this bill and a deduction for
100 percent of the wages the credit was based upon.
Generally, a credit is allowed in lieu of any deduction or
credit already allowable in order to eliminate multiple tax
benefits.
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).
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,
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there is generally no control over the amount of revenue
losses associated with any given tax expenditure. Finally,
it should 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) What would this bill do? : This bill would enact a new
tax expenditure program, capped at roughly $25 million, to
encourage surgical appliance manufacturers to hire disabled
veterans. Specifically, this bill would allow a $3,000
credit for each net increase in qualified full-time
employees (i.e., disabled veterans) hired during the
taxable year by such a manufacturer.
This bill's hiring credit language is closely modeled after
the New Jobs Tax Credit program enacted as part of the
2009-10 Budget Agreement, with certain key distinctions.
While the New Jobs Tax Credit may be claimed by any
qualifying business with 20 or fewer employees, this bill's
credit would be limited to surgical appliance
manufacturers, irrespective of their size. Specifically,
this bill defines a "qualified employer" by reference to
NAICS Code 339113, which comprises establishments primarily
engaged in manufacturing surgical appliances and supplies.
Such supplies include orthopedic devices, prosthetic
appliances, surgical dressings, crutches, surgical sutures,
personal industrial safety devices (except protective
eyewear), hospital beds, and operating room tables.
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
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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) Would this bill's credit operate as an incentive or a
reward? : At this Committee's March 27, 2012 oversight
hearing on tax expenditure programs, Professor Suzanne
O'Keefe of Sacramento State University addressed the
question of whether the existing 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, one could argue
that this bill's $3,000 credit would likely serve a similar
function.
f) How long would it take to utilize this bill's $25
million credit allocation? : As noted above, this bill's
credit is capped at roughly $25 million for all taxable
years. Given the relatively targeted nature of the credit,
the FTB estimates revenue losses of $600,000 in FY 2013-14,
growing to $800,000 by FY 2014-15. At this rate, it could
take roughly 30 years for the entire allocation to be
utilized. This Committee may wish to consider an earlier
sunset date to review the credit's efficacy.
REGISTERED SUPPORT / OPPOSITION :
Support
California Association for Health Services at Home
Opposition
SB 1179
Page G
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098