BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: SB 1197 HEARING: 5/9/12 AUTHOR: Calderon FISCAL: Yes VERSION: 2/22/12 TAX LEVY: Yes CONSULTANT: Grinnell TAX CREDIT FOR HIRING VETERANS Enacts a tax credit for paying wages to a qualified veteran Background and Existing Law The Federal Work Opportunity Tax Credit (WOTC), allows employers to claim a tax credit equal to 40% of qualified first year wages paid to employees that are members of a "targeted group," including qualified veterans. Employers must submit a pre-certification request before they hire the employee, then request certification from the WOTC Center at the California Employment Development Department within 28 days of the hire date. As amended by the VOW to Hire Heroes Act of 2011, signed by the President on November 1, 2011, federal law caps qualified wages based on the employee's targeted group. In the 2012 tax year, cap amounts are: $6,000 for qualified veterans receiving Supplemental Nutrition Assistance Program benefits, formerly Food Stamps, for at least three months during the 15 months prior to the hire date, or unemployed between four weeks and six months in the last year. $12,000 for qualified veterans certified as eligible for benefits for a service-connected disability hired within one year of discharge or release from active duty, or who began work before November 22, 2011 and was unemployed at least six months in the last year. $14,000 for qualified veterans began work after November 22, 2011, and was unemployed at least six months in the last year. $24,000 for qualified veterans certified as eligible for benefits for a service-connected disability hired within one year of discharge or release from active duty, and who began work after SB 1197 -- 2/22/12 -- Page 2 November 22, 2011 and was unemployed at least six months in the last year State law allows taxpayers to claim tax credits designed as incentives for taxpayers to incur certain expenses, such as child adoption, or to influence behavior, including business practices and decisions, such as research and development credits and Geographically Targeted Economic Development Area credits. The Legislature typically enacts such tax incentives to encourage taxpayers to do something but for the tax credit, they would otherwise not do. In Geographically Targeted Economic Development Areas (GTEDAs), employers paying qualified wages to members of targeted groups may claim a tax credit equal to 50% of qualified wages paid in the first year of employment up to 150% of the minimum wage, 40% in the second year, declining ten percent each year, ending in the sixth year. Any employer located within a GTEDA who pays qualified wages to an individual simply eligible for the WOTC may also claim the credit. Proposed Law Senate Bill 1197 allows employers to claim a credit against the Personal Income Tax or the Corporation Tax equal to an unspecified percentage of wages paid to qualified veterans. The bill employs definitions from the WOTC for qualified wages and qualified veterans. The taxpayer may carry over the credit until exhausted. The bill allows the Franchise Tax Board (FTB) to proscribe rules, guidelines, or procedures necessary to implement the credit, and exempts them from the Administrative Procedures Act. State Revenue Impact Without a specified percentage to calculate the value of the credit, no fiscal estimate exists. Comments SB 1197 -- 2/22/12 -- Page 3 1. Purpose of the bill . The purpose of the bill appears is to boost employment of veterans. 2. Checking in . Previous studies by academics, the Government Accountability Office, and the United States Department of Labor indicated that the WOTC had minimal effects on employer decisions; however, the most recent study of the credit by the RAND corporation found that the 2007 credit expansion that allowed the credit for employers paying qualified wages to disabled or unemployed veterans boosted employment for those groups. However, the study didn't speak to the efficacy of state tax credits, and the Legislative Analyst's Office often cautions that drawing conclusions about the effectiveness of tax credits is analytically difficult to impossible. With that said, SB 1197 contains no sunset provision, performance measurements, or study requirement. The Committee may wish to consider enacting a permanent tax credit without a credible study measuring its performance using established metrics. 3. Pump it up . Taxpayers employing qualified veterans may claim the WOTC to reduce federal tax. Additionally, taxpayers within Geographically Targeted Economic Development Areas can also claim another credit against state tax for paying wages to the qualified veteran, as the definitions are the same. Should SB 1197 be enacted, the same taxpayer could claim a credit for the same employee against state tax, and can additionally deduct from income the same wages that qualify for the credit from income. The Committee may wish to consider requiring the taxpayer to choose between the credits, and disallow business expense deductions for those wages that qualify for the credit. 4. 28 days later . WOTC serves as a good model for tax credit administration. Prior to the hire, the employer must submit a precertification form to EDD to qualify for the credit, then follow up with a certification request within 28 days, although these deadlines were temporarily eased by the VOW to Hire Heroes Act. The process ensures that employers that make a conscious decision to hire a member of a targeted group instead of another applicant that isn't. This safeguard stands in stark contrast to the Geographically Targeted Economic Development Area credits, where taxpayers can apply at any time for certification. SB 1197 -- 2/22/12 -- Page 4 As such, those credits often serve as rewards for firms employing individuals hired up to four years prior, thereby failing to meet the stated goal of increasing employment among specified populations. 5. Copycats . SB 1197 seeks to duplicate a federal benefit in state law, similar to the state's research and development credit and mortgage interest deduction. While duplicating tax benefits eases taxpayer compliance by reducing the difference between state and federal taxes, it can also attempt to direct specified kinds of economic activity in California instead of other states. However, a duplicating state credit provides a windfall for those taxpayers that act to obtain the federal benefit. What evidence exists that allowing a state tax credit that rewards the same activity as a federal credit will justify the measure's fiscal costs? Are there many firms that currently won't hire veterans because the federal benefits are insufficient, but will if the state offers a tax break? The Committee may wish to cost-effectiveness of copying the federal government. 6. Of holes and digging . The Department of Finance defines a tax expenditure as a "deduction, exclusion, exemption, credit, or any other tax benefit as provided by the state." Tax expenditures result in foregone tax revenues in the hopes of providing increased equity in the tax system or changing private investment behavior. This bill enacts a tax expenditure designed to encourage the employment of hard-to-hire individuals, adding to California's approximately $50 billion tax expenditure portfolio, which ranges from the exclusion from income for pension contributions and social security benefits to the mortgage interest deductions, and research and development credits. Tax expenditures evoke passionate and complicated debates, chiefly regarding whether state legislative action to forego tax revenues from specified taxpayers provides superior benefits than commensurate direct spending programs or general tax reductions. Quite different from direct spending measures, the Legislature may only limit, reduce, or eliminate tax credits by a 2/3-vote of each house of the Legislature. 7. Suggested Amendments . Committee staff and FTB recommend the following amendments: Inserting a percentage in the blank space (Page 1, SB 1197 -- 2/22/12 -- Page 5 Line 5 and Page 2, Line 21). The measure relies on the definition of qualified veteran and qualified wages in federal law as of the conformity date of January 1, 2009, which doesn't take into account the VOW to Hire Heroes Act's changes to WOTC. To allow the state tax credit to apply to changes Congress made after 2009, as well as any future ones, the measure should state that qualified veteran and qualified wages include those amounts that qualify for the federal WOTC in the current taxable year (Page 2, lines 1 through 4 and 24 through 28). SB 1197 allows wages paid inside and outside the state to be eligible for the credit. To limit the credit to only those wages paid within the state, the definition should be clarified to state that "qualified wages" means "wages subject to Division 6 (commencing with Section 13000) of the Unemployment Insurance Code)" (Page 2, lines 4 and 28). Specify that taxpayers must apply to the California Employment Development Department to certify eligibility for the credit. Support and Opposition (5/2/12) Support : Unknown. Opposition : Unknown.