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.