BILL ANALYSIS Ó
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THIRD READING
Bill No: AB 93
Author: Assembly Budget Committee
Amended: 6/25/13 in Senate
Vote: 27 - Urgency
SENATE BUDGET & FISCAL REVIEW COMMITTEE : 9-5, 6/24/13
AYES: Leno, Beall, Block, DeSaulnier, Hancock, Jackson,
Monning, Roth, Torres
NOES: Emmerson, Anderson, Berryhill, Nielsen, Wyland
NO VOTE RECORDED: Price, Wright
ASSEMBLY FLOOR : Not relevant
SUBJECT : Economic development: taxation: credits,
deductions, and net
operating losses
SOURCE : Author
DIGEST : This is an Economic Development bill that makes
various changes in the state tax system beginning in 2013-14.
The proposed statutory changes are related to the Governor's
Budget proposal to address budgetary aspects of one of the
state's largest and fastest growing tax expenditure programs,
and provide additional tax incentive programs to encourage
economic development. This bill makes substantial changes to
the state tax system, relating to the personal income tax (PIT),
corporation tax (CT), and sales and use tax (SUT). This bill
results in phasing-out and ending certain tax provisions
relating to taxpayers located in enterprise zones (EZs) and
CONTINUED
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similar tax incentive areas, ending the current New Jobs Credit
tax incentive program, and instituting two major tax programs-an
SUT exemption for equipment and similar purchases, and a hiring
tax credit under the PIT and CT for employment in specified
geographic areas. This bill also provides for allocating income
tax credits through the Governor's Office of Business and
Economic Development (GO-Biz) to assist in retaining existing
and attracting new business activity in the state.
Senate Floor Amendments of 6/25/13 (1) add "ex-offender" as
currently defined in the EZ program as a qualified employee"
under hiring credit; (2) add a 10-year carry-forward for all
existing EZ, local agency military base recovery area (LAMBRA),
and targeted tax area (TTA) credits. These credits are in the
current programs; (3) allow the sales and use tax exemption for
seven years (instead of 4 1/2 ) in EZs and census tracts only;
(4) extends the hiring credit to seven years (from five); and
(5) add poverty as a GO-Biz criterion for consideration for the
incentive credits.
ANALYSIS :
Existing Law
The state imposes a tax on the sale and use of tangible personal
property, a tax on personal income, and a CT based on income.
For each tax, there are various special tax expenditure programs
designed to encourage or reward particular economic activities.
The state's taxes and tax expenditure programs affected by this
bill are outlined below:
1. SUT . California's SUT law imposes the sales tax on the sale
of tangible personal property in the state and the use tax on
the storage, use, or other consumption of tangible personal
property in the state, except where a specific exemption is
provided. Generally, the SUT applies to the purchase or use
of tangible personal property, such as equipment, that is
used to manufacture, produce or process tangible personal
property. Thus, the tax is generally imposed on equipment
used in manufacturing and research and development. The tax
is not applied to sales of tangible personal property when it
is physically incorporated in a manufactured item that will
be sold. The current statewide SUT rate is 7.5% and includes
rates for the state General Fund, various special funds, and
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local governments. In addition, local governments may impose
voter-approved add-on rates. An allocated exclusion from
this tax is provided by the California Alternative Energy and
Advanced Transportation Financing Authority for purchases of
tangible personal property for approved manufacturing
projects. The Board of Equalization (BOE) administers the
SUT.
2. EZ programs . California levies the PIT on all
California-sourced income. The PIT is paid by all California
residents and nonresidents who receive income from sources in
the state, unless such income is specifically excluded from
taxation. The state also imposes the CT based on all income
derived from or attributable to California, and levies the
SUT on the sale of use of tangible personal property in the
state.
The Department of Housing and Community Development (HCD) may
designate certain geographic areas as EZs, thus providing
access to tax incentives for businesses that conduct
activities in these zones. Cities and counties may apply to
HCD for zone designation based on unemployment rates,
residents' participation in subsidized meal programs, median
resident income, recent experience with plant closures, and
certain other socio-economic characteristics. Statutory
authority allows for the creation by HCD of up to 42 zones,
each for a 15-year period. Currently, the state has 40
designated zones; two zones were allowed to expire in 2012.
EZs are widespread throughout the state and result in
potential tax benefits for virtually all types of industries.
With exceptions for certain tax programs, these tax
incentives are generally available for certain other
designated geographic areas, comprising LAMBRAs, TTAs,
manufacturing enhancement areas, and the Los Angeles
Revitalization Zone. These later areas constitute a minor
portion of the geographically-based tax incentive program.
Taxpayers with business activities located in an EZ can claim
various tax incentives through both the PIT and CT. The
available tax incentive programs include tax credits for
hiring certain qualified individuals, sales taxes paid on
equipment purchases, and net interest deductions for banks
making loans to an EZ business. In addition, EZ businesses
may benefit from accelerated depreciation of equipment and
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the carry-over of 100% of business losses to future tax
years. The specific programs are:
A. EZ hiring credit . The largest EZ-related incentive is
the hiring credit. California law provides a credit to
taxpayers that employ qualified employees in an EZ during
the taxable year equal to (1) 50% of qualified wages in
the first year of employment; (2) 40% of qualified wages
in the second year of employment; (3) 30% of qualified
wages in the third year of employment; (4) 20% of
qualified wages in the fourth year of employment; and (5)
10% of qualified wages in the fifth year of employment.
In general, qualified wages means wages that do not exceed
150% of the minimum wage. Such wages must be paid to a
qualified employee who works at least 90% of the time on
activities directly related to the business located in an
EZ and whose services must be at least 50% performed
within the boundaries of an EZ. Qualified employees
include economically disadvantaged individuals, dislocated
workers, disabled individuals, ex-offenders, recipients of
certain federal or state aid, members of a
federally-recognized Indian tribes, or residents of a
defined "targeted employment area" (TEA), where more than
50% of the residents are low- and moderate-income. To
qualify for the hiring credit, the taxpayer must obtain a
certification, or voucher, indicating that the employee
meets the eligibility criteria specified above. Taxpayers
are required to retain a copy of this voucher and provide
it upon request to the Franchise Tax Board (FTB), the
state agency charged with administering the CT and the
PIT.
B. SUT credit . Taxpayers engaged in a trade or business
within an EZ may take a credit equal to the SUT paid
during the taxable year in connection with the purchase of
qualified property. Qualified property includes specified
machinery and machinery parts, data processing and
communications equipment, and motion picture manufacturing
equipment central to production and postproduction. The
total cost of qualified property permitted for purposes of
claiming this credit may not exceed
$1 million for PIT filers and $20 million for CT filers.
Moreover, the qualified property must be used by the
taxpayer exclusively in an EZ.
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C. Net interest deduction . California law provides for
the deduction of net interest income on loans made to a
trade or business located solely within an EZ. For
purposes of the EZ net interest deduction, a qualified
taxpayer (creditor) is defined as an entity that loans
funds on or after the designation date of the EZ to a
qualified business (debtor) and receives interest payments
thereon. The taxpayer (creditor) does not have to be
located in the EZ to take advantage of the net interest
deduction; only the debtor needs to operate within the EZ.
D. Accelerated depreciation . Existing law allows EZ
taxpayers to treat 40% of the cost of specified property
as an expense not chargeable to the taxpayer's capital
account. Any such cost may be allowed as a deduction for
the taxable year in which the taxpayer places the property
in service. Such property must be for exclusive use in a
trade or business conducted within an EZ.
E. Employee tax credit . Existing law allows a PIT or CT
credit equal to 5% of "qualified wages," as defined,
received by a qualified EZ employee during the taxable
year. However, for each dollar of income received by the
employee in excess of qualified wages, the credit is
reduced by nine cents.
3. New Jobs Credit . Under the PIT and the CT, a tax credit of
up to $3,000 for each additional full-time employee hired is
available to small businesses with 20 or fewer employees,
beginning January 1, 2009. The credit is prorated on an
annual full-time equivalent basis for employees employed less
than a full year. To qualify, each qualified full-time
hourly employee must be paid wages for not less than an
average of 35 hours per week and each qualified full-time
employee that is a salaried employee must be paid
compensation during the year for full-time employment.
Generally, an employer may not claim the credit for those
employees who are certified as a qualified employee in an EZ
or similar incentive area, or for an employee whose wages are
included in calculating any other credit allowed. In
addition, there must be a net increase in qualified full-time
employees compared to the number of full-time employees
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employed in the preceding taxable year. For taxpayers who
first commence doing business in California during the
taxable year, the number of qualified full-time employees
considered employed in the preceding year would be generally
be zero, unless certain special rules apply.
The credit is an allocated credit and the total amount of
credit available to be claimed by all taxpayers is capped at
$400 million. The credit must be claimed on a timely filed
original return received by the FTB on or before a cut-off
date specified by the FTB.
4. GO-Biz . GO-Biz was created to serve as a single point of
contact for economic development and job creation efforts.
It offers a range of services to businesses including
business attraction, retention and expansion services; site
location selection; permit assistance; regulatory filing and
approval assistance; small business assistance; international
trade development; and assistance with state government.
Under the Governor's Reorganization Plan No. 2 (GRP 2), the
Infrastructure Development Bank, the California Film
Commission, the Office of Tourism, and the Small Business
Loan Guarantee Program will be transitioned from the
Business, Transportation and Housing Agency to GO-Biz,
effective July 1, 2013.
This bill institutes several new tax programs that will result
in tax reductions for certain purchases of tangible personal
property and for increasing employment in specific designated
areas. In addition, provides for the allocation of tax credits
in exchange for investments and employment in California.
Results in the elimination of EZ and related area tax incentives
and the New Jobs Credit.
1. SUT exemption . Allows for an exemption from the state
portion (General Fund and Education Protection Fund) of the
SUT, beginning July 1, 2014 and before January 1, 2021, for
certain purchases by qualified purchasers that are used in
designated activities. These combined rates are currently
4.19%. The exemption will be limited annually to the first
$200 million of otherwise eligible purchases by a qualified
purchaser. Qualified purchasers that will be eligible for
the SUT exemption are identified by designated codes of the
North American Industry Classification System (NAICS), but
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excluding extractive industries:
NAICS Codes 3111 through 3399 include all
establishments primarily engaged in manufacturing
activities. This encompasses manufacturers in the
aerospace sector, textiles, pharmaceuticals, printing,
food and others.
NAICS Code 541711 includes establishments primarily
engaged in conducting biotechnology research and
experimental development. This encompasses industries
using microorganisms and cellular and bio-molecular
processes to develop or alter materials.
NAICS Code 541712 includes establishments primarily
engaged in conducting research and experimental
development in the physical, engineering and life
sciences. This encompasses activities in agriculture,
electronics, environmental biology, botany, computers,
chemistry, food, fisheries, forest, geology, health,
mathematics, medicine, oceanography, pharmacy, physics,
veterinary and other allied fields.
Qualified tangible personal property must be used at least
50% of the time by the qualified purchaser in any stage of
manufacturing, processing, refining, fabricating, or
recycling of tangible personal property; for purposes of
research and development; to maintain, repair, measure, or
test tangible personal property; and, if purchased by a
contractor, used as an integral part of the manufacturing,
processing, refining, fabricating, or recycling process, or
as a research and storage facility for use in connection with
those processes.
Qualified tangible personal property eligible for the
exemptions include machinery and equipment, including
component parts such as belts, shafts, moving parts and
operating structures; equipment or devices used or required
to operate and control machinery such as computers, data
processing equipment, software; pollution control equipment
that meets state and federal standards; and special purpose
buildings used as an integral part of manufacturing,
processing, refining, fabricating or recycling process, not
including storage. Eligible property must have a useful life
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in excess of one year and excludes items such as furniture,
equipment used for extraction or storage, or property used
for administration, management or marketing.
The SUT exemption will be provided if the purchaser furnishes
a seller with an exemption certificate, which will be kept by
the seller and furnished to the BOE upon request. Qualifying
purchases that are removed from the state, or used for
unqualified activities, within one year of the purchase will
be subject to a 'claw-back' equal to the value of the SUT
exemption. The purchaser of the property will be liable for
the payment of the sales or use tax that would otherwise have
been collected from the seller absent the provision of the
exemption.
2. Hiring credit . Initiates a new hiring tax credit under the
PIT and CT, from January 1, 2014 to January 1, 2021, for
additional hiring of employees in defined geographic areas of
the state. The hiring credit will be available in the
geographic areas largely covered by the existing EZs (except
certain census tracts with low unemployment), two recently
expired EZs located in Antelope Valley and Watsonville, and
in designated census tracts that have a civilian unemployment
rate and a poverty rate in the top 25% of all census tracts
in the state. The credit percentages for all hiring credits
are 35% per year for five years for wages between 150% and
350% of the minimum wage (currently between $12 and $28 per
hour). The credit is available for full-time employees who
perform at least 50% of their activities in the designated
areas. Generally, (except for small businesses that claim
the credit), the following apply: (a) taxpayers from a
temporary agency, retailer, restaurant or drinking
establishment, as defined by the NAICS codes are prohibited
from receiving the hiring credit; and (b) taxpayers that move
into an EZ are required to provide an "offer of transfer" to
its employees with comparable compensation. Important
features of the hiring credit include the following:
Employee characteristics . Employees would have to
meet one of the following characteristics: (a) have been
previously unemployed for six months; (b) received the
Earned Income Tax Credit; (c) was an ex-offender; or (d)
have served in the United States Military. Credit
reservation requests from a qualified taxpayer who submits
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a tentative tax credit reservation request for an eligible
employee (under one of the three eligibility categories)
who also happens to reside in a TEA would be expedited.
Net new jobs . Requires that in order to qualify for
any credit, the taxpayer must have experienced an increase
in total jobs throughout the state from one year to the
next. Taxpayers are only allowed the credit for the
number of new jobs provided in the state. For example, if
a company shows it has hired 100 employees statewide, the
company may receive total credits for up to 100 employees.
Alternatively, if a taxpayer hires 50 new employees in
one area but laid-off 25 employees in another part of the
state, the taxpayer would only be eligible for credits for
25 qualified employees.
Small business provisions . Requires that 25% of the
hiring credits be reserved for small business, defined as
businesses with annual gross receipts of under $2 million.
Small business must comply with all requirements except
the offer of transfer and the industry limitations noted
above.
Credit administration . Taxpayers may only qualify for
the credit if it is on the original filed timely return
with the FTB; no credit may be claimed on an amended
return. Taxpayers, with qualified employees that meet the
net new jobs test, must reserve a credit with the FTB.
The credit is then claimed on an original filed timely
return. Requires the FTB to compile a list of the hiring
credit vouchers claimed and number of new jobs created for
each taxable year.
3. GO-Biz . Establishes the California Competes Tax Credit
Committee (CCTCC), consisting of the State Treasurer,
Director of the Department of Finance (DOF), the Director of
GO-Biz, and a representative of the Senate and Assembly. The
CCTCC would approve or reject written agreements for the
allocation of California Competes tax credits under the PIT
and the CT after the receipt of fully executed written
agreements between the taxpayer and GO-Biz. Under the
program, up to $30 million would be allocated in 2013-14,
$150 million in 2014-15 and $200 million from 2015-16 through
2018-19. The amounts actually allocated will be subject to
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restrictions based on the total value of SUT exemptions and
hiring credits claimed relative to the amount of $750
million. 25% of the credits will be reserved for small
businesses and priority will be given to projects proposed
for location in areas of high unemployment or poverty.
The agreement to award credits would take into consideration,
but not be limited to, the number of jobs created; the
compensation paid to employees; amount of investment by the
taxpayer in the state; amount of unemployment or poverty in
the area according to the U.S. census; other incentive
available to the taxpayer in this state and other states;
duration of the project; overall economic impact of the
project; strategic importance of the project; opportunity for
future expansion in the state by the taxpayer; and the extent
to which state benefits exceed state costs. In the event
that a taxpayer fails to perform under the written agreement,
the credit would be subject to recapture. Requires GO-Biz to
provide information to FTB regarding the effectiveness of the
credits as measured by job creation, additional investment
and other metrics.
4. EZ programs . Programs related to tax incentives for
activities in EZs and similar areas, will generally no longer
be effective beginning January 1, 2014. However, with
respect to the EZ hiring credit, for employees employed by
the qualified taxpayer prior to January 1, 2014, the wages
paid with respect to those employees will continue to qualify
for the credit for any remainder of the five-year period. In
addition, credits claimed, or earned, under the EZ program
and carried-over from prior years, could continue to be
applied to tax liabilities for up to 10 years, or through
December 2019.
5. New Jobs Credit . Under the proposed statute, the 2009 New
Jobs Credit will cease to be operative for taxable years
beginning on or after January 1, 2014, and repealed.
6. Legislative Intent . Indicates that the Legislature finds and
declares the goal of California's economic development policy
should be designed to create good jobs with middle class
wages and benefits; target for assistance individuals with
barriers to employment; and encourage businesses to invest
and create jobs in California.
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7. Legislative reporting . Requires the following program
evaluations be provided to the Joint Legislative Budget
Committee (JLBC) annually. The reports will include
discrepancies between initial estimates and actual credit or
exemption usage under the programs and identify options for
program changes in the event usage is below expectations.
The evaluations presented to the JLBC will be provided by FTB
for the hiring credit; BOE for the SUT exemption; and GO-Biz
for the California Competes credits.
8. Severability . Provides a severability clause that will allow
for the continued operation of other provisions of the
statute in the event that the establishment of the GO-Biz
California Competes credit is found to be an unlawful
delegation of legislative authority. Contains language that
precludes the operation of the SUT exemption and the hiring
credit in the event the repeal of the EZ program and the New
Jobs Credit are overturned and instead remain operative.
9. Appropriation . An appropriation to DOF and the CCTCC is
provided for the costs of administering the provisions of
this bill. The allocation of funds under this appropriation
would be effective 30 days after the notification by the
Director of DOF to the JLBC.
Comments
According to the Senate Budget and Fiscal Review Committee, from
an economic perspective, the core of the proposed policy changes
represent an improvement in overall state tax policy. The SUT
exemption, although limited to particular industries, represent
a fundamental policy improvement by addressing the phenomenon of
"tax pyramiding"-that is, when inputs to production are taxed as
well as the outputs. While this aspect of the proposal
represents good tax policy, broad application would result in
significant revenue loses; however, this possibility is dealt
with by targeting the exemption to particular industries.
Regarding the EZ programs, the general intent of the PIT and CT
tax incentives in the EZ program is to generate, in designated
areas, economic activity-such as additional investment and
employment-that would otherwise not occur. However, the
effectiveness of the EZ program in this regard has been the
subject of substantial criticism. A broad body of economic and
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tax research indicates that the program offers a poor return on
the state's sizable investment, largely as a consequence of the
ineffectiveness and inefficiencies inherent in tax incentive
programs of this type. On balance, the proposal represents a
significant step forward for state policy, while still retaining
certain incentive benefits for disadvantaged areas of the state.
FISCAL EFFECT : Appropriation: Yes Fiscal Com.: Yes
Local: No
The bill contains provisions that will result in revenue
increases and decreases. Revenue decreases will result from the
SUT exemption, tax credits for additional hiring created, and
tax incentives provided by GO-Biz. Increases in revenues will
stem from the repeal of certain tax credits and other tax
incentives related to EZs and similar tax incentive areas, and
cessation of the 2009 New Jobs Credit. The table below
indicates the revenue impacts of isolated components of the
proposal and the total impact of the bill over the next four
years:
Revenue Impacts (In Millions $)
----------------------------------------------------------
| | | | | |
|Tax Provision | 2013-14| 2014-15| 2015-16| 2016-17|
| | | | | |
|---------------------+---------+--------+--------+--------|
| | | | | |
|SUT Exemption | 0| -486| -521| -531|
| | | | | |
|---------------------+---------+--------+--------+--------|
| | | | | |
|Hiring Credit | -7| -34| -70| -110|
| | | | | |
|---------------------+---------+--------+--------+--------|
| | | | | |
|GO-Biz Incentives | 0| -32| -83| -134|
| | | | | |
|---------------------+---------+--------+--------+--------|
| | | | | |
|Enterprise Zone | 95| 375| 635| 805|
|Repeal | | | | |
| | | | | |
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|---------------------+---------+--------+--------+--------|
| | | | | |
|New Jobs Credit | 75| 0| 0| 0|
|Repeal | | | | |
| | | | | |
|---------------------+---------+--------+--------+--------|
| | | | | |
|Total | 163| -177| -39|30 |
| | | | | |
| | | | | |
----------------------------------------------------------
Estimates from the BOE and the FTB provide the basis for the
revenue estimates shown the table. DOF then made additional
adjustments in these estimates to account for specific policy
design aspects of the proposal, assumptions regarding behavioral
shifts, and anticipated future actions.
In particular, the BOE provided base estimates of the revenue
loss due to SUT exemptions which do not account for certain
adjustments required to incorporate behavioral changes,
interactions with other programs, and limitations on the
availability of the exemption. DOF's most significant
adjustment to the BOE estimates is a downward adjustment
resulting from the $200 million per-firm limitation. A review
of California data indicates that, while few firms exceed the
$200 million threshold, those that do contribute a
disproportionate share of capital purchases-almost 22% of
equipment purchases are attributable to purchases in excess of
$200 million by firms with more than $200 million in purchases.
This adjustment results in a reduction in the revenue loss from
this component.
Similarly, the FTB provided base estimates for the elimination
of EZ credits and those for similar zones. FTB's estimates did
not account for anticipated revenue impacts of regulatory
decisions by the Administration, through audit procedures or
other administrative steps that would, as a matter of course,
work to reduce the impact of the EZ tax incentive programs. Not
accounting for these anticipated actions would tend to overstate
the positive revenue implications in this bill attributable to
ending EZ tax incentive programs. Thus, the DOF adjustment
results in a reduction in the revenue gain associated with the
proposal.
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DOF's revenue impact projections are based on available
California data and account for historical patterns of equipment
purchases for various firms. The available state-level data
used is based on a reasonable period from which to sample.
While there will always be variations from estimated revenues
due to changing circumstances and events for which forecasting
tools cannot account, the revenue estimates seem reasonable.
MW:km 6/25/13 Senate Floor Analyses
SUPPORT/OPPOSITION: NONE RECEIVED
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