BILL ANALYSIS Ó AB 93 Page 1 Date of Hearing: June 27, 2013 ASSEMBLY COMMITTEE ON LOCAL GOVERNMENT K.H. "Katcho" Achadjian, Chair AB 93 (Budget Committee) - As Amended: June 25, 2013 SENATE VOTE : 30-9 SUBJECT : Economic development: taxation: credits, deductions, exemptions, and net operating losses. SUMMARY : Institutes two new tax programs - a Sales and Use Tax (SUT) exemption for manufacturing and bio-tech equipment and similar purchases, and a hiring credit under the Personal Income Tax (PIT) and Corporation Tax (CT) for employment in specified geographic areas. Additionally, this bill would result in phasing-out and ending certain tax provisions related Enterprise Zones (EZs) and similar tax incentive areas, and ending the current New Jobs Credit tax incentive program. The 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. Specifically, this bill has the following components: 1)SUT Exemption : a) Allows for a new exemption from the state portion of the SUT, for manufacturing and bio-tech equipment, including research and development equipment. i) For those in current EZs and designated census tract boundaries, the credit would apply for 6.5 years, and, ii) For those outside the boundaries, the credit would apply for 4.5 years. b) Includes a cap of $200 million in aggregate purchases annually per business. c) Provides an exemption at the time of purchase consistent with current Board of Equalization exemption process. d) Contains no cap on the total amount of the credit. AB 93 Page 2 e) Includes an operative date of July 1, 2014, and a sunset date of July 1, 2021. f) Includes provisions that if qualifying purchases are removed from the state, or used for unqualified activities, within one year of the purchase would be subject to a claw-back equal to the value of the SUT exemption. 2)Hiring Credit : a) Initiates a new hiring credit under the PIT and CT beginning July 1, 2014, to July 1, 2021 for additional hiring of employees in defined geographic areas of the state. b) Includes credit percentages for all hiring credits at 35% per year for wages at 1.5 times minimum wage up to 3.5 times minimum wage. c) Makes credit available to full-time employees who perform 50% of their activities in designated areas and generally excludes retail, casinos, temp agencies, etc.; these provisions do not apply to small businesses. d) Makes the hiring credit available in EZs that existed as of 2011, in addition adds back Watsonville and Antelope Valley, and includes certain census tracts with low unemployment and high wealth; and makes the hiring credit available statewide in those census tracts with the highest unemployment and high poverty rates. e) Includes a requirement that the credit is available only for "hard to hires" including: i) Long Term Unemployed (six months); ii) Veterans; iii) Those on Federal Earned Income Tax Credit (EITC); and, iv) Was an ex-offender under Revenue and Taxation Code Section 17035.74. f) States that 25% of credit is available for small AB 93 Page 3 businesses and defines small business as having gross receipts of less than $2 million at owner level. g) Requires that business be in a specific North American Industry Classification System (NAICS) code and excludes retail or food. h) Requires businesses to reserve a credit with Franchise Tax Board (FTB) ahead of time. i) Requires net new jobs, which is defined to mean that in order to qualify for any new credit, the taxpayer must have experienced an increase in the total jobs throughout the state from one year to the next. j) Requires an employee to stay with an employer for three years or credits must be returned, unless specified circumstances are made. aa) Requires program evaluations from FTB for the Hiring Credit, Board of Equalization (BOE) for the SUT Exemption, and GO-Biz for the California Competes Credit, to be submitted to the Joint Legislative Budget Committee annually, including 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. bb) Creates an expedited process of reserving a tax credit for a taxpayer who hires an employee that meets one of the hard to hire categories and lives in a Targeted Employment Area (TEA). cc) Contains a severability clause that would 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 unlawful delegation of legislative authority. dd) Contains language that would preclude 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. 3) GO-Biz Incentives : AB 93 Page 4 a) Allows businesses to compete for available funds based on criteria showing the number of jobs to be created and retained, wages those jobs pay, and a set job retention period. b) Establishes the California Competes Tax Credit Committee (CCTCC), which membership consists of the Treasurer, the Director of Finance, the Director of Governor's Office of Business and Economic Development, and an appointee by the Assembly and the Senate. c) Limits the amounts of credits available for GO-Biz not to exceed $30 million (fiscal year (FY) 2013-14), $150 million (FY 2014-15), and $200 million (each FY 2015-19). d) States that the amount available is dependent on how much SUT Credits and Hiring Credits are given out per year; and the total of all three not to exceed $750 million. e) Sets 25% aside for small business. f) Requires the CCTCC to approve or reject written agreements for the allocation of California Competes tax credits under the PIT and CT after the receipt of fully executed written agreements between the taxpayer and GO-Biz. g) Includes provisions that written agreements would take into consideration, but not limited to, the number of jobs created, the compensation paid to employees, amount of investment by the taxpayer in the state, and amount of unemployment in the area. h) Includes legislative intent to declare the economic policy in the state should be designed to create good jobs with middle class wages and benefits, target for assistance individuals with barriers to employment, and encourage business to invest in California. i) Caps GO-Biz credits to no more than 20% of funds available at GO-Biz for a single taxpayer per year. j) Includes provisions that approved businesses will receive funds via tax credit. AB 93 Page 5 aa) Includes provisions of six years for the carry over on GO-Biz credits. 4)Repeals the old EZ provisions and the small business hiring credit program effective January 1, 2014. 5)Ends the programs related to tax incentives for activities in EZs beginning January 1, 2014. However with respect to the hiring credit, allows any business that has credits to finish receiving their remaining credits over the next 10 years. No new hiring credits will be issued after December 31, 2013. 6)Contains an appropriation of $600,000, for the Department of Finance to allocate to agencies to fund the bill. 7)Includes an urgency clause allowing this bill to take effect immediately upon enactment. EXISTING LAW : 1)Provides for the establishment of Geographically-Targeted Economic Development Areas (G-TEDA) programs to stimulate business and industrial growth, and creates jobs in depressed areas of the state. Specifically, existing law: a) Establishes the EZ program with a maximum of 42 EZs, each designated for an initial 15-year period by the Department of Housing and Community Development (HCD); b) Establishes the Local Agency Military Base Realignment Area (LAMBRA) Program with a maximum of eight LAMBRAs, each designated for an eight-year period by HCD. Limits designation to one LAMBRA per geographical region of the state; c) Establishes the Manufacturing Enhancement Area (MEA) Program with a maximum of two MEAs, each designated for a 14-year period by HCD. Limits MEA designation to impoverished areas along the California-Mexico border; and, d) Establishes the Targeted Tax Area (TTA) Program, administered by HCD, within the County of Tulare for a 15-year period. AB 93 Page 6 2)Provides legislative intent that the "health, safety, and welfare of the people of California depend upon the development, stability, and expansion of private business, industry, and commerce, and there are certain areas within the state that are economically depressed due to a lack of investment in the private sector. Therefore, it is declared to be the purpose of this chapter to stimulate business and industrial growth in the depressed areas of the state by relaxing regulatory controls that impede private investment. Further, that is in the economic interest of the state to have one strong, combined, and business-friendly incentive program to help attract business and industry to the state, to help retain and expand existing state business and industry, and to create increased job opportunities for all Californians." 3)Provides for the New Jobs Credit, where employers inside an EZ may claim a tax credit of 50% of the wages paid to a qualified employee in the first year, 40% in the second year, 30% in the third year, 20% in the fourth year, and 10% in the fifth year, up to 150% of the minimum wage. Businesses or consultants submit applications to qualify employees to zone managers, who grant the firm or consultant a voucher certifying eligibility if the employee qualifies and the firm claims the credit on its next tax return. FISCAL EFFECT : Preliminary costs from the Department of Finance suggest that over the next five years, the net benefits can range from a benefit of $163 million to a cost to the state of $169 million, changing year to year. Additionally, it includes costs of $600,000, for the Department of Finance to allocate to agencies to implement the program. COMMENTS : 1)Under existing law, HCD can designate up to 42 EZs, which are intended to stimulate business and industrial growth in economically depressed areas of the state and to provide incentives for hiring disadvantaged individuals. Within an EZ, cities and counties can relax regulatory controls (such as permits and development fees), provide tax incentives, expand infrastructure, and target federal grants for education, health and welfare, economic development, vocational education, transportation, and housing. The state allows a number of tax credits and deductions for businesses in the EZ, AB 93 Page 7 including credits for sales and use tax paid on manufacturing equipment purchases, hiring credits for qualified employees, 100% net operating loss carryover for losses associated with operations within the EZ, deduction of interest earned by lenders who loan money to EZ businesses, and election to expense rather than amortize equipment used within the EZ. An EZ designation lasts for 15 years. Cities and counties apply to HCD to designate geographic areas in their jurisdictions as EZs. Geographic areas are eligible based on unemployment rates, free lunch program participation, median income, plant closures, or history of gang-related activity. HCD selects EZs through a competitive process based on the appropriateness of the applicant's proposed economic development strategy and implementation plan. There are 40 EZs located throughout the state, from Siskiyou County to Calexico, with eight located in Los Angeles County and three in Kern County. Ventura County has no EZs in its boundaries. EZs range in size from one square mile to 70 square miles. Two EZ designations became available in 2012. The Franchise Tax Board (FTB) reported that $721.5 million in EZ business incentives were claimed through corporate and personal income tax returns in 2010. Additionally, FTB reported hundreds of millions in carryover credits have been earned by businesses, but have not been claimed. 2)The EZ program has been the subject of much debate, litigation, and two legislative oversight hearings in recent years. Program supporters contend that EZs are an effective tool for economic development, citing accounts from taxpayers who state that they locate in California largely because of EZ program incentives. Supporters state that the incentives draw investment into economically distressed communities and provide avenues for hard-to-hire individuals to find employment. Critics argue that the program offers a poor return on the state's investment, and question specific components of the program. There have been different proposals over the years to reform the EZ program. The last major reform proposal came in 2011-12. Governor Brown proposed to repeal all EZ tax credits, citing the Legislative Analyst's Office long-standing recommendation to reform or repeal the program. The Department of Finance noted that the proposal would have increased AB 93 Page 8 revenue by $343 million (2010-11), and $583 million (2011-12). The Governor proposed that the zones would continue to provide local incentives, but zone taxpayers could no longer receive state tax benefit. The Legislature at that time did not act on his proposal. This year, the Governor's January budget assumed savings related to new regulations for the EZ program, which is estimated to increase General Fund revenues by $10 million in 2012-13 and $50 million in 2013-14. The reforms are projected to save $310 million over the first five years. 3)This bill goes beyond previous proposals to eliminate enterprise zones. This bill creates a new process to create jobs and stimulate the economy. 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 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. REGISTERED SUPPORT / OPPOSITION : Support Unknown Opposition Unknown Analysis Prepared by : Debbie Michel / L. GOV. / (916) 319-3958 AB 93 Page 9