BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 93
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          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.









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             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  








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               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  :








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             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.








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             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. 








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          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,  








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            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  








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            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 












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