BILL ANALYSIS                                                                                                                                                                                                    



                                                                AB 93
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        ( Without Reference to File  )

        CONCURRENCE IN SENATE AMENDMENTS
        AB 93 (Budget Committee)
        As Amended  June 25, 2013
        2/3 vote.  Urgency
         
         
         ---------------------------------------------------------------------- 
        |ASSEMBLY: |     |(May 13, 2013)  |SENATE: |30-9 |(June 25, 2013)      |
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                            (vote not relevant)


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        |COMMITTEE VOTE:  |7-0  |(June 27, 2013)     |RECOMMENDATION: |concur    |
        |(L.GOV)          |     |                    |                |          |
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        Original Committee Reference:    BUDGET  

         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.








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           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.

           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;








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             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 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. 









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           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  :

           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.
                     








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           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.

           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  








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             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. 

        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  :  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,  








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        economic development, vocational education, transportation, and  
        housing.  The state allows a number of tax credits and deductions  
        for businesses in the EZ, 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.  

        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  








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        would have increased 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.

        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.


         Analysis Prepared by  :    Debbie Michel / L. GOV. / (916) 319-3958 


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