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
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|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
FN: 0001361