BILL ANALYSIS �
AB 825
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Date of Hearing: May 13, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 825 (Medina) - As Introduced: February 21, 2013
SUSPENSE
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: hiring full-time employees.
SUMMARY : Expands the existing hiring tax credit for small
businesses. Specifically, this bill :
1)Expands the existing definition of a "qualified employer" to
include taxpayers that, as of the last day of the preceding
taxable year, employed 50 or fewer employees (instead of 20 or
fewer employees per current law).
2)Provides that the above modification shall apply to taxable
years beginning on or after January 1, 2013.
3)Deletes duplicative sections of the Revenue and Taxation Code
as a housekeeping matter.
4)Corrects erroneous cross-references and makes other technical
non-substantive changes in existing law.
5)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits under both the Personal Income Tax
(PIT) Law and the Corporation Tax Law. These credits are
generally designed to provide relief to taxpayers who incur
specified expenses or to encourage socially beneficial
behavior, including business practices.
2)Establishes the following geographically-targeted economic
development areas (G-TEDAs): Enterprise Zones, Manufacturing
Enhancement Areas, Targeted Tax Areas, and Local Agency
Military Base Recovery Areas. Special tax incentives are
provided to taxpayers conducting business activities within a
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G-TEDA. These incentives include a hiring credit equal to a
percentage of wages paid to qualified employees.
3)Allows a New Jobs Tax Credit for taxable years beginning on or
after January 1, 2009, to qualified employers equal to $3,000
for each net increase in qualified full-time employees hired
during the taxable year, determined on an annual full-time
equivalent basis. [ABX3 15 (Krekorian), Chapter 10, Statutes
of 2009 and SBX3 15 (Calderon), Chapter 17, Statutes of 2009].
The credit is limited to small businesses (i.e., taxpayers
with 20 or fewer employees as of the last day of the preceding
taxable year). The credit is capped at roughly $400 million
for all taxable years. Any credits not used in the taxable
year may be carried forward up to eight taxable years.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates that
this bill would result in an annual General Fund (GF) revenue
loss of $50 million in fiscal year (FY) 2013-14, $7.1 million in
FY 2014-15, and $4.5 million in FY 2015-16.
COMMENTS :
1)The Author's Statement . The author has provided the following
statement in support of this bill:
For taxable years beginning on or after January 1, 2013,
this bill would change the existing Jobs Tax Credit to
define a qualified employer as one that as of the previous
taxable year employs 50 or fewer employees. A qualified
employer is a taxpayer employing 20 or less employees.
2)Arguments in Opposition . Opponents state that there is little
point in "broadening the employee tax credit to larger
employers" because it "will have no measurable impact on
employment but will lose scarce revenue for vital public
services." The opponents argue that hiring occurs "when the
employee adds value beyond their cost, and the $3000 credit
will never make a difference when hiring a new employee costs
$10s of thousands of dollars on an on-going basis." The
opponents conclude that the fact "that the credit is still
unused? is a case in point relative to the failure of such tax
credits to be meaningful in the hiring process."
3)What is a "tax expenditure"? : Existing law provides various
credits, deductions, exclusions, and exemptions for particular
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taxpayer groups. In the late 1960s, U.S. Treasury officials
began arguing that these features of the tax law should be
referred to as "expenditures," since they are generally
enacted to accomplish some governmental purpose and there is a
determinable cost associated with each (in the form of
foregone revenues). This bill would modify an existing tax
expenditure program known as the New Jobs Tax Credit.
4)How is a tax expenditure different from a direct expenditure? :
As the Department of Finance notes in its annual Tax
Expenditure Report, there are several key differences between
tax expenditures and direct expenditures. First, tax
expenditures are reviewed less frequently than direct
expenditures once they are put in place. This can offer
taxpayers greater certainty, but it can also result in tax
expenditures remaining a part of the tax code without
demonstrating any public benefit. Second, there is generally
no control over the amount of revenue losses associated with
any given tax expenditure.<1> Finally, it should also be
noted that, once enacted, it takes a two-thirds vote to
rescind an existing tax expenditure absent a sunset date.
This effectively results in a "one-way ratchet" whereby tax
expenditures can be conferred by majority vote, but cannot be
rescinded, irrespective of their efficacy, without a
supermajority vote.
5)How would this bill alter the existing New Jobs Tax Credit
program? : The FTB reports that, as of March 4, 2013, 24,345
PIT and business entity returns had been filed claiming the
New Jobs Tax Credit, with the cumulative credit amount
totaling only $142.5 million. At this rate, it could take
several years for the existing $400 million cap to be reached
absent significant growth in the economy. This bill seeks to
modify the New Jobs Tax Credit by expanding the pool of small
businesses eligible for the credit to include those with up to
50 employees (instead of 20 employees). As such, this bill
would likely accelerate usage of the existing $400 million
credit allocation.
6)Do hiring credits actually produce jobs? : With the national
unemployment rate hovering above 7%, some have advocated job
creation tax credits as a means of revitalizing the struggling
---------------------------
<1> This is not so in the case of the existing New Jobs Tax
Credit, which is capped at roughly $400 million for all taxable
years.
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economy. The question, however, is whether such credits
actually work. Recently, Daniel Wilson, Assistant Director of
the Center for the Study of Innovation and Productivity at the
Federal Reserve Bank of San Francisco, attempted to answer
this question. In a paper co-authored with Robert Chirinko of
the University of Illinois at Chicago, Wilson examined the
period between January 1990 and August 2009, and found that,
among states where employers could qualify for credits
immediately after enactment of the credit legislation, there
was a slight employment increase of 0.12%. These findings
would suggest that hiring credits, at least at the state
level, are a blunt tool for stimulating job growth.
7)Does the New Jobs Tax Credit provide an incentive or a
reward? : At this Committee's oversight hearing on tax
expenditure programs on February 22, 2012, Professor Suzanne
O'Keefe of Sacramento State University addressed the question
of whether the New Jobs Tax Credit actually encourages job
creation. Professor O'Keefe began by noting that the program
provides small businesses with a $3,000 credit for each net
increase in full-time employees. However, she was quick to
point out that any new full-time hire costs his/her employer a
minimum of $21,000 per year, assuming an $8 minimum wage and
other legally required benefits. Thus, a $3,000 credit
represents, at most, only 14% of the cost of hiring a new
full-time employee. Professor O'Keefe testified that the New
Jobs Tax Credit only serves to tip the scales in favor of
hiring for relatively few small businesses. It would seem
that, in the majority of cases, the New Jobs Tax Credit serves
to reward small businesses for hiring decisions they would
have made even without the credit. Committee members may wish
to consider whether the remaining New Jobs Tax Credit
allocation could be put to better use.
8)Reward or incentive? AB 825 proposes to expand the New Jobs
Tax Credit by increasing the number of small businesses that
would qualify for the credit. This change is scheduled to
take effect for taxable years beginning on or after January 1,
2013. Normally, tax credits are designed to encourage
taxpayers to take actions they may not otherwise undertake.
This principle of sound tax policy is arguably undermined by
providing a tax credit for actions that have already taken
place (e.g., hiring an employee in 2013). By allowing a
retroactive application of the New Jobs Tax credit, this bill
would reward some of the taxpayer behavior (i.e. hiring of new
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employees) that has already occurred. To ensure that this
credit serves as an incentive for future taxpayer behavior
(and not a reward for past actions), the author may wish to
amend this bill to apply to taxable years beginning on or
after January 1, 2014.
9)Related legislation : Committee staff notes the following
related bills introduced in the 2011-12 Legislative Session:
i) AB 11 (Portantino) would have reduced the New Jobs
Tax Credit allocation from roughly $400 million to
roughly $200 million, and allowed a new credit equal to
20% of annual workers' compensation premiums paid by
qualified taxpayers. The total amount of the new credit,
in turn, would have been capped at roughly $200 million.
AB 11 was held in this Committee.
ii) AB 234 (Wieckowski) would have modified and expanded
the existing New Jobs Tax Credit by, among other things,
providing a credit of $9,100 for each net increase in
qualified full-time employees paid more than $16 per
hour. AB 234 was held in this Committee.
iii) AB 236 (Swanson) would have reallocated $50 million
from the New Jobs Tax Credit to establish a new credit
designed to encourage the hiring of the chronically
unemployed. AB 236 was held in the Assembly
Appropriations Committee.
iv) AB 246 (Wieckowski) would have modified and expanded
the existing New Jobs Tax Credit by, among other things,
providing a credit of $9,100 for each net increase in
qualified full-time employees paid more than $16 per
hour. AB 246 failed passage in the Senate Committee on
Governance and Finance.
v) AB 248 (Perea) would have reallocated $150 million
from the New Jobs Tax Credit to establish a credit equal
to 25% of the value of qualified medical services
personally provided by a physician during the taxable
year. AB 248 was held in the Assembly Appropriations
Committee.
vi) AB 304 (Knight) would have allowed a tax credit,
under both the PIT Law and the Corporation Tax Law, for
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each "qualified employee" employed by a "qualified
employer," as specified. AB 304 was held in this
Committee.
vii) AB 643 (Davis) would have reallocated $300 million
from the New Jobs Tax Credit to establish a state New
Markets Tax Credit program designed to stimulate economic
development. AB 643 was held in the Assembly
Appropriations Committee.
viii) AB 1009 (Wieckowski) would have recast the existing
New Jobs Tax Credit by, among other things, modifying the
definition of a "qualified full-time employee" to apply,
for taxable years beginning on or after January 1, 2012,
only to individuals who were unemployed for the 30 days
immediately prior to being hired. AB 1009 was held in
this Committee.
ix) AB 1195 (Allen, Perea, and Wieckowski) would have
expanded the New Jobs Tax Credit's definition of a
"qualified employer" to include taxpayers that, as of the
last day of the preceding taxable year, employed 50 or
fewer employees (instead of 20 or fewer employees per
current law). AB 1195 was held in the Senate
Appropriations Committee.
x) AB 1596 (Cook) would have expanded the New Jobs Tax
Credit's definition of a "qualified employer" to include
taxpayers that, as of the last day of the preceding
taxable year, employed 50 or fewer employees (instead of
20 or fewer employees per current law). AB 1596 was held
under submission in this Committee.
xi) AB 2037 (Davis) would have reallocated $300 million
from the New Jobs Tax Credit to establish a state New
Markets Tax Credit program designed to stimulate economic
development. AB 2037 was held under submission in the
Assembly Committee on Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
AB 825
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Opposition
California Tax Reform Association
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098