BILL ANALYSIS �
AB 927
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Date of Hearing: May 6, 2013
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 927 (Muratsuchi) - As Amended: April 29, 2013
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: hiring.
SUMMARY : Allows a hiring tax credit, under both the Personal
Income Tax (PIT) Law and the Corporation Tax (CT) Law, for each
"qualified employee" employed by a "qualified employer," as
specified. Specifically, this bill :
1)Allows, for each taxable year beginning on or after January 1,
2014, a credit for a "qualified employee" employed during the
taxable year by a "qualified employer."
2)Provides that the credit amount shall be as follows:
a) $3,000 for each "net increase" in qualified full-time
employees hired during the taxable year, and
b) An additional $1,000 for each qualified full-time
employee who is a veteran, or an additional $2,000 for each
qualified full-time employee who is a service-connected
disabled veteran, as measured by the percentage of increase
in an annual "full-time equivalent" that the veteran or
service-connected disabled veteran represents.
3)Defines a "qualified full-time employee" as an employee who:
a) Was paid qualified wages by the qualified employer for
services rendered for not less than an average of 35 hours
per week; or,
b) Was a salaried employee and was paid compensation for
full-time employment, within the meaning of Labor Code
Section 515,<1> by the qualified employer.
---------------------------
<1> Labor Code Section 515(c) defines "full-time employment" as
employment in which an employee is employed for 40 hours per
week.
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4)Defines a "qualified employer" as a taxpayer who employs
qualified full-time employees located in California and meets
any of the following requirements:
a) Manufactures, assembles, tests, renovates, or converts
aircraft and spacecraft,
b) Manufactures or designs aircraft or spacecraft engines
and engine parts,
c) Manufactures or designs aircraft and spacecraft
auxiliary components, including detection equipment,
navigation, and guidance systems,
d) Provides aircraft and spacecraft support services,
including launching, operating, and retrieving air and
space vehicles; or,
e) Has contracted with the United States (U.S.) military or
federal government for the purpose of national defense
related to aerospace, including the manufacturing of
missiles and military airplanes.
5)Defines "service-connected disabled veteran" as a veteran who
is disabled by an injury or illness that was incurred or
aggravated during active military service.
6)Defines "veteran" as a person honorably discharged from the
Armed Forces of the U.S.
7)Defines "qualified wages" as wages subject to Division 6
(commencing with Section 13000) of the Unemployment Insurance
Code.
8)Provides that the "net increase" in qualified full-time
employees is determined on an annual "full-time equivalent"
basis by subtracting the total number of qualified full-time
employees employed by the taxpayer in the preceding taxable
year and by any trade or business acquired by the taxpayer
during the current taxable year from the total number of
full-time employees employed by the taxpayer in the current
taxable year.
9)Defines "annual full-time equivalent" as the total number of:
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a) Hours worked for the taxpayer by the employee (not to
exceed 2,000 hours per employee) divided by 2,000, in the
case of a full-time employee paid hourly qualified wages.
b) Weeks worked for the taxpayer by the employee divided by
52, in the case of a salaried full-time employee.
10)Provides that the credit is allowed on a
first-come-first-serve basis.
11)Limits the total aggregate amount of credit allowed to a
qualified employer for all taxable years to $5 million.
12)Provides that the aggregate amount of credit allowed under
both the PIT and CT Laws in any taxable year is limited to $35
million.
13)Authorizes the Franchise Tax Board (FTB) to prescribe
appropriate rules, guidelines, and procedures to administer
the credit, including any guidelines relating to the
application of the $35 million cap to taxpayers in the case of
split-ups, shell corporations, partnerships, and tiered
ownership structures.
14)Requires the FTB to periodically provide notice on its
Internet website with respect to the amount of credit claimed
on timely-filed original returns received by the FTB.
15)States the legislative intent to create a competitive tax
policy for businesses involved with research, development, and
manufacturing.
16)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits under both the PIT Law and the CT
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
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provided to taxpayers conducting business activities within a
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 FTB estimates an annual General Fund revenue
loss of $9.2 million in fiscal year (FY) 2013-14, $28 million in
FY 2014-15, and $31 million in FY 2015-16.
COMMENTS :
1)Author's Statement . The author has provided the following
statement in support of this bill:
California was once a global leader in Aerospace research,
development and manufacturing. In 2009 alone, the
California Aerospace industry generated $27 billion in
revenue, employed large numbers of high-skilled workers,
and was largely responsible for creating the golden state
middle class. Unfortunately today, the state is losing
alarming ground on this vital industry. In the past 20
years, Aerospace had to shed half of its workforce -
Southern California saw the loss of 142,000 Aerospace
workers, laid off or relocated to other states, resulting
in major revenue loss and a damaged job market.
From the assembly of airplanes, the launch of satellites,
to the construction of military defense projects, our state
must continue to be at the forefront of Aerospace
technology and innovation. Through a series of controlled
tax credits, this bill would ensure that California can
incentivize Aerospace job creation and lower the cost of
hiring - one of the top costs of the industry - and retain
our workforce here in California.
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2)What Does this Bill Do? : AB 927 establishes a new tax credit
program to incentivize hiring of new employees in the
aerospace industry. It provides a $3,000 credit for each new
full-time employee hired, with an additional amount of either
$1,000 or $2,000 allowed for each new employee who is either a
veteran or a disabled veteran, respectively. The program is
capped at $35 million per taxable year and the credit is
allowed on a first-come-first-serve basis. The aggregate
amount of the credit allowed to any one qualified taxpayer may
not exceed $5 million. The proposed credit is patterned after
the New Jobs Tax Credit. However, it is not limited to small
business employers, nor is it imposing an overall cap on the
total aggregate amount of the credit over the life of the
credit. In fact, the proposed credit does not have a sunset
date and, thus, is set to apply indefinitely. It targets one
industry, i.e. employers that manufacture or design aircraft
or spacecraft, including engines and auxiliary components, or
provide aircraft or spacecraft support services. The
definition of "qualified employer" also includes taxpayers
that have federal contracts for national defense purposes
related to aerospace.
3)What is a "Tax Expenditure"? : Existing law provides various
credits, deductions, exclusions, and exemptions for particular
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 enact a new tax
expenditure program, in the form of an income tax credit, to
incentivize the hiring and retention of new employees in the
aerospace industry.
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
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any given tax expenditure.<2> 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. To that end, the author may wish to
consider adding an appropriate sunset date to this bill to
allow the Legislature to review this tax expenditure in the
future.
5)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
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%.
Another recent study by David Neumark at the Public Policy
Institute of California (PPIC) suggested two direct job
creation policies: Hiring credits and worker subsidies such as
the federal Earned Income Tax Credit. Mr. Neumark argued that
hiring credits act to increase the demand for labor and are
the best policy response to spur a recovery from the
recession. However, he suggested that hiring credits should
focus broadly on the recently unemployed and establish
incentives for new hires. But, in order to be effective, the
credits would need to be anywhere between $9,100 to $75,000
per employee, so any potential state funding would contribute
only modestly, at best, to the credit. Thus, these findings
would seem to suggest that hiring credits, at least at the
state level, are a blunt tool for stimulating job growth.
6)New Jobs Tax Credit Program: Is it Effective? The hiring
credit for small businesses has been in effect since 2009 and
---------------------------
<2> 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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there is little evidence that it has incentivized hiring of
new employees in this state. 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.
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.
7)Implementation Concerns : Committee staff has identified the
following policy and implementation concerns. Committee staff
is available to work with the author's office to resolve these
and other concerns that may be identified.
a) "Double Dipping" . Existing law already provides a tax
incentive, in the form of a deduction for ordinary and
necessary business expenses, for wages paid to an employee.
This bill would allow a qualified taxpayer a double
benefit: First, a deduction and, then, a credit calculated
based on the same wages paid by a qualified employer to
newly hired employees. Generally, a credit is allowed in
lieu of a deduction in order to eliminate multiple tax
benefits for the same item or expense. Furthermore,
because this bill does not specify otherwise, multiple
hiring credits based on the same wage expenditures would be
allowed. For example, a qualified employer may claim the
New Jobs Tax Credit or an enterprise zone hiring credit, in
addition to the credit allowed by this bill. Typically, a
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newly-proposed hiring credit includes a provision that the
credit is allowed in lieu of any other credit or deduction
the taxpayer may otherwise claim with respect to qualified
wages.
b) Clarifying Eligibility for the Higher Credit Amount .
This bill provides a higher credit amount ($4,000 or $5,000
instead of $3,000) if a qualified employee is a veteran or
a service-connected disabled veteran. An additional amount
is allowed based, not on a net increase in qualified
full-time employees, but on per qualified employee, as
measured by the percentage of increase in an annual
full-time equivalent that the veteran represents. This
bill is silent, however, regarding when or how this
percentage shall be calculated. This, in turn, creates a
certain degree of ambiguity.
c) No Credit Carryover . This bill does not allow a
qualified taxpayer to carry over the unused credit. The
lack of the carryover provision may severely limit the
taxpayers' ability to utilize this credit. Generally, an
eight-year carryover period is allowed for other credits,
since credits are typically exhausted within eight years of
being earned.
8)The not-so-dormant commerce clause : The credit this bill
proposes is only available for hiring new employees whose
services will be performed in California. By limiting the
credit to in-state activity, this credit could arguably be
susceptible to challenge under the dormant commerce clause of
the U.S. Constitution.
The U.S. Constitution authorizes Congress to regulate commerce
with foreign nations, and among the several states. (U.S.
Constitution, Article I, Section 8, Clause 3). While the
commerce clause is phrased as a positive grant of regulatory
power, it "has long been seen as a limitation on state
regulatory powers, as well as an affirmative grant of
congressional authority." [Fulton Corp. v. Faulkner (1996)
516 U.S. 325, 330.] This negative aspect, commonly referred
to as the dormant commerce clause, prohibits economic
protectionism in the form of state regulation that benefits
"instate economic interests by burdening out-of-state
competitors." (Ibid.)
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Both the U.S. Supreme Court and the California courts have
addressed challenges to various state tax provisions on
dormant commerce clause grounds. Most recently, the Court of
Appeal struck down a California statute that allowed taxpayers
a deferral for income received from the sale of stock in
corporations maintaining assets and payroll in California,
while providing no such deferral for income from the sale of
stock in corporations maintaining assets and payroll
elsewhere. [Cutler v. Franchise Tax Board (2012) 208
Cal.App.4th 1247, 1250.] Specifically, the court held that
"the deferral provision discriminates on its face on the basis
of an interstate element in violation of the commerce clause."
(Ibid.)
While noting that no court decision has yet invalidated, as a
general matter, a state income tax credit that provides an
incentive for in-state activity, the FTB notes that such
credits "may be subject to constitutional challenge."
9)Related legislation :
a) AB 1326 (Gorell and Bradford), introduced in the 2013
legislative session, would allow an income tax credit based
on qualified wages paid to employees of employers engaged
in unmanned aerial vehicle manufacturing. AB 1326 is
currently pending in this Committee.
b) AB 304 (Knight), introduced in the 2011-2012 legislative
session, would have allowed a tax credit, under both the
PIT Law and the Corporation Tax Law, for each "qualified
employee" employed by a "qualified employer," as specified.
AB 304 was held in this Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
The American Institute of Aeronautics and Astronautics
SpaceX
Opposition
AB 927
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None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098