BILL ANALYSIS Ó
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UNFINISHED BUSINESS
Bill No: SB 90
Author: Galgiani (D) and Cannella (R)
Amended: 7/2/13
Vote: 27 - Urgency
SENATE BUDGET & FISCAL REVIEW COMM .: 14-0, 7/3/13 (pursuant to
Senate Rule 29.10) (ROLL CALL NOT AVAILABLE)
SENATE FLOOR : Not relevant
ASSEMBLY FLOOR : Not available
SUBJECT : Economic development: taxation: credits:
exemption
SOURCE : Author
DIGEST : This is an economic development bill that makes
various changes in the state tax system beginning in 2013-14.
The proposed statutory changes are related to the approval by
the Legislature of tax law measures in AB 93 (Assembly Budget
Committee), designed to encourage economic development and the
phase-out other of existing tax incentives. This bill becomes
operative only if AB 93 is chaptered and becomes operative.
Assembly Amendments delete the Senate version of the bill, which
expressed legislative intent to enact statutory changes related
to the Budget Act of 2013, and instead add the current language.
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ANALYSIS : This bill clarifies certain provisions of AB 93 and
institutes various changes that expand the availability of tax
credits and exemptions provided under that legislation. Under
the bill, the length of time for the sales and use tax (SUT)
exemption will be extended to eight years. In addition, the
applicability of the hiring credit under the personal income tax
(PIT) and the corporation tax (CT) will be expanded by including
certain additional geographic areas and adding additional
criteria for eligible employees. Finally, this bill establishes
pilot areas under the hiring credit with somewhat expanded
criteria in order to determine the effectiveness of alternative
incentive structures.
Existing Law
The state imposes a tax on the sale and use of tangible personal
property, a tax on personal income, and a corporation tax based
on income. For each tax, there are various special tax
expenditure programs designed to encourage or reward particular
economic activities. AB 93, as approved by the Legislature,
enacts significant changes to these programs. This bill will
result in additional changes to those effectuated by AB 93.
Existing law and legislative changes pursuant to AB 93 establish
the following:
1.SUT Exemption . California's SUT law imposes the sales tax on
the sale of tangible personal property in the state and the
use tax on the storage, use, or other consumption of tangible
personal property in the state, including equipment and
similar business purchases, except where a specific exemption
is provided. As amended by AB 93, an exemption is allowed
from the state portion (General Fund and Education Protection
Fund) of the SUT, beginning July 1, 2014 and before January 1,
2019, for certain purchases by qualified purchasers that are
used in designated activities. The exemption extends up to
July 1, 2021 for property purchased for use in designated
census tracts and former enterprise zones (EZs). The combined
rates related to the exemption currently total 4.19%. The
exemption would be limited annually to the first $200 million
of otherwise eligible purchases by a qualified purchaser.
Qualified purchasers that would be eligible for the SUT
exemption are identified by designated codes of the North
American Industry Classification System (NAICS), largely
comprising manufacturing and research and development
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industries. Eligible purchases would generally include
equipment and other tangible personal property related to
these manufacturing and research and development activities.
2.Hiring Credit . Pursuant to AB 93, a new hiring tax credit is
established under the personal income tax (PIT) and
corporation tax (CT), from January 1, 2014 to January 1, 2021,
for additional hiring of employees in defined geographic areas
of the state. The hiring credit would be available in the
geographic areas largely covered by the former EZs (except
certain census tracts with low unemployment), two recently
expired EZs, and in designated census tracts that have a
civilian unemployment rate and a poverty rate in the top 25%
of all census tracts in the state. The credit percentages for
all hiring credits are 35% per year for five years, for wages
between 150% and 350% of the minimum wage (currently between
$12 and $28 per hour). The credit is available for full-time
employees who perform at least 50% of their activities in the
designated areas. Generally, (except for small businesses
that claim the credit), the following apply: (1) taxpayers
from a temporary agency, retailer, restaurant or drinking
establishment, as defined by the NAICS codes are prohibited
from receiving the hiring credit; and (2) taxpayers that move
into an EZ are required to provide an "offer of transfer" to
its employees with comparable compensation. Important
features of the hiring credit include the following:
A. Employee characteristics . Employees must meet one of
the following criteria: (1) have been previously unemployed
for six months; (2) received the Earned Income Tax Credit
(EITC); (3) have served in the United States Military, or
(4) be an ex-offender. Tax credit requests regarding an
eligible employee who also happens to reside in a TEA would
be expedited.
B. Net new jobs . In order to qualify for any credit, the
taxpayer must have experienced an increase in total jobs
throughout the state from one year to the next. Taxpayers
are only allowed the credit for the number of new jobs
provided in the state.
C. Small business provisions . Small businesses are defined
as businesses with annual gross receipts of under $2.0
million. Small business must comply with all requirements
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of the program except the offer of transfer and the
industry limitations noted above.
D. Credit administration . Taxpayers may only qualify for
the credit if it is on the original filed timely return
with the Franchise Tax Board (FTB); no credit may be
claimed on an amended return. Taxpayers with qualified
employees that meet the net new jobs test must reserve a
credit with the FTB, which must be claimed on an original
filed timely return. FTB is required to compile a list of
the hiring credit vouchers claimed and number of new jobs
created for each taxable year.
1.EZ Programs . Under existing law, special tax programs are
available for designated EZs, as well as certain other
geographic areas, comprising Local Area Military Base Recovery
Areas (LAMBRAs), Targeted Tax Areas, Manufacturing Enhancement
Areas, and the Los Angeles Revitalization Zone. Taxpayers
with business activities located in an EZ and similar areas
can claim various tax incentives through both the PIT and CT,
including tax credits for hiring certain qualified
individuals, sales taxes paid on equipment purchases, and net
interest deductions for banks making loans to an EZ business.
In addition, EZ businesses may benefit from accelerated
depreciation of equipment and the carry-over of 100% of
business losses to future tax years. As amended by AB 93, the
programs related to tax incentives for activities in EZs and
similar areas would generally no longer be effective beginning
January 1, 2014. However, with respect to the EZ hiring
credit, for employees employed by the qualified taxpayer prior
to January 1, 2014, the wages paid with respect to those
employees would continue to qualify for the credit for any
remainder of the five-year period. In addition, credits
claimed, or earned, under the EZ program and carried-over from
prior years, could continue to be applied to tax liabilities
for up to 10 years.
Provisions of SB 90
This bill makes certain changes to the economic development
programs instituted or altered pursuant to AB 93. In addition,
this bill contains certain other statutory provisions.
Specifically:
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1.SUT Exemption . This bill extends the exemption from the state
portion of the SUT for manufacturing and research and
development equipment established by AB 93 to eight years,
from July 1, 2014 to July 1, 2022, on a statewide basis. In
so doing, the extended exemption period for designated census
tracts and former EZs in AB 93 will be rendered immaterial,
and consequently the provision establishing this program will
be removed pursuant to this bill.
2.Hiring Credit . Under this bill, eligible employees for the
hiring credit established by AB 93 will be expanded to include
a recipient of CalWORKs or General Assistance. The definition
of ex-offender eligible employee will also be refined under
this bill as "ex-offenders previously convicted of a felony."
Employers eligible for the hiring credit (including the small
business set-aside) will exclude sexually-oriented businesses,
as defined. The eligible areas for the credit set forth in AB
93 are also expanded under this bill to include LAMBRAs,
which, together with former EZs (including certain former EZs
inadvertently omitted in AB 93), are termed "economic
development areas."
This bill allows the Governor's Office of Business and
Economic Development (GO-Biz) to designate five pilot areas,
where eligible wages for the credit will be amounts over $10
per hour, rather than the $12 per hour floor established in AB
93. Eligible pilot areas are those within a designated census
tract or economic development area with average wages less
than the statewide average and areas within a designated
census tract or economic development area based on high
poverty or high unemployment. One or more of these pilot
areas must be an area within five or fewer designated census
tracts within a single county based on high poverty or high
unemployment or an area within an economic development area
based on high poverty or high unemployment. Pilot areas would
be initially designated for four years, with an extension of
up to three additional years at the sole discretion of GO-Biz.
The applicable period of the pilot area, and any extension,
will not be effective beyond December 31, 2020.
3.EZ Programs . This bill clarifies that the 10-year carryover
would apply to existing credits that have been claimed, but
not applied to a tax liability by the taxpayer, as well as
credits that are earned subsequent to January 1, 2014. This
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bill also includes language regarding legislative findings and
declarations in this regard.
4.Contingency . This bill specifies that it becomes operative
only if AB 93 is chaptered and becomes operative.
Comments
This bill clarifies certain provision of AB 93 and institutes
various changes that expand the availability of tax credits and
exemptions provided under that legislation. The length of time
for the SUT exemption and the availability of the hiring credit
will be expanded. Certain additional areas will be included in
the hiring credit and the criteria for eligible employees
increased. Finally, this bill establishes pilot areas under the
hiring credit with somewhat looser criteria in order to
determine the effectiveness of alternative incentive structures.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
Estimated revenue impacts of the economic development reform
legislation are contained in the Senate Floor analysis of AB 93.
SB 90, by increasing the time allowed to claim the SUT
exemption for eligible purchases, will result in additional
revenue reductions in the years outside the budget window. In
addition, SB 90 in some cases expands, and in another cases
narrows, the applicability of the hiring credit contained in AB
93, as adopted by the Legislature. These changes will result in
somewhat different revenue losses associated with the hiring
credit component, compared to AB 93. Total revenue losses
associated with altered hiring credit are estimated to be: -$8.0
million in 2013-14; -$39.0 million in 2014-15; -$77.0 million in
2015-16; and, -$126.0 million in 2016-17. There are also
unknown, but likely minor revenue reductions associated with the
pilot areas designated by GO-Biz.
SUPPORT : (Verified 7/3/13)
California Chamber of Commerce
California Manufacturers & Technology Association
ARGUMENTS IN SUPPORT : The California Manufacturers &
Technology Association writes:
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Manufacturers have decade-long planning horizons for major
investments and three to five year budget cycles for
ongoing purchases of capital equipment. We need a policy
that will encourage manufacturers to make these long-term
commitments. A sales tax exemption for the purchase of
manufacturing equipment and research and development will
make California a more competitive place to invest and help
reverse the recent declines in the state's manufacturing
investments while helping to grow high wage jobs.
Moving from a 4.5 year sunset to an 8 year sunset on the
manufacturer sales tax exemption is a good start, but we
should send the message to manufacturers that California
intends to review and renew the policy indefinitely. A
predictable, long-term horizon for this tax policy will
incentivize more manufacturers to make commitments to
California.
Also, the 10 year carry-forward for accrued hiring credits,
starting in 2014, is an important component of this package
because it respects the commitments made by companies
relying on the Enterprise Zone program.
The California Chamber of Commerce writes, "Our ability to meet
our state's economic needs depends on a healthy and competitive
California economy. A new and improved tax treatment for
manufacturing and R&D investments will send a strong message
that California favors fair tax policies that make the state
more business-friendly, even during difficult economic times."
MW:nl 7/3/13 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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