BILL ANALYSIS                                                                                                                                                                                                    Ó




                   Senate Appropriations Committee Fiscal Summary
                            Senator Kevin de León, Chair


          SB 434 (Hill) - Personal Income and Corporation Taxes: Hiring  
          Credits: Enterprise Zones, LAMBRAs, Manufacturing Enhancement  
          Areas and Targeted Tax Areas
          
          Amended: May 7, 2013            Policy Vote: G&F 5-2
          Urgency: No                     Mandate: Yes
          Hearing Date: May 20, 2013      Consultant: Robert Ingenito
          
          This bill does not meet the criteria for referral to the  
          Suspense File.


          Bill Summary: SB 434 would make substantial changes to  
          Enterprise Zone (EZ) hiring credits, vouchers and disclosure  
          requirements. 

          Fiscal Impact: The Franchise Tax Board (FTB) estimates that  
          implementing this bill would lead to increased General Fund  
          revenues of $120 million in 2013-14, $220 million in 2014-15,  
          and $260 million in 2015-16. In addition, FTB indicates that the  
          bill's other changes to hiring credits within Manufacturing  
          Enhancement Areas (MEAs), Targeted Tax Areas, and Local Agency  
          Military Base Recovery Areas (LAMBRAs) would likely lead to  
          additional revenues; however, they cannot be estimated at this  
          time. 

          FTB anticipates that the deterrents in this bill with respect to  
          the new penalty for violating the prohibition on charging  
          contingency fees would likely result in minor penalty revenue  
          increases (General Fund). Some penalties would be assessed after  
          enactment, but would decline in subsequent years as taxpayers  
          and tax preparers become aware of the new law.

          FTB would incur implementation costs related to changes to the  
          department's forms, the creation of a searchable database, and  
          staff training. The additional costs are unknown (pending the  
          resolution of FTB implementation concerns), but likely exceed  
          $50,000 annually (General Fund).

          Background: Enterprise Zones (EZs) are geographic areas  
          designated by the State that provide for substantial tax  
          incentives for business activities conducted within their  








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          borders. Cities and counties apply to the Department of Housing  
          and Community
          Development (HCD) for zone designation based on unemployment  
          rates, participation in subsidized meal programs, median  
          resident income, recent plant closures, gang activity, and  
          certain other socio-economic characteristics. Statutory  
          authority allows for the creation by HCD of up to 42 zones for a  
          15-year period. Currently, the State has 40 designated zones;  
          two zones were allowed to expire in 2012. EZs are widespread  
          throughout the State and result in various tax benefits for  
          virtually all types of industries. As a result of the various  
          incentives granted by the Legislature through the EZs and other  
          similar programs, the annual revenue impact on the state is on  
          the order of $750 million and growing.

          The most significant EZ incentive is the hiring credit.   
          Employers inside an enterprise zone may claim a tax credit of 50  
          percent of the wages paid to a qualified employee in the first  
          year, 40 percent in the second year, 30 percent in the third  
          year, 20 perent in the fourth year, and 10 percent in the fifth  
          year, up to 150 percent 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.  The firm then claims the  
          credit on its tax return.  Qualified employees include  
          individuals: 

                Eligible for job training programs.
                Eligible for most social welfare programs.
                Economically disadvantaged.
                A "dislocated worker," as defined.
                A disabled individual who is eligible or enrolled in a  
               state rehabilitation plan.
                Service connected veteran.
                Ex-offender.
                Member of a federally recognized Indian tribe.


          Taxpayers engaged in a trade or business within an EZ may take a  
          credit equal to the sales or use tax paid during the taxable  
          year in connection with the purchase of qualified property.  
          Qualified property includes specified machinery and machinery  
          parts, data processing and communications equipment, and motion  
          picture manufacturing equipment central to production and  








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          postproduction. The total cost of qualified property that may be  
          taken into account for purposes of claiming this credit may not  
          exceed $1 million for PIT filers and $20 million for CT filers.  
          Moreover, the qualified property must be used by the taxpayer  
          exclusively in an EZ.
          
          Proposed Law: SB 434 would make significant changes to the  
          hiring credit within the EZ program, while maintaining the  
          current number of designated zones, beginning on January 1, 2014  
          as follows:

                 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.
                 The credit percentages in the bill drop to 10 percent in  
               the first year; 30 percent in the second year; 50 percent  
               in the third year; 30 percent in the fourth year and 10  
               percent in the fifth year.
                 Prohibits taxpayers from a temporary agency, as defined  
               by the National Association of Industry Classification  
               Codes (NAICS) from receiving the hiring credit.
                 Requires taxpayers that move into an Enterprise Zone to  
               provide an "offer of transfer" to its employees with  
               comparable compensation.
                 Taxpayers must provide the hiring credit voucher  
               certification annually.
                 SB 434 requires the FTB to compile a list of the hiring  
               credit vouchers claimed and number of new jobs created for  
               each taxable year.  
                 Retro-vouchering.  Beginning on January 1, 2014,  
               taxpayers may only amend a return to claim the hiring  
               credit for one year.

          With respect to LAMBRA's and MEAs, the bill would require a net  
          new jobs calculation and would change the credit percentages;  
          all other provisions are unchanged.

                 The percentages are: 10 percent in the first year, 10  
               percent in the second year, 30 percent in the third year,  
               40 percent in the fourth year and 50 percent in the fifth  
               year.
                 Prohibits a person from charging a contingency fee, as  
               defined, for services rendered in connection with a tax  
               credit relating to an enterprise zone, a LAMBRA, a  








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               manufacturing enhancement area, or a targeted tax.

          The governmental entity responsible for administering the tax  
          shall impose a penalty equal to the amount of the contingency  
          fee or $5,000, whichever is greater, for persons who fail to  
          comply.

          The bill would sunset the hiring credit for LAMBRAs, MEAs,  
          Targeted Areas, and EZs on January 1, 2019.

          Related Legislation:

                 SB 133 (DeSaulnier, 2013) would limit the size of a  
               specified enterprise zone.

                 AB 28 (V. Perez, 2013) would make various six  
               programmatic/fiscal changes improvements to  
               geographically-targeted economic development area programs,  
               relating to cost, transparency and accountability.

          Staff Comments: The Legislative Analyst reports that in 2010,  
          the hiring and sales tax credits resulted in $698 million of  
          reduced corporation and personal income tax revenues. This  
          amount has grown at an average annual rate of 18 percent since  
          2000, about six times faster than the rate of the state budget  
          over the same period.

          The number of EZs is expected to decline as authorizations  
          expire. Two EZs, Watsonville and Antelope Valley, were allowed  
          to expire in 2012.

          The 2013-14 May Revision also proposes to reform the EZ program.  
          Its summary document notes that "in its current form, it fails  
          to encourage the creation of new jobs and instead rewards moving  
          jobs from one part of the State to another." The proposal would  
          be revenue-neutral.