BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Kevin de Le�n, 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
SB 434 (Hill)
Page 1
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
SB 434 (Hill)
Page 2
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
SB 434 (Hill)
Page 3
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.