BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                            



           ----------------------------------------------------------------- 
          |SENATE RULES COMMITTEE            |                        SB 434|
          |Office of Senate Floor Analyses   |                              |
          |1020 N Street, Suite 524          |                              |
          |(916) 651-1520         Fax: (916) |                              |
          |327-4478                          |                              |
           ----------------------------------------------------------------- 
           
                                           
                                    THIRD READING


          Bill No:  SB 434
          Author:   Hill (D), et al.
          Amended:  5/24/13
          Vote:     27

           
          SENATE GOVERNANCE & FINANCE COMMITTEE  :  5-2, 5/1/13
          AYES:  Wolk, Beall, DeSaulnier, Hernandez, Liu
          NOES:  Knight, Emmerson

           SENATE APPROPRIATIONS COMMITTEE  :  4-2, 5/20/13
          AYES:  De León, Hill, Padilla, Steinberg
          NOES:  Walters, Gaines
          NO VOTE RECORDED:  Lara


           SUBJECT  :    Personal income and corporation taxes:  hiring  
          credits

           SOURCE  :     Author


           DIGEST  :    This bill makes substantial changes to the Enterprise  
          Zone (EZ) hiring credits, a request for certifications, and  
          disclosure requirements.

           Senate Floor Amendments  of 5/24/13 (1) strike-out all the  
          sections related to Local Military Base Recovery Act,  
          manufacturing enhancement areas, and targeted tax areas; (2)  
          make technical/non-substantive changes to the EZ hiring credit  
          sections; and (3) make technical corrections changing the  
          reference from "voucher" to "a request for certification."

                                                                CONTINUED





                                                                     SB 434
                                                                     Page  
          2

           ANALYSIS  :    The Personal Income Tax Law and the Corporation Tax  
          Law allow credits for hiring employees, based on qualified  
          wages, in an EZ.

          This bill:

          1.  EZ Hiring credit  .  Makes significant changes to the hiring  
             credit within the EZ program, while maintaining the 40  
             designated zones, beginning on January 1, 2014 as follows:

             A.     Net new jobs requirement  .   Requires that 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.  While the credit may  
                be spread across all new employees in the "hard to  
                hire" categories under existing law, taxpayers are only  
                allowed the credit for the number of new jobs in the  
                state.  

             B.     Credit percentages  .  The credit percentages in this  
                bill will change to 10% in the first year; 30% in the  
                second year; 50% in the third year; 30% in the fourth  
                year and 10% in the fifth year.

             C.     Taxpayer restrictions  .  Prohibits taxpayers from a  
                temporary agency, as defined by the National  
                Association of Industry Classification Codes (NAICS),  
                from receiving the hiring credit.

             D.     Offer of transfer  .  Requires taxpayers that move  
                into an EZ to provide an "offer of transfer" to its  
                employees with comparable compensation.  The California  
                Workforce Investment Board shall certify the notice and  
                provide a copy to the taxpayer.

             E.     Certification requirements  .  Taxpayers must provide  
                the hiring credit certification annually.

             F.     Public database  .  Requires the Franchise Tax Board  
                (FTB) to compile a list of the hiring credit  
                certifications claimed and number of new jobs created  
                for each taxable year.  

             G.     Retro-certifying  .  Beginning on January 1, 2014,  

                                                                CONTINUED





                                                                     SB 434
                                                                     Page  
          3

                taxpayers may only amend a return to claim the hiring  
                credit for one year.

          2.  Sunset  .  Sunsets the hiring credit for LAMBRA's,  
             Manufacturing Enhancement Areas, Targeted Areas and EZs on  
             January 1, 2019.

          3.  Contingency fees  .  Prohibits a person from charging a  
             contingency fee for services charge a contingent fee for  
             services rendered in connection with a tax credit relating to  
             an EZ, a LAMBRA, a manufacturing enhancement area, or a  
             targeted tax.  This bill defines a contingency fee as any  
             fee.

             This bill defines "contingent fee" identically to Circular  
             230, but without the exceptions, as any fee that is:

             A.    A fee that is based on the percentage of the refund  
                reported on a return, a fee that is based on a  
                percentage of the taxes saved, or a fee that depends on  
                the specific tax result attained.  

             B.    Any fee arrangement in which the party to whom  
                services are rendered, or a designee of the party to  
                whom services are rendered, is reimbursed or credited  
                for all or a portion of the fee paid or agreed to be  
                paid if a position taken on a tax return or other filing  
                is challenged or is not sustained, whether pursuant to  
                an indemnity agreement, a guarantee, a right of  
                rescission, or any other arrangement with similar  
                effect.

          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.

           FISCAL EFFECT  :    Appropriation:  No   Fiscal Com.:  Yes    
          Local:  Yes

          According to the Senate Appropriations Committee, the FTB  
          estimates that implementing this bill leads to increased General  
          Fund revenues of $120 million in 2013-14, $220 million in  
          2014-15, and $260 million in 2015-16.  

                                                                CONTINUED





                                                                     SB 434
                                                                     Page  
          4


          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 will be assessed after  
          enactment, but declines in subsequent years as taxpayers and tax  
          preparers become aware of the new law.

          FTB incurs 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).

           Related legislation

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

          AB 28 (V. Perez, 2013) makes various six programmatic/fiscal  
          changes improvements to geographically-targeted economic  
          development area programs, relating to cost, transparency and  
          accountability.  
           
           SUPPORT  :   (Verified  5/25/13) 

          American Federation of State, County and Municipal Employees,  
          AFL-CIO
          California Conference Board of the Amalgamated Transit Union
          California Teamsters Public Affairs Council
          California Conference of Machinists
          California Federation of Teachers
          California Labor Federation
          California Nurses Association
          California Professional Firefighters
          California Public Interest Research Group
          California School Employees Association
          Engineers and Scientists of California
          International Longshore & Warehouse Union
          Professional & Technical Engineers, Local 21
          San Mateo County Central Labor Council
          UNITE HERE!
          United Food and Commercial Workers Union
          Utility Workers Union of America, Local 132

                                                                CONTINUED





                                                                     SB 434
                                                                     Page  
          5

          Western Center on Law and Poverty
          Western States Council

           OPPOSITION  :    (Verified  5/25/13) 

          California Asian Pacific Chamber of Commerce
          California Association for Local Economic Development
          California Association of EZs
          California Bankers Association
          California Business Properties Association
          California Chamber of Commerce
          California Employment Opportunity Network
          California Hispanic Chamber of Commerce
          California League of Cities
          California Manufacturing and Technology Association
          California Retailers Association
          City of Sacramento
          City of San Jose
          League of California Cities
          National Federation of Independent Business

           ARGUMENTS IN SUPPORT  :    According to the author's office, this  
          bill reforms the EZ program to make sure taxpayer dollars are  
          being spent on true job creation instead of job transferring.   
          The EZ program has cost the state over $4 billion dollars since  
          its creation in the 1980s.  It began as a way to help struggling  
          companies create jobs in disadvantaged communities but it's  
          evolved into a handout for large corporations.  Nearly all of  
          the tax credits (91%) were claimed by corporations with assets  
          of $10 million or more.  Corporations with less than $1 million  
          in assets claimed only 1% of EZ tax credits.  The largest EZ tax  
          break is the hiring credit that gives employers up to $37,440  
          for each qualified hire over a five year period.  The EZ program  
          costs the state $700 million a year, and the cost is growing by  
          more than 30% annually.  The Public Policy Institute of  
          California found that "on average, EZs have no effect on  
          business creation or job growth."  The Legislative Analysts'  
          Office said "most research indicates that programs [such as the  
          EZ Program] have little if any impact on the creation of new  
          employment"  In a survey conducted by the California Department  
          of Housing and Community Development, nearly half of businesses  
          report that the EZ hiring credit "never" or "rarely" influenced  
          their hiring decisions.  61% of companies report that it "never"  
          or "rarely" played a role in deciding whether or not to retain  

                                                                CONTINUED





                                                                     SB 434
                                                                     Page  
          6

          workers.  This bill continues to allow local governments and  
          employers to utilize the EZ program, but enacts common sense  
          reforms to focus incentives on true job creation that will  
          benefit the state.

           ARGUMENTS IN OPPOSITION  :    The opponents of this bill state  
          that it seriously harms California's only remaining economic  
          development program and particularly impact small businesses,  
          impoverished areas of the state and primarily low-income and  
          minority communities.  The coalition opposition letter points to  
          several provisions that it finds objectionable including the  
          elimination of retroactive credits, the net increase in  
          headcount requirement, no hiring for temp jobs, cap, sunset and  
          review, transparency and the regulation of tax consultants.  All  
          of these reforms will preclude small businesses from claiming  
          the credit, have a chilling effect on business climate and lose  
          much of its incentive effect.


          AB:d  5/28/13   Senate Floor Analyses 

                           SUPPORT/OPPOSITION:  SEE ABOVE

                                   ****  END  ****
          




















                                                                CONTINUED