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