BILL ANALYSIS Ó AB 931 Page A CONCURRENCE IN SENATE AMENDMENTS AB 931 (Irwin) As Amended July 1, 2015 2/3 vote. Tax levy -------------------------------------------------------------------- |ASSEMBLY: |79-0 |(June 1, 2015) |SENATE: |39-0 |(September 3, | | | | | | |2015) | | | | | | | | | | | | | | | -------------------------------------------------------------------- Original Committee Reference: REV. & TAX. SUMMARY: Revises, under the Corporation Tax (CT) and the Personal Income Tax (PIT) Law, the definition of a "qualified full-time employee" to include a veteran who separated from service in the United States Armed Forces within 36 months preceding commencement of employment with a qualified taxpayer, for purposes of qualifying for a hiring tax credit. The Senate amendments: AB 931 Page B 1)Revise the definition of a "qualified full-time employee," for taxable years beginning on or after January 1, 2014, and before January 1, 2016, to include a veteran who separated from service in the Armed Forces of the United States within the 12 months preceding commencement of employment with the qualified taxpayer. 2)Revise the definition of a "qualified full-time employee," for taxable years beginning on or after January 1, 2016, to include a veteran who separated from service in the Armed Forces of the United States within the 36 months preceding commencement of employment with the qualified taxpayer. AS PASSED BY THE ASSEMBLY, this bill: 1)Revised, under the CT and the PIT Law, on or after January 1, 2016, the definition of a "qualified full-time employee" to include a veteran who separated from service in the Armed Forces within 36 months and was unemployed for the six months immediately preceding commencement of employment with the qualified taxpayer. 2)Takes effect immediate as a tax levy. FISCAL EFFECT: According to the Senate Appropriations Committee, the Franchise Tax Board (FTB) estimates that this bill would result in General Fund losses of $20,000 in fiscal year (FY) 2015-16, $150,000 in FY 2016-17, and $250,000 in FY AB 931 Page C 2017-18. The bill would not impact FTB's administration costs. COMMENTS: 1)Author's Statement: The author has provided the following statement in support of this bill: AB 931 will expand the timeframe for veterans who have separated from active duty to be eligible for a hiring tax credit which makes them a more attractive hire for potential employers. This bill will also increase the total amount of veterans in California who are included in this group which will help employers identify more unemployed veterans. California is home to a growing population of over 1.8 million veterans. As two overseas operations are concluding, the employment needs for veterans in California will continue to increase. According to a Congressional Joint Economic Committee report, the unemployment rate for California's veterans continues to be substantially larger than the national average. The state's unemployment rate is also higher for post-9/11 veterans. There is not yet sufficient tax data on the effectiveness of the New Employment Credit because it began on January 1, 2014. However, based on early project based on tax reservation the hiring tax credit appears to be going underutilized. Less than 50 employers in the state have applied for tax reservation for hiring a veteran eligible for the tax credit. AB 931 Page D AB 931 will address this by allowing more veterans to be hired under the New Employment Credit. This tax credit also ensures that those hired are paid at least 150% of the minimum wage and for no less than 35 hours per week. This bill will increase incentives for employers to connect Veterans with quality, high-paying jobs. 2)What is a "tax expenditure": Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures," since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each (in the form of foregone revenues). This bill would modify the existing hiring tax credit program by expanding eligible veterans that qualify for the program. 3)How is a tax expenditure different from a direct expenditure? As the Department of Finance notes in its annual Tax Expenditure Report, there are several key differences between tax expenditures and direct expenditures. First, tax expenditures are reviewed less frequently than direct expenditures once they are put in place. Second, there is generally no control over the amount of revenue losses associated with any given tax expenditure. Finally, it should also be noted that, once enacted, it generally takes a two-thirds vote to rescind an existing tax expenditure absent a sunset date. This effectively results in a "one-way ratchet" whereby tax expenditures can be conferred by majority vote, but cannot be rescinded, irrespective of their efficacy, without a supermajority vote. 4)Background: AB 93 (Budget Committee), Chapter 69, Statutes of AB 931 Page E 2013, phased out and replaced the California Enterprise Zone tax credits with three new economic development incentives: a) hiring tax credit, b) partial sales and use tax exemption, and c) a negotiated incentive administered by the Governor's Office of Business and Economic Development (GO-Biz). The new hiring tax credit incentivizes additional hiring of certain individuals within specified geographic areas of California. In general, a business is allowed to claim the hiring tax credit for wages paid to a qualifying employee performing work in an economic development area or certified census tract. As a way of encouraging the hiring of veterans, the hiring tax credit specifically provides that a taxpayer may claim a credit for hiring a veteran who has separated from service in the Armed Forces within the last 12 months. Despite the incentive, only 35 companies have claimed a credit for hiring a veteran<1>. The author hopes to address the underutilization of the hiring tax credit by adding veterans who have separated from service in the Armed Forces within 36 months and are unemployed for the six months immediately preceding commencement of employment with a qualified taxpayer. 5)Do Hiring Tax Credits Work? In previous years, some have advocated job creation tax credits as a means of revitalizing the struggling economy. The question, however, is whether such credits actually work, and whether they are an appropriate tool in light of substantial declines in unemployment over the last five years. Daniel Wilson, --------------------------- <1> The FTB has provided information indicating that only 35 companies have requested a tentative new employment tax credit reservation for a veteran. However, FTB's research department also notes that most of the companies applying for reservations have been marking all of the categories. As such, the data may not be representative of the actual number of employees that qualify as veterans. AB 931 Page F Assistant Director of the Center for the Study of Innovation and Productivity at the Federal Reserve Bank of San Francisco, attempted to answer this question. In a paper co-authored with Robert Chirinko of the University of Illinois at Chicago, Wilson examined the period between January 1990 and August 2009 and found that among states where employers could qualify for credits immediately after enactment of the credit legislation there was a slight employment increase of 0.12%. These findings suggest that hiring credits, at least at the state level, have some impact but appear to be very a blunt tool for stimulating job growth. Additionally, it is unclear if the hiring tax credit provides an incentive or reward. The state's unemployment rate has been steadily declining over the last few years to a rate of 6.5%. An improved economy is more likely to lead to additional hiring of all individuals in all industries, irrespective of state incentives such as a hiring tax credit. As a result, this hiring tax credit could potentially provide an employer with a windfall for actions that would have already taken place because of improvements in the economy and job market. Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0001730