BILL ANALYSIS                                                                                                                                                                                                    






                                                                     AB 961


                                                                     Page A


          Date of Hearing:  May 11, 2015





                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION


                                 Philip Ting, Chair





          AB 961  
          (Gallagher) - As Amended March 26, 2015


          


          Majority vote.  Fiscal committee.  Tax levy.


          SUBJECT:  Income taxation:  credits:  California competes


          SUMMARY:  Temporarily increases the aggregate amount of the  
          California Competes Tax Credit that may be allocated to  
          taxpayers by $50 million per fiscal year.  Specifically, this  
          bill:  



          1)Increases the aggregate amount of the California Competes Tax  
            Credit, under both the Personal Income Tax (PIT) and the  
            Corporation Tax (CT) laws, by $50 million for the 2015-16  
            fiscal year (FY), and each FY thereafter, through the FY  











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            2017-18.

          2)Authorizes the Governor's Office of Business and Economic  
            Development (GO-Biz) to allocate the additional amount of the  
            credit to eligible taxpayers located in a county, city and  
            county, or metropolitan statistical area that has a 10%, or  
            higher, rate of unemployment.  The amount available for this  
            allocation in any given FY would be adjusted by any  
            unallocated credit amount from the preceding FY, and the  
            amount of any previously allocated credits that have been  
            recaptured. 



          3)Specifies that both of the following conditions do not apply  
            to the increased allocation amount of $50 million:



             a)   The minimum credit reservation applicable to small  
               businesses, as defined in Revenue and Taxation Code (RT&C)  
               Section 17053.73 or 23626; and,

             b)   The limitation on the maximum amount of the California  
               Competes Tax Credit that may be allocated to any one  
               taxpayer.



          4)Takes effect immediately as a tax levy. 
          


          EXISTING LAW:  



          1)Allows a credit against the taxes imposed under the  
            Corporation Tax (CT) Law and the Personal Income Tax (PIT) Law  











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            for each taxable year beginning on or after January 1, 2014,  
            and before January 1, 2025, in an amount as provided in a  
            written agreement between GO- Biz and the taxpayer, based on  
            certain specified factors, including the number of jobs the  
            taxpayer will create or retain in the state and the amount of  
            investment in the state by the taxpayer.  The credit is  
            generally referred to as the "California Competes Tax Credit."

          2)Authorizes GO-Biz to allocate the California Competes Tax  
            Credit with respect to the FY 2013-14 and each FY thereafter,  
            through and including FY 2017-18.

          3)Limits the aggregate amount of the California Competes Tax  
            Credit that may be allocated to taxpayers under both the CT  
            and PIT laws to a certain specified sum per fiscal year.

          4)Authorizes the Director of Finance to increase the aggregate  
            amount of the economic development credits that may be  
            allocated to taxpayers each fiscal year by $25 million per  
            fiscal year through the 2017-18 fiscal year, as specified. 
          


          FISCAL EFFECT:  Unknown. 


          


          COMMENTS:  



           1)The Author's Statement  .   The author has provided the  
            following statement in support of this bill:

          "Since the birth of the California Competes, the Governor's  
            Office of Business and Economic Development (GO-Biz) has  
            awarded 85 companies approximately $60 million to create an  











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            estimated 10,000 jobs and generate $3 billion in investment  
            across the state.  In February, 2015, GO-Biz announced it  
            received a total of 253 applications with a combined tax  
            credit request of $289 million for the California Competes Tax  
            Credit period which ended on February 2, 2015.  However, in  
            the 2015-16 fiscal year, GO-Biz is only authorized to award  
            $151.1 million in tax credits. Unfortunately, the requests for  
            tax credits from businesses aiding California's economy are  
            higher than the amount of money allocated for the program.   
            GO-Biz is over $137 million short of what was requested.

          "The lack of funding for businesses applying for the credit is  
            limiting job growth and investment the state could create if  
            allowed to increase the budget of the program.  This is  
            especially important for areas that have high unemployment.   
            Currently, the only funding requirement of the Program is that  
            25% of the total amount each fiscal year be reserved for small  
            businesses (those businesses that have gross receipts greater  
            than $0 but less than $2 million in the prior tax year).  In  
            contrast, unemployment or poverty in an area is only one of  
            many factors that the California Competes Tax Credit Committee  
            considers, and there is no requirement in law that funding be  
            set aside specifically for these areas.

          "The legislature must do everything in its power to encourage  
            economic development and business creation and expansion for  
            areas that are struggling to recover from the recession.   
            California Competes is a great start, but unless its efforts  
            are reinforced and targeted through additional financial  
            support for needy areas, the program will not be able to  
            perform to its full potential."

          2)  The "California Competes" Tax Credit (CCTC) Program  .  Last  
            year, Governor Brown signed legislation that reformed  
            California's economic development policies.  [AB 93 (Committee  
            on Budget) Chapter 69, Statutes of 2014.]  The new law  
            eliminated enterprise zones and other geographically targeted  
            economic development areas and, instead, created three new tax  
            benefits:  (a) a temporary tax credit for wages paid by  











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            taxpayers to qualified employees within former enterprise  
            zones, and other areas that suffer from high levels of poverty  
            and unemployment; (b) a temporary sales and use tax exemption  
            on purchases of manufacturing equipment made by qualified  
            taxpayers, capped at $200 million annually per taxpayer; and,  
            (c) the California Competes Tax Credit program.  Existing law  
            limits the total annual amount of these three tax incentives -  
            the wage credit, the sales and use tax exemption, and the  
            California Competes Tax Credit - to $750 million. 

          While the CCTC program is scheduled to sunset on January 1,  
            2025, GO-Biz is only authorized to award this credit to  
            qualified taxpayers until FY 2018-19, up to an annually capped  
            amount.  The amount equals $30 million for the FY 2013-14,  
            $150 million for the FY 2014-15, and $200 million for the FY  
            2015-16, FY 2016-17, and FY 2017-18, plus certain statutorily  
            prescribed adjustments.  

            Out of the $30 million available for allocation in FY 2013-14,  
            $28.9 million was awarded.  
            The CCTC was granted to 30 companies (out of 390 companies  
            that applied), including 11 small businesses.  According to  
            the information submitted by the companies that received the  
            credit, approximately 6,000 jobs and more than $2 billion in  
            investment across California will be created as a result of  
            the credit award.  The companies represent various industries,  
            including manufacturing, biotech, agriculture, food  
            processing, high tech, etc.  In  FY 2014-15, the total  
            allocation amount is $151.1 million, of which a total of over  
            $100.3 million (after adjusting for S-corporation tax law)<1>  
            has been awarded so far to 146 companies, including Northrop  
            --------------------------
          <1> One-third of the California Competes Tax Credit may be  
          utilized by an S-Corporation to offset the tax on net income at  
          the S-Corporation level (R&TC 23803(a)(1).)  The remaining  
          two-thirds is disregarded and may not be used as a carryover for  
          the S-Corporation (R&TC 23803(a)(2)(A).) However, the full  
          amount of the California Competes Tax Credit is also passed  
          through to the S-Corporation's shareholders (R&TC  
          23803(a)(2)(F).)










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            Grumman, Macy's.com, Inc., Alibaba.com, and Honeywell  
            International, Inc.   

           3)Too Soon  ?  The CCTC program was designed to retain businesses  
            in California, as well as encourage businesses to move to  
            California or expand their current in-state operations.   
            Taxpayers must commit to create a certain number of jobs, make  
            a specified investment in California, and enter into a Tax  
            Credit Agreement with the GO-Biz.  The award and the agreement  
            must be approved by the California Competes Tax Credit  
            Committee.  The agreement to award credits takes into  
            consideration the number of jobs created, the compensation  
            paid to employees, amount of investment by the taxpayer in  
            California, the amount of unemployment or poverty in the area  
            according to the U.S. census, the overall economic impact of  
            the project, and the extent to which state benefits exceed  
            state costs, among other criteria.  In the event that a  
            taxpayer fails to perform under the written agreement, the  
            credit is recaptured.  

          The original legislation that created that CCTC program requires  
            GO-Biz to provide information to FTB regarding the terms and  
            conditions of the written agreements and of any recapture, in  
            whole or in part, of a previously allocated credit.  In turn,  
            the FTB must provide to the Joint Legislative Budget  
            Committee, by no later than March 1, a report of the total  
            dollar amount of the credits claimed with respect to the  
            relevant fiscal year.  This exchange of information is needed  
            to facilitate the implementation of the CCTC program as well  
            as to evaluate its effectiveness.  

            The first round of allocations of the CCTC was done on June  
            19, 2014, when GO-Biz awarded $28.9 million to eligible  
            taxpayers.  The amounts of credit available for allocation in  
            the current fiscal year and the following years, however, are  
            much higher:  $150 million in FY 2014-15 and $200 million in  
            each of the FYs 2015-16, 2016-17, and 2017-18.  Given that the  
            first credit award took place less than one year ago, the  
            Committee may wish to consider whether a modification of the  











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            program is warranted in the absence of data necessary to  
            evaluate the needs of the program or its effectiveness.  

          REGISTERED SUPPORT / OPPOSITION:




          Support


          None on file




          Opposition


          None on file 




          Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098