BILL ANALYSIS Ó
AB 2582
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2582
(Maienschein) - As Introduced February 19, 2016
Majority vote. Tax levy. Fiscal committee.
SUBJECT: Income taxes: credit: employees with disabilities
SUMMARY: Allows an income tax credit, under both the Personal
Income Tax (PIT) and the Corporation Tax (CT) laws, to employers
who employ qualified individuals with a disability, as provided.
Specifically, this bill:
1)Allows an income tax credit, under both the PIT and CT laws,
to a qualified employer who pays a qualified employee a wage
that equals or exceeds the state minimum wage during the
taxable year.
2)Specifies that the credit amount equals to the difference
between the special minimum wage that may be paid to the
qualified employee and the state minimum wage, multiplied by
the number of hours worked by the qualified employee for the
qualified employer during the taxable year.
3)Defines the "minimum wage" as the wage established by the
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Industrial Welfare Commission as provided for in Chapter 1
(commencing with Section 1171) of Part 4 of Division 2 of the
Labor Code (LC).
4)Defines a "qualified employee" as an individual who may be
paid a special minimum wage pursuant to Section 214(c) of
Title 29 of the United States (U.S.) Code or Section 1191 or
1191.5 of the LC.
5)Defines a "qualified employer" as a taxpayer that employs a
qualified employee in this state.
6)Provides that, in the case of a pass-thru entity, the
determination of whether a taxpayer is a qualified employer
shall be made at the entity level, and the credit shall be
passed through to the partners or shareholders in accordance
with applicable law. The term "pass-thru entity" means any
partnership or "S" corporation.
7)Requires a qualified employer to do both of the following:
a) Obtain from the Industrial Welfare Commission a
certification that a qualified employee meets the
applicable eligibility requirements. The certification must
include the dollar amount of special minimum wage
applicable to each qualified employee; and,
b) Retain the certification and provide a copy of it upon
request to the Franchise Tax Board (FTB).
8)Authorizes the FTB to prescribe rules, guidelines or
procedures necessary or appropriate to carry out the purposes
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of this tax credit program.
9)Provides that Chapter 3.5 of Part 1 of Division 3 of Title 2
of the Government Code (GC) does not apply to any standard,
criterion, procedure, determination, rule, notice, or
guideline established or issued by the FTB pursuant to this
bill.
10)States legislative intent to comply with the requirements of
Section 41 of the Revenue and Taxation Code (R&TC).
11)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Allows, under the CT and the PIT Law, a New Employment Credit
to qualified taxpayers that hire a qualified full-time
employee, have an overall net increase in employment, and pay
or incur qualified wages attributable to work performed by a
qualified full-time employee in a designated census tract or
former Enterprise Zone. The qualified taxpayer must receive a
tentative credit reservation from the Franchise Tax Board
(FTB) for the qualified full-time employee.
2)Provides that a qualified full-time employee must meet at
least one of the following conditions upon commencement of
employment:
a) Unemployed for six months immediately preceding
employment;
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b) Veteran separated from the Armed Forces in the preceding
12 months;
c) Recipient of the Earned Income Tax Credit in the
previous taxable year;
d) Ex-offender convicted of a felony; and,
e) Current recipient of California Work Opportunity and
Responsibilities to Kids (CalWORKS) or general assistance.
3)Provides that, as of January 1, 2016, state minimum wage is
generally $10 per hour, but employees classified as "learners"
may be paid a lesser wage.
4)Specifies that the minimum wage requirements do not apply to
the wages paid by an employer to the employees who are the
employer's parents, spouse, or children.
5)Applies performance measurement standards to any new tax
credit under either the PIT or CT Law if enacted by a bill
introduced on or after January 1, 2015. Specifically,
existing law requires the all of the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve:
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
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purposes, and objectives stated in the bill; and,
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives, including a requirement to specify both of the
following:
i) The baseline data, to be collected and remitted in
each year the credit is effective, for the Legislature to
measure the change in performance indicators; and,
ii) The taxpayers, state agencies, or other entities
required to collect and remit data.
FISCAL EFFECT: The FTB estimates General Fund revenue loss of
$2.7 million in fiscal year (FY) 2016-17, $11 million in FY
2017-18, and $21 million in FY 2018-19.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"The objective of AB 2582 is to create an incentive for
employers to hire Californians with developmental disabilities
at minimum wage or higher. This furthers the objective of
'employment first' for this population as established by
Chapter 677 of 2013 (AB 1041/Chesbro).
"AB 2582 will create a meaningful tax credit that will
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incentivize employers to offer minimum wage jobs to persons
with developmental disabilities who would otherwise receive
less than minimum wage under FLSA Section 14(c).
"The concept is to create an offset or credit between the
minimum wage paid and what the person would be paid using
14(c) productivity measurements. The goal would be to continue
to utilize 14(c) productivity measurements, which would relate
to the credit allowed for the employer and to continue to
measure the employee's growth in accomplishing job-related
tasks."
2)Arguments in Support . The sponsor of this bill states, "Under
Section 214(c) of Title 29 of?the United States Code or
Section 1191 or 1191.5 of the Labor Code?, persons with
disabilities may be eligible to earn less than minimum wage
if, as a result of their disability, they are unable to
compete for a specific job with people without disabilities."
The sponsor explains that the special wage certificates
"provide employment opportunities for workers who would
otherwise be excluded from the workforce." According to the
sponsor, the "goal of employment for people with or without
disabilities," however, is to "earn the highest possible wage
in a job they choose." The proponents argue that this bill
provides "an incentive to employers to pay workers with
disabilities a higher wage by providing a tax credit for the
difference between the qualified wage and the
State-established minimum wage." The proponents believe that
this bill is a "reasonable step" towards improving the earning
capacity of workers with significant disabilities. Finally,
the proponents assert that investing in employment for people
with disabilities "not only provides dignity and independence
for those who are hired, it [also] lessens the need for a
social safety net."
3)Federal Minimum Wage Requirements and Section 14(c) . Under
the FLSA, the federal minimum wage for covered, nonexempt
employees is $7.25 per hour effective July 24, 2009. However,
the federal Fair Labor Standards Act (29.U.S.C. §214(c),
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Section 14(c)) authorizes employers, after receiving a
certificate from the Wage and Hour Division of the Federal
Department of Labor, to pay a "special minimum wage" to
individuals whose earning or productive capacity is impaired
by age, physical or mental deficiency, or injury.<1> A
special minimum wage is less than the federal minimum wage and
is determined on a case by case basis.
For many years, the special minimum wage certification program
has generated heated debate on both sides of the issue,
highlighting concerns regarding the efficacy and integrity of
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<1> Such individuals include student-learners (vocational
education students), as well as full-time students employed in
retail or service establishments, agriculture, or institutions
of higher education. Also included are individuals whose
earning or productive capacities are impaired by a physical or
mental disability, including those related to age or injury, for
the work to be performed.
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the Section 14(c) wage certificate program of FSLA.<2> In
2014, Congress enacted the Workforce Innovation and
Opportunity Act (WIOA), which was signed by President Obama.
Under the new law, individuals with disabilities age 24 and
younger will no longer be allowed to work for less than the
federal minimum wage, unless they first are provided
pre-employment transition services and attempt vocational
rehabilitation services first. WIOA also requires state
vocational rehabilitation agencies to work with education
providers to provide transition services and requires the
agencies to allocate at least 15% of their federal funds
towards such transition efforts.
On February 12, 2014, President Obama signed Executive Order
13658, "Establishing a Minimum Wage for Contractors." This
Order establishes a minimum wage to be paid to workers
performing on, or in connection with, a covered contract with
the Federal Government. Workers covered by this Executive
Order and due the full Executive Order minimum wage include
individuals with disabilities whose wages are calculated
pursuant to certificates issued under FLSA Section 14(c).
4)California's Special Minimum Wage Requirements . Many states
also have minimum wage laws. Where an employee is subject to
both the state and federal minimum wage laws, the employee is
entitled to the higher minimum wage rate. As of January 1,
2016, the minimum wage in California is $10 per hour.
However, a recently enacted law requires a gradual increase in
the minimum wage over the next six to seven years (or
potentially longer if the economy or state budget is
declining) to $15 per hour. According to the California
Budget and Policy Center, over one-third of California's
workforce, or 5.6 million workers, are expected to see their
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<2> "Some believe this program may keep disabled employees in
isolated workshop environments and often allows them to be paid
less than the federal minimum wage. Others believe that some
form of financial support is essential to creating and
maintaining jobs for people with disabilities. The initial
legislation was passed to give individuals with disabilities a
chance to work when the perspective on disability was very
different than it is today. As views have changed, this program
seems to no longer be fully aligned with the national disability
agenda. Although Section 14(c) gives individuals with
disabilities the experience of working, it allows them to be
paid less than prevailing wage, and in some instances isolates
them and fails to integrate them fully with their non-disabled
peers. Federal legislation was introduced that would repeal
Section 14(c) and prohibit the payment of special minimum wages.
While this legislation will potentially leave hundreds of
thousands of workers without employment, opponents argue that
special minimum wage certificates are antithetical to current
national disability policy promoting integration and financial
independence for individuals with disabilities." [Nye,
Gretchen. "The Uncertain Future of Section 14(c) of the Fair
Labor Standards Act," The George Washington University School of
Public Health and Health Services, Department of Health Policy,
(June 2013).]
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earnings rise due to the higher state minimum wage, including
workers who earn just above the current $10 hourly minimum.<3>
However, California's laws allows the Industrial Welfare
Commission to issue a license to an employee who is mentally
or physically handicapped, or both, authorizing the employment
of the licensee for a period not to exceed one year from date
of issue, at a wage less than the legal minimum wage.<4> The
commission may also issue a special license to a nonprofit
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<3> California Budget Bites, California's $15 Minimum Wage: What
We Know and Don't Know, Alissa Anderson and Chris Hoene, April
13, 2016, p. 3.
<4> California Labor Code contains two specific provisions
related to the payment of subminimum wage to individuals with
disabilities: Section 1191 and Section 1191.5. Section 1191
provides as follows: "For any occupation in which a minimum
wage has been established, the commission may issue to an
employee who is mentally or physically handicapped, or both, a
special license authorizing the employment of the licensee for a
period not to exceed one year from date of issue, at a wage less
than the legal minimum wage. The commission shall fix a special
minimum wage for the licensee. Such license may be renewed on a
yearly basis." Section 1191.5 states that "Notwithstanding the
provisions of Section 1191, the commission may issue a special
license to a nonprofit organization such as a sheltered workshop
or rehabilitation facility to permit the employment of employees
who have been determined by the commission to meet the
requirements in Section 1191 without requiring individual
licenses of such employees. The commission shall fix a special
minimum wage for such employees. The special license for the
nonprofit corporation shall be renewed on a yearly basis, or
more frequently as determined by the commission."
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organization such as a "sheltered workshop"<5> or
rehabilitation facility to permit the employment of those
employees without requiring individual licenses.
In recent years several states have announced initiatives to
transition from "sheltered workshops" to focus more on
"integrated employment." This effort involves preparing
people with disabilities to work in integrated settings (as
opposed to isolated workshops employing primarily disabled
individuals) earning a livable wage. This trend is sometimes
referred to as "competitive integrated employment." In
January 2015, the California Department of Rehabilitation, the
Department of Developmental Services, and Department of
Education, in collaboration with Disability Rights California,
announced plans to join other states in transforming its
provision of employment services to people with intellectual
and developmental disabilities. The agencies announced the
development of a blueprint that, among other things, states
that employment in integrated, competitive settings is
preferred for individuals with disabilities, and calls for the
establishment of measurable goals and benchmarks. In making
this move, California joined several other states, including
New York, Massachusetts, Pennsylvania and Rhode Island, which
have announced efforts to transition from "sheltered
workshops" to "integrated employment."
5)What Does this Bill Do ? This bill creates a new income tax
credit for employers who hire workers with developmental
disabilities, provided that the workers are paid at least the
state minimum wage during the taxable year. The proposed
amount of credit would equal to the difference between the
special minimum wage and the state minimum wage, multiplied by
the number of hours worked by the qualified employee during
the taxable year. According to the FTB staff, the number of
workers paid special minimum wages in California in 2016 is
approximately 26,000. It is estimated, based on the studies
prepared by the U.S. General Accounting Office, that the
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<5> Employers that have obtained special certificates to pay a
subminimum wage to disabled workers have traditionally been
referred to as "sheltered workshops." However, the term
"sheltered workshop" is seen by some as offensive and obsolete,
and has become generally disfavored. Unfortunately, many
statutes, including FEHA, continue to use the term "sheltered
workshop."
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average special minimum wage worker in California is paid 50%
of the state minimum wage rate. Thus, if this bill becomes
law, the qualified employer would earn a credit for the
difference between the California minimum wage (currently an
hourly rate of $10) and the special minimum wage, for a tax
credit equal to $5 per qualified employee per hour of wages
earned.
6)A Subsidy or an Incentive ? According to the author's office,
the unemployment rate for Californians with development
disabilities is well over 80%. Most employment opportunities
for this population are garnered through the efforts of
community-based, nonprofit agencies that seek employment in
accordance with the individual consumer's Individualized
Program Plan (IPP) as established in concert with the Regional
Center with which the person's services are coordinated.
As a way of encouraging the hiring of individual with
development disabilities, this bill proposes a tax incentive.
However, it is unclear to Committee staff whether this bill is
intended to create an incentive for employers to hire
individuals who otherwise would not be hired or a subsidy to
pay the state's minimum wage to the individuals who would have
been hired even in the absence of this credit. While this
proposed tax credit is available only to employers that hire
persons with developmental disabilities and pay them the state
minimum wage, it fully compensates those employers for the
difference between the state minimum wage and the special
minimum wage. In effect, as long as a qualified employer has
adequate income tax liability to utilize the credit, the
employer that has paid the state minimum wage, instead of the
special minimum wage, will have spent none of its money to pay
for the wage increase afforded to individuals with development
disabilities. Essentially, this bill simply serves as a
vehicle of transferring moneys from the General Fund to
qualified employers, who in turn will pay the state minimum
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wage to their employees. Generally, a hiring tax credit is
structured to compensate a qualified employer only for a
percentage of the additional hiring costs incurred. The
Committee may wish to consider whether the amount of the
proposed credit should be reduced to equal only to a
percentage (less than 100%) of the difference between the
state minimum wage and the special minimum wage paid to
qualified employees. Furthermore, the Committee may wish to
consider whether this credit is an effective tool in
incentivizing additional hiring of individuals with
development disabilities.
7)A New Tax Expenditure . By creating a new tax credit for
employers that hire individuals with developmental
disabilities, this bill would create a new tax expenditure.
The term "tax expenditure" refers to various credits,
deductions, exclusions, and exemptions for particular taxpayer
groups. In the late 1960s, U.S. 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).
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.
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8)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. Mr. Daniel Wilson,
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 5.4%, as of March 2016. 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, a 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.
9)California's Existing Hiring Tax Credit Programs: Background .
AB 93 (Committee on Budget), Chapter 69, Statutes of 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
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credit for wages paid to a qualifying employee performing work
in an economic development area or certified census tract.
The Committee may wish to consider expanding the existing
hiring tax credit program to include an incentive for hiring
individuals with developmental disabilities.
10) Absence of a Sunset Date . In its current form, this bill's
proposed tax expenditure lacks an automatic sunset provision.
This Committee has a longstanding policy favoring the
inclusion of sunset dates to allow the Legislature
periodically to review the efficacy and cost of such programs.
The Committee may wish to consider the addition of an
appropriate sunset provision.
11)Section 41 Requirements . SB 1335 (Leno), Chapter 845,
Statutes of 2014 added R&TC Section 41, which recognized that
the Legislature should apply the same level of review used for
government spending programs to tax preference programs,
including tax credits. Thus, Section 41 requires any bill
that is introduced on or after January 1, 2015 and allows a
new PIT credit to contain specific goals, purposes, and
objectives that the tax credit will achieve. In addition,
Section 41 requires detailed performance indicators for the
Legislature to use when measuring whether the tax credit meets
the goals, purposes, and objectives so-identified.
Although this bill declares legislative intent to comply with
the requirements of Section 41, it does not articulate the
specific objective of the proposed tax credit. Nor does this
bill include the performance indicators to measure the
effectiveness of the credit. The Committee may wish to
consider asking the author to specify the goals, purpose and
objective of the credit as well as the performance indicators
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to measure its effectiveness.
12)California Wages . The FTB staff notes that this bill fails
to specify that the wages paid to qualified employees must be
California wages. As such, an employer who pays
non-California wages to otherwise qualified employees would be
eligible for the credit. The Committee may wish to consider
whether the State of California should be subsidizing wages
paid for work performed out of state.
REGISTERED SUPPORT / OPPOSITION:
Support
The Alliance Supporting People with Intellectual and Development
Disabilities (Sponsor)
Center for Autism and Related Disorders (CARD)
Autism Speaks
California Disability Services Association
The Arc and United Cerebral Palsy California Corroboration
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Opposition
California Tax Reform Association
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098