BILL ANALYSIS Ó AB 2582 Page A 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 AB 2582 Page B 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 AB 2582 Page C 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; AB 2582 Page D 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, AB 2582 Page E 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 AB 2582 Page F 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), AB 2582 Page G 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 --------------------------- <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. AB 2582 Page H 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 --------------------------- <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).] AB 2582 Page I 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 --------------------------- <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." AB 2582 Page J 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 --------------------------- <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." AB 2582 Page K 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 AB 2582 Page L 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. AB 2582 Page M 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 AB 2582 Page N 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 AB 2582 Page O 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 AB 2582 Page P Opposition California Tax Reform Association Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098