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  
















          ---------------------------
          <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  
          ---------------------------


          <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  
          ---------------------------
          <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  
          ---------------------------


          <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