BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |SB 1216 |Hearing |4/27/16 |
| | |Date: | |
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|Author: |Hueso |Tax Levy: |Yes |
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|Version: |2/18/16 |Fiscal: |Yes |
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|Consultant|Bouaziz |
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Income taxes: credits: qualified employees
Establishes a tax credit for employers that hire certain
ex-offenders who have completed a work readiness program.
Background
California law allows various income tax credits, deductions,
and sales and use tax exemptions to provide incentives to
compensate taxpayers that incur certain expenses, such as child
adoption, or to influence behavior, including business practices
and decisions, such as research and development credits. The
Legislature typically enacts such tax incentives to encourage
taxpayers to do something that but for the tax credit, they
would not do. The Department of Finance is required to annually
publish a list of tax expenditures.
State law generally allows taxpayers engaged in a trade or
business to deduct all expenses that are considered ordinary and
necessary in conducting that trade or business, including
employee wages.
Current state law allows a New Employment Credit, available to a
qualified taxpayer that hires a qualified full-time employee
(CalWorks recipient, ex-offender convicted of a felony, veteran,
or an individual unemployed for 6 months) has an overall net
increase in employment, and pays or incurs qualified wages
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attributable to work performed by the qualified full-time
employee in a designated census tract or former Enterprise Zone.
The credit is 35 percent of wages between 150 percent and 350
percent of minimum wage, or $10 for a designated pilot area. In
order to obtain the credit, the qualified taxpayer must have a
net increase in its total number of full-time employees working
in California, when compared to its base year both based on
annual full-time equivalents. The qualified taxpayer must
receive a tentative credit reservation from the Franchise Tax
Board (FTB) for that qualified full-time employee.
Proposed Law
Senate Bill 1216 establishes a credit to a "qualified taxpayer"
equal to 20 percent of the "qualified wages" paid or incurred to
a "qualified full-time employee." The credit cannot exceed
$15,000 per qualified taxpayer per taxable year and the employee
must be employed full-time for at least 36 months.
SB 1216 defines a "qualified taxpayer" as a person or entity
engaged in a trade or business within the state that, during the
taxable year, pays or incurs qualified wages. If the taxpayer
is a pass-thru entity, the determination of whether a taxpayer
is a qualified taxpayer would be made at the entity level and
any credit would be allowed to pass through to the partners and
shareholders. The bill defines "pass-thru entity" to mean any
partnership or "S" corporation.
The bill specifies that a "qualified taxpayer" does not include
any of the following types of employers:
Employers that provide temporary help services.
Employers that provide retail trade services.
Employers that are primarily engaged in providing food
services.
Employers that are primarily engaged in services in
casinos, casino hotels, or drinking places.
Employers that are a "sexually oriented business" as
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defined.
The bill defines "qualified wages" as wages that meet all of the
following requirements:
Wages that exceeds 150 percent of minimum wage, but does
not exceed 350 percent of minimum wage.
Wages paid between January 1, 2016 and January 1, 2021.
In the case of any employee who is reemployed, including a
regularly occurring seasonal increase, in the trade or
business operations of the qualified taxpayer, this
reemployment would not be treated as constituting
commencement of employment.
SB 1216 defines a "qualified full-time employee" as an
individual who meets all of the following requirements:
Receives starting wages that are at least 150 percent of
the minimum wage,
Is an ex-offender previously convicted of a felony who:
o Is at the time of hiring between 18 and 25
years of age, and
o Demonstrates completion of a work readiness
program.
Hired by the qualified taxpayer on or after January 1,
2016, and
Satisfies either of the following conditions:
o Is paid qualified wage by the qualified
taxpayer for services not less than an average of 35
hours per week.
o Is a salaried employee and was paid
compensation during the taxable year for full-time
employment by the qualified taxpayer.
The bill defines "work readiness program" as a program offered
by a job training provider that provides vocational job
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training, education opportunities, and life skills. A work
readiness program must include all of the following:
Paid or unpaid on-the-job training opportunities,
pre-apprenticeship programs, vocational instruction or
internship placement.
The opportunity for academic advancement.
The opportunity to earn at least one industry recognized
certification.
A life-skills training component.
If employment of a qualified full-time employee is terminated by
a qualified taxpayer at any time during the first 36 months
after commencing employment with the qualified taxpayer, whether
or not consecutive, the tax for the taxable year in which that
employment is terminated would be increased by an amount equal
to the credit allowed for that taxable year and all prior
taxable years attributable to qualified wages paid or incurred
with respect to that employee. This recapture provision would
not apply to any of the following conditions:
Termination of employment of a qualified full-time
employee who voluntarily leaves the employment of the
qualified taxpayer.
Termination of employment of a qualified full-time
employee who, before the close 36 months of employment,
becomes disabled and unable to perform the services of that
employment, unless that disability is removed before the
close of the 36 months and the qualified taxpayer fails to
offer reemployment to that employee.
Termination of employment of a qualified full-time
employee due to the misconduct of that employee.
Termination of employment of a qualified full-time
employee due to a substantial reduction in the trade or
business operations of the qualified taxpayer, including
reductions due to seasonal employment.
Termination of employment of the qualified full-time
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employee when that employee is replaced by other qualified
full-time employees so as to create an increase in both the
number of employees and the hours of employment.
Termination of the employment of the qualified full-time
employee when that employment is considered seasonal
employment and the qualified employee is rehired on a
seasonal basis.
To be eligible for the credit, the bill requires a qualified
taxpayer to request a tentative credit reservation from FTB
within 30 days of complying with the Employment Development
Department's (EDD) new hiring reporting requirements, in the
form and manner prescribed by the FTB. A tentative credit
reservation provided to a taxpayer with respect to an employee
would not constitute a determination by the FTB regarding a
taxpayer's eligibility for the credit.
The credit can only be claimed on a timely filed original return
and only with respect to a qualified full-time employee for whom
the qualified taxpayer has received a tentative credit
reservation.
Any excess credit may be carried over to reduce the net tax/tax
for the succeeding 5 years, until the credit is exhausted.
SB 1216 shall remain in effect until December 1, 2021, and as of
that date is repealed.
State Revenue Impact
According to FTB, SB 1216 results in revenue losses of $600,000
in fiscal year (FY) 2016-17, $1.6 million in FY 2017-18, and
$2.3 million in FY 2018-19.
Comments
1. Purpose of the bill. According to the author, "In recent
decades, the number of Americans who have come in contact with
the criminal justice system has increased exponentially. Between
1980 and 2009, California's prison population increased 583%.
As a direct result of the state's increasing incarceration rate
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the number of Californians with a criminal record has soared.
Currently, there are nearly eight million individuals in the
state's criminal history file. Upon release, many California's
have found it increasingly difficult to find employment. As
these California's have learned a felony conviction or a prison
or jail term on an individual's record can have a substantial
negative impact on future job procurement for numerous reasons.
Specifically, incarceration or a felony conviction imparts a
negative societal stigma that makes employers less likely to
hire ex-offenders.
Overwhelmingly, ex-offenders have tenuous relationships to the
labor market. Approximately 70% have dropped out of high
school, contributing to their un-employability. Moreover, time
spent incarcerated can make the matter worse by depriving those
incarcerated the chance to develop the job skills and social
capital necessary for success in the labor market later in life.
Statistics demonstrate that younger felons have a more
difficult time reintegrating into society post incarceration. A
recent California Department of Corrections and Rehabilitation
(CDCR) outcome evaluation report indicated that younger felons
recidivate at the highest rates. Inmates released at age 24 or
younger return to prison at a rate of 67.2 percent. SB 1216 is
a much needed bill that seeks to help a fragile and
disadvantaged demographic group successfully transition back
into society post-incarceration by reducing the barriers to
employment these individuals frequently face."
2. A new tax expenditure. Existing law provides 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). This bill would create a new tax expenditure,
costing the general fund almost $600,000 million dollars in
foregone revenue in the first year alone. The tradeoff for
providing a new tax expenditure, resulting in revenue losses, is
higher taxes or reductions to other services or programs.
3. How is a tax expenditure different from a direct expenditure?
As the Department of Finance notes in its annual Tax
Expenditure Report, there are several key differences between
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tax expenditures and direct expenditures. First, tax
expenditures are reviewed less frequently than direct
expenditures once they are put in place. This can offer
taxpayers greater certainty, but it can also result in tax
expenditures remaining a part of the tax code without
demonstrating any public benefit. Second, there is generally no
control over the amount of revenue losses associated with any
given tax expenditure. Finally, once enacted, it takes a
two-thirds vote to rescind an existing tax expenditure absent a
sunset date. This effectively results in a "one-way ratchet"
whereby tax expenditures can be conferred by majority vote, but
cannot be rescinded, irrespective of their efficacy, without a
supermajority vote.
4. Section 41 shall not apply. On September 29, 2014, Governor
Brown signed SB 1335 (Leno, 2014), which added R&TC Section 41.
SB 1335 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 introduced on or after January 1, 2015 that
allows a new income tax 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. This bill provides
that R&TC Section 41 shall not apply to this credit. The
Committee may wish to consider the appropriateness of this
Section 41 exemption.
5. New Employment Credit v. SB 1216. The New Employment Tax
Credit provides a tax credit to employers who employ
ex-offenders convicted of a felony, among others, while SB 1216
is only available to ex-offenders convicted of a felony who have
completed a work readiness program. The New Employment Tax
Credit only applies to employers located in a former enterprise
zone, a local agency military base, a designated pilot area, or
a designated census tract, whereas SB 1216 applies to any
employer statewide. Both credits require the employee to work
full time, and receive starting wages between 150 percent and
350 percent of minimum wage, unless the employer is in a
designated pilot area, then the New Employment Credit allows an
employer to receive the credit for a $10 an hour wage. The New
Employment Credit is 35 percent of wages, and the SB 1216 credit
is 20 percent of wages up to $15,000. The employer must receive
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a tentative credit reservation from FTB under both credits.
6. Triple dipping. SB 1216 does not prohibit an employer from
obtaining the New Employment Tax Credit, deducting wages as a
business expense, as well as obtaining the SB 1216's credit for
a single employee. The Committee may wish to consider limiting
an employer to a single tax benefit per employee.
7. Technical amendments. FTB staff suggests the following
technical amendment:
Replace the phrase "net tax" with "tax" for consistency
within the code section.
8. Implementation concerns. For taxable years beginning on or
after January 1, 2016, the bill would allow a qualified employer
that hires qualified employees a credit for wages paid to those
qualified employees, but only if the employer receives a
tentative credit reservation from the FTB within 30 days of
complying with the EDD's new hire reporting requirements.
Because of this requirement, any employer that hires qualified
employees between January 1, 2016, and the date this bill is
enacted (presumably after September of 2016) would be ineligible
for the credit because they would have failed to meet this
requirement. The Committee may wish to consider amending the
bill to either revise the operative date to January 1, 2017, or
remove the reservation requirement.
Support and
Opposition (4/21/16)
Support : Alliance for Community Empowerment; Anti-Recidivism
Coalition; CCEO YouthBuild; California Association of Local
Conservation Corps; Center for Employment Opportunities;
Children's Defense Fund California; City Heights Community
Development Corp; City of Imperial Police Department; Civicorps;
Communities United for Restorative Youth Justice; Compton
YouthBuild; Conservation Corps of Long Beach; Conservation Corp
North Bay; County of Imperial Probation Department; Fathers &
Families of San Joaquin; Fresno Local Conservation Corps;
Homeboy Industries; Imperial County Public Defender's Office;
John Muir Charter Schools; Los Angeles Conservation Corps;
Orange County Conservation Corps; Reality Changers; Sacramento
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Regional Conservation Corps; San Francisco Conservation Corps;
San Joaquin Regional Conservation Corps; San Jose Conservation
Corps; Sequoia Community Corps; South County Economic
Development Council; Urban Conservation Corps of the Inland
Empire; Urban Corps of San Diego County; Women in Non
Traditional Employment Roles; YouthBuild San Joaquin;
Opposition : Unknown.
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