BILL ANALYSIS                                                                                                                                                                                                    



          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      |
          |----------+---------------------------------+-----------+---------|
          |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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