BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 1216 (Hueso) - Income taxes: credits: qualified employees
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|Version: May 4, 2016 |Policy Vote: GOV. & F. 6 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 16, 2016 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 1216 would establish a tax credit for employers that
hire certain ex-offenders who have completed a work readiness
program.
Fiscal
Impact: The Franchise Tax Board (FTB) estimates that the bill
would result in a General Fund revenue loss of $0.3 million in
2016-17, $1.1 million in 2017-18, and $1.8 million in 2018-19.
FTB's implementation costs have yet to be determined, but would
likely reach the hundreds of thousands of dollars annually
(General Fund).
SB 1216 (Hueso) Page 1 of
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Background: The term "tax expenditure programs" (TEPs) refers to various
special tax provisions (credits, deductions and exemptions) that
reduce the amount of revenues the "basic" tax system would
otherwise generate in order to provide (1) benefits to certain
groups of taxpayers, and/or (2) incentives to encourage certain
types of behavior and activities. The Legislature typically
enacts such tax incentives to encourage taxpayers to do
something that, absent the tax credit, they would not do. The
Department of Finance (DOF) is required to annually publish a
list of TEPs; DOF estimates that the 2015-16 revenue loss from
all TEPs exceeds $57 billion.
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 includes the New Employment Credit, available
to a qualified taxpayer that (1) hires a qualified full-time
employee (CalWorks recipient, ex-offender convicted of a felony,
veteran, or an individual unemployed for 6 months), (2) has an
overall net increase in employment, and (3) pays or incurs
qualified wages 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 FTB for that qualified full-time employee.
Proposed Law:
This bill would establish a credit, for taxable years 2017 to
2021, 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.
This bill would define a "qualified taxpayer" as a person or
SB 1216 (Hueso) Page 2 of
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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 would specify that a "qualified taxpayer" does not
include employers that (1) provide temporary help services or
retail trade service, (2) are primarily engaged in providing
either food services or services in casinos, casino hotels, or
drinking places, and (3) are a "sexually oriented business" as
defined.
The bill would define "qualified wages" as wages that meet all
of the following requirements: (1) wages that exceeds 150
percent of minimum wage, but does not exceed 350 percent of
minimum wage, and (2) 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.
The bill would define 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
(1) is at the time of hiring between 18 and 25 years of
age, and, (2) demonstrates completion of a work readiness
program.
Hired by the qualified taxpayer on or after January 1,
2017.
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Satisfies either of the following conditions: (1) is
paid qualified wage by the qualified taxpayer for services
not less than an average of 35 hours per week, or (2) 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
training, education opportunities, and life skills. A work
readiness program must include all of the following: (1) paid or
unpaid on-the-job training opportunities, pre-apprenticeship
programs, vocational instruction or internship placement, (2)
the opportunity for academic advancement, (3) the opportunity to
earn at least one industry recognized certification, and (4) 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 under specified conditions.
To be eligible for the credit, the bill would require 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.
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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.
Related
Legislation: AB 1404 (Grove, 2015) would have allowed a credit
to a qualified employer who employs a qualified employee and
pays the qualified employee a wage that exceeds the minimum wage
during the taxable year. The credit would be in an amount equal
for the difference between the special minimum wage that may be
paid to a qualified employee and the minimum wage. AB 1404
failed to pass out of the Assembly by the constitutional
deadline.
Staff
Comments: FTB estimates that there are approximately 35,000
ex-offenders previously convicted of a felony in California
between the ages of 18 and 25 years in 2016, and the department
assumes that 30 percent (or approximately 10,000) of these
individuals entered a qualified work readiness program.
Ultimately, FTB assumes that 1,000 individuals will become
qualified full-time employees under the provisions of the bill,
and an annual revenue loss that would reach $4.4 million by
taxable year 2021.
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