BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session SB 1216 (Hueso) - Income taxes: credits: qualified employees ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 4, 2016 |Policy Vote: GOV. & F. 6 - 0 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: May 16, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- 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 ? 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 ? 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. SB 1216 (Hueso) Page 3 of ? 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. SB 1216 (Hueso) Page 4 of ? 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. -- END --