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).









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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  








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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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