BILL ANALYSIS                                                                                                                                                                                                    




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          |SENATE RULES COMMITTEE            |                       SB 1216|
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                                   THIRD READING 


          Bill No:  SB 1216
          Author:   Hueso (D) 
          Amended:  5/4/16  
          Vote:     21 

           SENATE GOVERNANCE & FIN. COMMITTEE:  6-0, 4/27/16
           AYES:  Hertzberg, Nguyen, Beall, Hernandez, Lara, Pavley
           NO VOTE RECORDED:  Moorlach

           SENATE APPROPRIATIONS COMMITTEE:  7-0, 5/27/16
           AYES:  Lara, Bates, Beall, Hill, McGuire, Mendoza, Nielsen
           
           SUBJECT:   Income taxes:  credits:  qualified employees


          SOURCE:    Author


          DIGEST:  This bill establishes a tax credit for employers that  
          hire certain ex-offenders who have completed a work readiness  
          program.


          ANALYSIS:  


          Existing law:


           1) 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.  








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           2) Allows a New Employment Tax 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 six months) has an overall net  
             increase in employment, and 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 the Franchise Tax Board (FTB) for that  
             qualified full-time employee.


          This bill:


           1) 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.


           2) 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.  This bill defines  
             "pass-thru entity" to mean any partnership or "S"  
             corporation.


           3) Specifies that a "qualified taxpayer" does not include any  








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             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  
                defined.


           1) 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, unless the  
                employer is in a designated pilot area, then the allowable  
                wage is $10 an hour.  


                   Wages paid between January 1, 2017, and January 1,  
                2022.  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.




           1) 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  








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                of the minimum wage, unless the employer is in a  
                designated pilot area, then the credit is allowed for  
                wages of $10 an hour.  

                   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,  
                2017, 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. 


           1) 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:


                   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.









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           1) States 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  
                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.









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           1) States 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.


           2) States any excess credit may be carried over to reduce the  
             net tax/tax for the succeeding five years, until the credit  
             is exhausted.  


          10)      States this credit and the New Employment Tax Credit  
             may not both be claimed.


          11)      Applies to taxable years beginning on or after January  
             1, 2017, and before January 1, 2022 
          
          Comments
          
          1)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 this  
            bill 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  
            this bill 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 both  
            credits 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 a tentative credit reservation from  
            FTB under both credits.


          FISCAL EFFECT:    Appropriation:     No         Fiscal  
          Com.:YesLocal:    No








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          According to the Senate Appropriations Committee, the Franchise  
          Tax Board (FTB) estimates that the bill will 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).




          SUPPORT:   (Verified5/27/16)


          Alliance for Community Empowerment
          Anti-Recidivism Coalition
          CCEO YouthBuild
          California Association of Local Conservation Corps
          California Police Chiefs Association
          Center for Employment Opportunities
          Children's Defense Fund California
          City Heights Community Development Corporation
          City of Imperial Police Department
          Civicorps
          Communities United for Restorative Youth Justice
          Compton YouthBuild
          Conservation Corps of Long Beach
          Conservation Corp North Bay
          Councilmember Marti Emerald, City of San Diego
          County of Imperial Probation Department
          Fathers & Families of San Joaquin
          Fresno Economic Opportunities Commission
          Fresno Local Conservation Corps
          Homeboy Industries
          Imperial County Public Defender's Office
          John Muir Charter Schools
          Kids in Common
          League of California Cities Latino Caucus  
          Los Angeles Conservation Corps
          Opportunity Youth Initiative
          Orange County Conservation Corps








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          Reality Changers
          Sacramento Regional Conservation Corps
          San Diego Youth Development Office
          San Francisco Conservation Corps
          San Joaquin Regional Conservation Corps
          San Jose Conservation Corps
          Second Chance  
          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:   (Verified5/27/16)


          Department of Finance


          ARGUMENTS IN SUPPORT:     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 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' 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  








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          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.  The  
          Franchise Tax Board has estimated that SB 1216's employer tax  
          incentive will cost the state $600,000 in lost revenue for the  
          2016-2017 fiscal year.  However, it is important to note that  
          various analysts estimate that it costs California nearly  
          $60,000 annually to incarcerate an inmate in California prisons.  
           If SB 1216's employer tax incentive program keeps 10 high  
          risk-youth from re-offending then this program will cost the  
          state nothing in net revenue, (10x$60,000=$600,000).   
          Additionally, there are a multitude of additional social  
          benefits associated with an ex-offender successfully  
          reintegrating back into society ultimately resulting in greater  
          savings.  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."

          ARGUMENTS IN OPPOSITION:The Department of Finance argues this  
          bill has a negative impact on state revenues.  To maintain a  
          structural balance of the State Budget the state must weigh the  
          additional cost of this tax credit program with other competing  
          budget priorities.  The Department of Finance notes that the New  
          Employment Tax Credit already provides a hiring credit for  
          ex-offenders within certain geographical regions.


          Prepared by:Myriam Bouaziz / GOV. & F. / (916) 651-4119
          5/28/16 16:46:03


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