BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | SB 1216| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- 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. SB 1216 Page 2 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 SB 1216 Page 3 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 SB 1216 Page 4 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. SB 1216 Page 5 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. SB 1216 Page 6 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 SB 1216 Page 7 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 SB 1216 Page 8 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 SB 1216 Page 9 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 **** END **** SB 1216 Page 10