BILL ANALYSIS Ó
SB 1216
Page 1
Date of Hearing: June 20, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
SB
1216 (Hueso) - As Amended May 4, 2016
SUSPENSE
SENATE VOTE: 39-0
SUBJECT: Income taxes: credits: qualified employees
SUMMARY: Establishes an income tax credit, under both the
Personal Income Tax (PIT) and the Corporation Tax (CT) laws, for
employers that hire certain young individuals who are
ex-offenders convicted of a felony, as defined. Specifically,
this bill:
1)Allows an income tax credit, for taxable years beginning on or
after January 1, 2017, and before January 1, 2022, to a
"qualified taxpayer" equal to 20% of the "qualified wages"
paid to a "qualified full-time employee."
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2)Provides that the amount of credit may not exceed $15,000 per
qualified taxpayer per taxable year.
3)Defines a "qualified taxpayer" as a person or entity engaged
in a trade or business within California that, during the
taxable year, pays or incurs qualified wages.
4)Specifies that a "qualified taxpayer" does not include any of
the employers that:
a) Provide temporary help services, as described in the
North American Industry Classification System (NAICS) Code
561320 published by the United States Office of Management
and Budget, 2012 edition;
b) Provide retail trade services, as described in the NAICS
Section 44-55;
c) Are primarily engaged in providing food services, as
described in NAICS Code 711110, 722513, 722514, or 722515;
d) Are primarily engaged in services in casinos, casino
hotels, or drinking places, as described in NAICS Code
713210, 721120, or 722410; or,
e) Are "sexually oriented businesses," as defined.
5)Defines "qualified wages" as wages that meet all of the
following requirements:
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a) That portion of the wages paid or incurred by the
qualified taxpayer that exceed 150% of minimum wage, but
does not exceed 350% of minimum wage. However, if a
qualified full-time employee is employed in a designated
pilot area, as defined, qualified wages must exceed $10 per
hour or an equivalent amount for salaried employees,
instead of the 150% minimum wage requirement.
b) Paid or incurred during the 60-month period beginning
with the first day the qualified full-time employee
commences employment with the qualified taxpayer. 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.
6)Defines a "qualified full-time employee" as an individual who
meets all of the following requirements:
a) Receives starting wages that are at least 150 percent of
the minimum wage;
b) Is an ex-offender previously convicted of a felony who
is, at the time of hiring, between 18 and 25 years of age,
and who demonstrates completion of a work readiness
program;
c) Is hired by the qualified taxpayer on or after January
1, 2017; and,
d) Satisfies either of the following conditions:
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i) Is paid qualified wage by the qualified taxpayer for
services not less than an average of 35 hours per week.
ii) Is a salaried employee and was paid compensation
during the taxable year for full-time employment by the
qualified taxpayer.
7)Defines a "work readiness program" as a program offered by a
job training provider that offers vocational job training,
education opportunities, and life skills.
8)Requires a work readiness program to include all of the
following:
a) Paid or unpaid on-the-job training opportunities,
pre-apprenticeship programs, vocational instruction or
internship placement;
b) The opportunity for academic advancement;
c) The opportunity to earn at least one industry recognized
certification; and,
d) A life-skills training component.
9)Requires a qualified employee to be employed full-time for at
least 36 months in order for the qualified taxpayer to receive
the credit.
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10)Provides for a recapture of the credit claimed by the
qualified taxpayer if the qualified full-time employee is
terminated at any time during the first 36 months after
commencing employment with the taxpayer. However, this
recapture provision would not apply to any of the following
types of termination of employment:
a) The employee voluntarily leaves the employment of the
qualified taxpayer;
b) Before the close of the 36 month-period, the employee
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;
c) The employee was terminated due to the misconduct, as
defined;
d) The employee was terminated due to a substantial
reduction in the trade or business operations of the
qualified taxpayer, including reductions due to seasonal
employment;
e) The employee was replaced by other qualified full-time
employees so as to create a net increase in both the number
of employees and the hours of employment; or
f) Employment is considered "seasonal employment" and the
qualified employee is rehired on a seasonal basis.
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11)Requires a qualified taxpayer to claim the credit only a
timely filed original return of the qualified taxpayer.
12)Requires a qualified taxpayer to receive a tentative credit
reservation from the Franchise Tax Board (FTB) for each
qualified full-time employee within 30 days of complying with
the Employment Development Department's new hire reporting
requirements as provided, in the form and manner prescribed by
the FTB.
13)Requires FTB to do all of the following:
a) Approve a tentative credit reservation with respect to a
qualified full-time employee hired during a calendar year;
b) Determine the aggregate tentative reservation amount;
and,
c) Provide as a searchable database on the Internet Web
site, for each taxable year beginning on or after January
1, 2017, and before January 1, 2022, the employer names,
amounts of tax credit claimed, and number of new jobs
created for each taxable year, as provided.
14)Provides that in the case of a taxpayer that is a pass-thru
entity, the determination of whether the 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.
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15)Defines a "pass-thru entity" as any partnership or "S"
corporation.
16)Disallows any other credit to the taxpayer who is allowed the
credit for qualified wages paid to a qualified employee, with
respect to any wage consisting in whole or in part of those
qualified wages.
17)Provides that any excess credit may be carried over to reduce
the tax, as defined, for the succeeding four years, until the
credit is exhausted.
18)Requires the FTB to provide annually to the Joint Legislative
budget Committee, by no later than March 1, a report of the
total dollar amount of the credits claimed with respect to the
relevant fiscal year. If the total dollar amount of credits
claimed for the fiscal year is less than the FTB's estimate
for that fiscal year, the report shall identify options for
increasing annual claims of the credit so as to meet estimated
amounts.
19)Declares that Revenue and Taxation Code (R&TC) Section
41shall not apply.
20)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Allows taxpayers engaged in a trade or business to deduct all
expenses that are considered ordinary and necessary in
conducting that trade or business.
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2)Allows, under the CT and the PIT Law, an income tax credit to
qualified taxpayers that hire a qualified full-time employee,
have an overall net increase in employment, and pay or incur
qualified wages attributable to work performed by a qualified
full-time employee in a designated census tract or former
Enterprise Zone (the New Employment Credit). The qualified
taxpayer must receive a tentative credit reservation from the
Franchise Tax Board (FTB) for the qualified full-time
employee.
3)Provides that a qualified full-time employee must meet at
least one of the following conditions upon commencement of
employment:
a) Unemployed for six months immediately preceding
employment;
b) Veteran separated from the Armed Forces in the preceding
12 months;
c) Recipient of the Earned Income Tax Credit in the
previous taxable year;
d) Ex-offender convicted of a felony; and,
e) Current recipient of California Work Opportunity and
Responsibilities to Kids (CalWORKS) or general assistance.
4)Provides that, as of January 1, 2016, state minimum wage is
generally $10 per hour, but employees classified as "learners"
may be paid a lesser wage. Specifies that the minimum wage
requirements do not apply to the wages paid by an employer to
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the employees who are the employer's parents, spouse, or
children.
5)Applies performance measurement standards to any new tax
credit under either the PIT or CT Law if enacted by a bill
introduced on or after January 1, 2015. Specifically,
existing law requires the all of the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve;
b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in the bill; and,
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives, including a requirement to specify both of the
following:
i) The baseline data, to be collected and remitted in
each year the credit is effective, for the Legislature to
measure the change in performance indicators; and,
ii) The taxpayers, state agencies, or other entities
required to collect and remit data.
FISCAL EFFECT: The FTB staff estimates that this bill will
result in an annual General Fund (GF) loss of $0.3 million in
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fiscal year (FY) 2016-17, $1.1 million in FY 2017-18, and $1.8
million in FY 2018-19.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"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 Californians have found it increasingly
difficult to find employment. As these Californians 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 demonstrate that younger felons have a more
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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 2016-17 fiscal year. However, it is important to note
that 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 (10 x $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."
2)Arguments in Support . The proponents state that this bill
"aims to remove a significant barrier to successful re-entry
from the lives of young ex-offenders by implementing a tax
incentive" and to provide "opportunities for young ex-offender
to find employment that pays above minimum wage." The
proponents argue that approximately 70% of ex-offenders "have
dropped out of high school" and lack the job skills necessary
"for success in the labor market later in life." This bill
increases the opportunity for these disenfranchised youth to
find employment after incarceration and the training necessary
for them to succeed in the future employment. The proponents
contend that this bill would increase real job placement for
young ex-offenders and would help "improve their lives."
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3)California's Existing Hiring Tax Credit Programs: Background .
In 2014, Governor Brown signed legislation that reformed
California's economic development policies. [AB 93 (Committee
on Budget) Chapter 69, Statutes of 2014.] The new law
eliminated enterprise zones and other geographically targeted
economic development areas and, instead, created three new
economic development tax incentives: (a) a temporary tax
credit for wages paid by taxpayers to qualified employees
within former enterprise zones, and other areas that suffer
from high levels of poverty and unemployment (the "New
Employment Credit"); (b) a temporary sales and use tax
exemption on purchases of manufacturing equipment made by
qualified taxpayers, capped at $200 million annually per
taxpayer; and (c) the California Competes Tax Credit program -
a negotiated incentive administered by the Governor's Office
of Business and Economic Development (GO-Biz). The total
annual amount of these three tax incentives - the wage credit,
the sales and use tax exemption, and the California Competes
Tax Credit - was limited to $750 million. Existing law also
requires that each fiscal year at least 25% of the aggregate
credit amount be reserved for small businesses, i.e., a
business with $2 million or less in gross receipts, minus
returns and allowances.
4)The New Employment Credit Program . Pursuant to AB 93, the
hiring tax credit is established under both the PIT and CT
laws, from January 1, 2014 to January 1, 2021, for additional
hiring of employees in defined geographic areas (DGAs) in
California. The hiring credit is generally available in the
geographic areas largely covered by the former enterprise
zones (EZs), except certain census tracts with low
unemployment, two recently expired EZs, and in designated
census tracts that have a civilian unemployment rate and a
poverty rate in the top 25% of all census tracts in the state.
In order to qualify for the credit, the taxpayer must have
experienced an increase in total jobs throughout the state
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from one year to the next. Taxpayers are only allowed the
credit for the number of new jobs provided in California.
The New Employment Credit is available for wages paid by
taxpayers to full-time employees, including ex-offenders
convicted of a felony, who perform at least 50% of their
activities in the designated areas. The credit percentages
are 35% per year for five years, for wages between 150% and
350% of the minimum wage. For a qualified employee working in
a pilot area, the applicable wages are those wages exceeding
$10 per hour, up to 350% of the minimum wage. Pilot areas are
areas within the DGA that have been designated by GO-Biz. Up
to five pilot areas may be designated for a period of four
calendar years. On April 24, 2014, GO-Biz designated three
pilot areas: (a) Fresno Pilot Area, which is the former
Fresno City Enterprise Zone, except within census tracts with
the lowest unemployment and poverty; (b) Merced Pilot Area,
which is the former Merced Enterprise Zone, except within
census tracts with the lowest unemployment and poverty, and
(c) Riverside Pilot Area - census tracts 303, 401.01, 402.03,
429.04, and 467 in Riverside County. These pilot areas are in
effect until December 31, 2017. However, the pilot area
designation may be extended by GO-Biz for an additional period
of up to three calendar years.
Except for small businesses, certain employers otherwise
qualified for the New Employment Credit are prohibited from
receiving this credit. For example, excluded businesses
consist of those in temporary help services, as defined in the
NAICS Code 561320, retail trades services (NAICS Sector
44-45), and those primarily engaged in food services (Codes
722511, 722513, 722514, and 722515). In addition, theater
companies and dinner theaters (Codes 711110), drinking places
(alcoholic beverages) (Code 722410) and casinos and casino
hotels (Codes 713210, 721120) are disqualified as well.
Finally, all sexually-oriented businesses are excluded from
being a qualified taxpayer regardless of their status as a
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small business. A sexually oriented business includes a
nightclub, bar, or similar commercial enterprise that provides
for an audience of two or more individuals live nude
entertainment or live nude performances where the nudity is a
function of everyday business operations and where nudity is a
planned and intentional part of the entertainment or
performance.
5)What Does this Bill Do ? This bill would create a new income
tax credit for employers who hire an ex-offender previously
convicted on a felony, who at the time of hiring is between 18
and 25 year of age, and who demonstrates documented completion
of a work readiness program. The worker must be paid at least
150% of the state minimum wage during the taxable year. The
proposed credit amount would equal 20% of the difference
between 150% and 350% of minimum wage. However, in the case
of a qualified employee employed in a pilot area the credit
would be allowed for wages that exceed $10 per hour or an
equivalent amount for salaried employees. The 350% of minimum
wage cap would still apply. The total amount of credit
available per qualified taxpayer per taxable year is limited
to $15,000. Similarly to the existing New Employment Credit
program, the qualified employer must receive a tentative
credit reservation from the FTB and must claim the credit on
an original filed timely return.
6)How Different Is the Proposed Hiring Credit ? The New
Employment Credit already provides a hiring tax credit to
employers who employ ex-offenders convicted of a felony, among
others. However, the proposed credit program is targeted
towards hiring only young ex-offenders convicted of a felony
who have completed a work readiness program. Furthermore,
this bill would make the credit available to qualified
employers on a statewide basis, instead of limiting it only to
former enterprise zones, local agency military bases,
designated pilot areas, and designated census tracts. Both
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credit programs require a qualified employee to work full time
and require a qualified employer to pay wages between 150% and
350% of minimum wage, unless the qualified employee is working
in a designated pilot area. The existing credit percentage is
35% of qualified wages in contrast to 20% proposed by this
bill. The aggregate annual amount of the credit is further
limited by this bill to $15,000 per qualified taxpayer per
taxable year. Finally, unlike the New Employment Credit, the
new tax incentive would target individuals between 18 and 25
years of age and does not require qualified employers to show
a net increase in employment. Stated differently, an
otherwise eligible employer would be not disqualified to
receive the proposed credit if the employer hires a qualified
ex-offender and fires another employee.
7)A Subsidy or an Incentive ? According to the author's office,
between 1980 and 2009, California's prison population
increased 583%. As a result, the number of Californians with
a criminal record has soared. Currently, there are nearly
eight million individuals in the state's criminal history
file. It appears that younger felons have a more difficult
time reintegrating into society post incarceration. A recent
California Department of Corrections and Rehabilitation
outcome evaluation report indicates that inmates released at
age 24 or younger return to prison at a rate of 67.2%. The
author also points out that the majority of incarcerated
individuals have fewer marketable skills and less education
than the general population.
As a way of encouraging the hiring of ex-offenders and
consequently helping them to rehabilitate, this bill proposes
a tax incentive. It is unclear, however, whether this bill
would create an incentive for employers to hire individuals
who otherwise would not be hired or a subsidy for hiring
individuals who would have been hired even in the absence of
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this credit. The Committee may wish to consider whether this
credit is an effective tool in incentivizing additional hiring
of young individuals with criminal record.
8)Do Hiring Tax Credits Work ? In previous years, some have
advocated job creation tax credits as a means of revitalizing
the struggling economy. The question, however, is whether
such credits actually work, and whether they are an
appropriate tool in light of substantial declines in
unemployment over the last five years. Mr. Daniel Wilson,
assistant director of the Center for the Study of Innovation
and Productivity at the Federal Reserve Bank of San Francisco,
attempted to answer this question. In a paper co-authored
with Robert Chirinko of the University of Illinois at Chicago,
Wilson examined the period between January 1990 and August
2009 and found that among states where employers could qualify
for credits immediately after enactment of the credit
legislation there was a slight employment increase of 0.12%.
These findings suggest that hiring credits, at least at the
state level, have some impact but appear to be very a blunt
tool for stimulating job growth. Additionally, it is unclear
if the hiring tax credit provides an incentive or reward. The
state's unemployment rate has been steadily declining over the
last few years to a rate of 5.4%, as of March 2016. An
improved economy is more likely to lead to additional hiring
of all individuals in all industries, irrespective of state
incentives such as a hiring tax credit. As a result, a hiring
tax credit could potentially provide an employer with a
windfall for actions that would have already taken place
because of improvements in the economy and job market.
9)Excluded Businesses . According to the author's office, this
bill is written to be consistent with the policy underlying
the New Employment Credit and therefore is drafted to emulate
- albeit on a broader scale - the New Employment Credit.
Thus, this bill excludes certain otherwise qualified employers
from receiving the proposed credit for hiring youth
ex-offenders unless those employers are "small businesses."
Similar to the New Employment Credit, excluded businesses
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would be those in temporary help services, retail trade
services, and those primarily engaged in food services.
Furthermore, theater companies and dinner theaters, drinking
places, casinos and casino hotels, and all sexually oriented
businesses would be disqualified. However, the proposed
credit targets only those employers who hire youth
ex-offenders under the age of 25 and it is unclear how many
businesses - besides food and retail services - would employ
this group of individuals in large numbers. It seems that
allowing the "excluded businesses" to qualify for the new
credit may provide more jobs opportunities to this demographic
group. At the same time, it is questionable how many of these
"excluded businesses" (such as for example, "big box"
retailers or fast-food chains) would hire these individuals at
more than 150% of minimum wage.
10)Double Dipping: Allowing Credit and Deduction . Existing law
already provides a tax incentive, in the form of a deduction
for business expenses, for wages and benefits paid by
employers to employees. A deduction decreases the taxpayer's
gross income and its value depends on the taxpayer's tax
bracket. For example, if a taxpayer is in the 25% bracket, a
$1,000 deduction would lower the taxpayer's tax bill by $250.
In contrast, a $1,000 credit decreases the tax liability by
the full $1,000, regardless of the tax bracket. Thus, the
value of a tax credit is the same, regardless of the tax rate
and, therefore, it is generally more appealing to taxpayers.
A tax credit is more valuable because it lowers the tax
liability dollar-for-dollar.
This bill does not prohibit an employer from deducting qualified
wages as a business expense, as well as obtaining the credit
for the same wages. The Committee may wish to consider
disallowing a deduction for the wages paid or incurred by a
qualified employer if the employer claims the new tax credit
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for the same wages.
11)R&TC Section 41 . SB 1335 (Leno), Chapter 845, Statutes of
2014 added R&TC Section 41, which recognized that the
Legislature should apply the same level of review used for
government spending programs to tax preference programs,
including tax credits. Thus, Section 41 requires any bill
that is introduced on or after January 1, 2015 and allows a
new PIT credit to contain specific goals, purposes, and
objectives that the tax credit will achieve. In addition,
Section 41 requires detailed performance indicators for the
Legislature to use when measuring whether the tax credit meets
the goals, purposes, and objectives so-identified.
This bill creates a new tax credit program but does not
articulate its objective or goal. Nor does this bill include
the performance indicators to measure the effectiveness of the
credit. Since performance indicators are critical in
measuring the effectiveness of the tax credit, the Committee
may wish to consider amendments to articulate the specific
goal, purpose or objective of the proposed tax credit as well
as the performance indicators to measure its effectiveness.
12)California Wages . This bill fails to specify that qualified
wages must be paid to qualified employees for work performed
in California. As such, an employer that pays non-California
wages to the otherwise qualified employees would be eligible
for the credit. In practice, it is unlikely that many
qualified employees who completed a "work readiness program"
administered in California would be hired to perform services
outside of California. Nonetheless, the absence of clarity
may lead to disputes between the FTB and taxpayers.
Therefore, the Committee may wish to consider amendments to
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ensure that California does not subsidize wages paid for work
performed outside California.
13)Implementation Concerns . The bill has several requirements
for FTB to administer this credit, including a searchable
database and a tax credit reservation system. These
requirements would result in substantial administrative costs
for the FTB.
The FTB staff has also noted that the phrase "employed in a
pilot area" is undefined. It is unclear whether an hour of
employment in a pilot area would be enough to allow a taxpayer
to qualify for the credit. The absence of definitions could
lead to disputes with taxpayers and would complicate the
administration of this credit. The Committee may wish to
consider defining this phrase to ensure that the qualified
wages incurred by the taxpayer are for services performed in a
pilot area.
REGISTERED SUPPORT / OPPOSITION:
Support
Anti-Recidivism Coalition (ARC)
Children's Defense Fund - California
California Association of Local Conservation Corps (CALCC)
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Opposition
None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916)
319-2098