BILL ANALYSIS Ó SB 1216 Page 1 SENATE THIRD READING SB 1216 (Hueso) As Amended June 29, 2016 Majority vote. Tax Levy SENATE VOTE: 39-0 ------------------------------------------------------------------ |Committee |Votes|Ayes |Noes | | | | | | | | | | | | | | | | |----------------+-----+----------------------+--------------------| |Revenue & |9-0 |Ridley-Thomas, | | |Taxation | |Brough, Dababneh, | | | | |Gipson, Mullin, | | | | |O'Donnell, Patterson, | | | | |Quirk, Wagner | | | | | | | |----------------+-----+----------------------+--------------------| |Appropriations |14-0 |Gonzalez, Bigelow, | | | | |Bloom, Bonilla, | | | | |Bonta, Chang, Eggman, | | | | |Eduardo Garcia, | | | | |Jones, Quirk, | | | | |Santiago, Weber, | | | | |Wood, McCarty | | | | | | | | | | | | ------------------------------------------------------------------ SB 1216 Page 2 SUMMARY: Establishes an income tax credit, under both the Personal Income Tax (PIT) Law and the Corporation Tax (CT) Law, 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 23.5% of the "qualified wages" paid to a "qualified full-time employee." 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 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 NAICS Sector 44-55; c) Are primarily engaged in providing food services, as SB 1216 Page 3 described in NAICS Code 711110, 722511, 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: a) That portion of the wages paid or incurred by the qualified taxpayer that exceeds 150% of minimum wage, but does not exceed 350% of minimum wage. However, if a qualified full-time employee provides services exclusively 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: SB 1216 Page 4 a) Receives starting wages that are at least 150% 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) Performs at least 50% of his or her services for the qualified taxpayer during the taxable year in California; d) Is hired by the qualified taxpayer on or after January 1, 2017; and, e) Satisfies either of the following conditions: i) Is paid qualified wages 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: SB 1216 Page 5 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 taxpayer to claim the credit only on a timely filed original return of the qualified taxpayer. 10)Requires a qualified taxpayer to receive a tentative credit reservation from the Franchise Tax Board (FTB) for each qualified full-time employee, as specified. 11)Requires the 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 its 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 SB 1216 Page 6 created for each taxable year, as provided. 12)Provides that no deduction shall be allowed for wages paid or incurred to the extent those wages are qualified wages with respect to calculating a credit under this bill. 13)Contains findings and declarations for purposes of complying with Revenue and Taxation Code Section 41. 14)Takes immediate effect as a tax levy. EXISTING LAW: 1)Allows, under the CT Law 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). 2)Provides that a qualified full-time employee must meet at least one of the following conditions upon commencement of employment: a) Be unemployed for six months immediately preceding employment; b) Be a veteran separated from the Armed Forces in the preceding 12 months; SB 1216 Page 7 c) Be a recipient of the Earned Income Tax Credit in the previous taxable year; d) Be an ex-offender convicted of a felony; or, e) Be a current recipient of California Work Opportunity and Responsibilities to Kids (CalWORKS) or general assistance. FISCAL EFFECT: According to the Assembly Appropriations Committee: 1)One-time administrative costs to the FTB of approximately $750,000 to implement the proposed tax credit and ongoing administrative costs of approximately $150,000 to maintain the program and searchable database. (General Fund) 2)Annual revenue loss of $0.3 million, $1.0 million, and $1.7 million in fiscal years 2016-17, 2017-18, and 2018-19, respectively. (General Fund) 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 SB 1216 Page 8 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 [of] 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 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%. [...] 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. SB 1216 Page 9 2)What Does this Bill Do? This bill would create a new income tax credit for employers who hire an ex-offender previously convicted of a felony, who at the time of hiring is between 18 and 25 years 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 23.5% 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. 3)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 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 23.5% proposed by this bill. 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. Analysis Prepared by: SB 1216 Page 10 M. David Ruff & Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0004016