BILL ANALYSIS                                                                                                                                                                                                    



                                                                    SB 1216


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          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


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          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  








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               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:   









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             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:








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             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  








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               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; 










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             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  








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               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. 









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          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


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          M. David Ruff & Oksana Jaffe / REV. & TAX. / (916) 319-2098       
             FN: 0004016