BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON GOVERNANCE AND FINANCE
                         Senator Robert M. Hertzberg, Chair
                                2015 - 2016  Regular 

                              
          
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          |Bill No:  |SB 1272                          |Hearing    |4/27/16  |
          |          |                                 |Date:      |         |
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          |Author:   |Runner                           |Tax Levy:  |Yes      |
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          |Version:  |4/12/16                          |Fiscal:    |Yes      |
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          |Consultant|Grinnell                                              |
          |:         |                                                      |
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             Income taxes:  credit:  small business employee savings plan



          Enacts a credit for employers who contribute to an "Employee  
          Savings Match Plan" on behalf of employees.


           Background 

           California law 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.  The  
          Legislature typically enacts such tax incentives to encourage  
          taxpayers to do something that but for the tax credit, they  
          would not do.  The Department of Finance must annually publish a  
          list of tax expenditures; according its most recent report, the  
          Department estimates tax expenditures result in $57 billion in  
          foregone revenue in 2015-16.


           Proposed Law

           Senate Bill 1272 enacts a credit against the Personal Income Tax  
          and Corporation Tax in an amount equal to 50% of an employer's  
          contribution to an "Employee Savings Match Plan," beginning in  
          the 2016 taxable year, and ending in the 2020 taxable year.  The  
          measure limits the credit to $2,000 per employee per taxable  







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          year, and is only available to taxpayers meeting the Government  
          Code's definition of small business, which requires all of the  
          following be true to qualify:

                 The firm is an independently owned and operated business  
               that is not dominant in its field of operation, 

                 The firm's principal office is located in California,  
               and its officers are domiciled in the state, and 

                 When combined with affiliates, employs 100 or fewer  
               employees, and average annual gross receipts of ten million  
               dollars ($10,000,000) or less over the previous three  
               years, or is a manufacturer, as defined, with 100 or fewer  
               employees.

          The measure defines "Employee Savings Match Plan" as a savings  
          plan established by the taxpayer that meets all of the following  
          conditions:

                 Allows the employer to match voluntary contributions of  
               participating employees, without limitation,

                 An employee who has an annual salary of at least  
               $12,000, and has been continuously employed by the taxpayer  
               for at least six months may contribute to the plan,

                 At least one-half of participating employees earn less  
               than $40,000 during the calendar year for work performed by  
               the employer contributing to the plan,

                 Deposits are held in an insured bank or other financial  
               institution subject to withdrawal, and

                 Employees who withdraws funds from a plan less than one  
               year after the employee's first contribution, or less than  
               one year after a previous withdrawal shall not be eligible  
               to participate in that plan for the remainder of the year  
               in which that withdrawal was made or during the next  
               calendar year.  The bill provides that a transfer of funds  
               from an Employee Savings Match Plan into an IRA or other  
               deferred compensation plan shall not be considered a  
               withdrawal.









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          The measure allows the credit to be carried over for three  
          years.  The bill also provides that contributions to, and income  
          from, a plan shall be treated as ordinary income.  SB 1272  
          sunsets the credit on December 1, 2021

          In 2014, The Legislature enacted SB 1335 (Leno, 2014), which  
          added Revenue and Taxation Code §41 to apply the same level of  
          review used for government spending programs to tax preference  
          programs, including tax credits.  To satisfy these requirements,  
          the bill states that the intent of its tax expenditure is to  
          promote savings for employees, especially young and low-income  
          workers who have no savings and no retirement options other than  
          social security.  To measure whether the bill accomplishes the  
          goal, SB 1272 directs the Franchise Tax Board (FTB) to annually  
          prepare a written report of:

                 The percentage of employees under age 30 who are  
               receiving matching funds,

                 The percentage of employees earning less than $40,000  
               per annum who are receiving matching funds.


           State Revenue Impact

          According to the Franchise Tax Board (FTB), SB 1272 results in  
          revenue losses of $8.9 million in 2016-17, $7.5 million in  
          2017-18, and $7.8 million in 2018-19.


           Comments

           1.  Purpose of the bill  .  According to the author, "SB 1272  
          establishes a 'qualified savings plan' program to encourage  
          small businesses, and their workers employees to participate in  
          payroll based savings.  The program would create tax incentives  
          for participating small businesses by providing a partial tax  
          credit for matching amounts contributed to an employee's savings  
          account.  The program would be limited to businesses with fewer  
          than 100 employees and require that at least half of the  
          participating employees earn less than $40,000 per year.   
          Payroll savings plans can provide ease and incentives which  
          reduce resistance to savings.  A plan that includes an employer  
          contribution may be hard to resist.  A payroll savings plan can  








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          establish a regular pattern of savings which serve young  
          employees well.  In the contemporary workplace, the average  
          person may have ten or more jobs in their lifetime.  Company  
          benefits, when offered, are often lost when an employee leaves  
          while accumulations in a payroll saving plan move with the  
          employee.  An incentive that attracts employees also benefits  
          employers; especially if that incentive helps the worker  
          maintain financial stability"

          2.   Retirement savings  .  According to news reports, more than  
          half of all Americans are not financially prepared for  
          retirement.  Fewer employers today offer traditional,  
          defined-benefit pensions than in the past, and an estimated one  
          in three workers don't have access to a savings plan, such as a  
          401(k).  SB 1272 would create an incentive for employers to  
          create such savings plans, and to contribute to them on behalf  
          of their employees, by enacting a tax credit beyond the general  
          treatment of employer contributions to employee retirement  
          savings plans as deductible business expenses.  However, there  
          are other ways of increasing retirement savings without relying  
          on the inefficiency inherent in tax expenditures.  In 2012, the  
          Legislature enacted the California Secure Choice Retirement  
          Savings Trust Act, administered by the California Secure Choice  
          Retirement Savings Investment Board, housed in the State  
          Treasurer's Office, and created by the Act (SB 1234, De León).   
          While enactment is contingent on subsequent legislation, the  
          program could provide a voluntary, automatic-enrollment  
          retirement savings plan for more than 6 million California  
          workers who currently lack access to retirement savings plans  
          through their employers.  The measure would require private  
          employers with five or more employees not currently offering a  
          retirement savings plan to provide their employees access to,  
          and payroll deductions for, Secure Choice retirement accounts.   
          The bill directed the Board to commission a study to determine  
          whether the legal and practical conditions for implementation  
          can be met.  On March 17th, 2016, Overture Financial, the  
          contractor selected to complete the program design, market  
          analysis, and financial feasibility study work streams, issued  
          its findings, which can be found here:  
           http://www.treasurer.ca.gov/scib/report.pdf  .  In short, Overture  
          found that the program could be financially viable and  
          self-sustaining even under adverse conditions with poor  
          investment returns and high opt-out rates.  The Committee on  
          Public Employment, Retirement, and Social Security recently  








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          approved legislation that would express legislative approval  
          for, and direct the Board to implement, the program (SB 1234, De  
          León, 2016).  The bill is currently awaiting hearing in the  
          Committee on Appropriations.  While SB 1272 takes a different  
          approach to encouraging retirement savings, this bill could  
          instead be harmonized with Secure Choice by amending it to allow  
          employers a credit only when they contribute to their employees'  
          Secure Choice accounts, contingent on that program's  
          implementation.  

          3.   Will it work  ?  Tax benefits directed at specific products do  
          two things:  First, they reward behavior that would have  
          occurred without the subsidy, so-called "deadweight loss."  Some  
          employers may contribute to their employees' retirement accounts  
          without any incentive, so the bill will give these taxpayers a  
          windfall benefit equal to the sales tax not paid, providing no  
          marginal benefit.  Second, the bill may alter decisions at the  
          margin; the incentive of the credit may spur employers to begin  
          contributing to an account, or increase current levels to match  
          higher employee contributions.  A successful tax incentive  
          causes more economic activity at the margin than its deadweight  
          loss, but no tax credit has yet conclusively demonstrated that  
          its benefits outweigh its costs.  Additionally, because  
          California taxes a business's net income, not its gross, a tax  
          credit will only benefit profitable firms, which often isn't the  
          case for newer, smaller businesses.  The Committee may wish to  
          consider how much additional retirement savings SB 1272 will  
          spur versus its deadweight loss.

          4.   New tax expenditure  .  Enacting a new tax exemption results  
          in foregone revenue, which requires cuts in spending or higher  
          taxes, all else equal.  Tax credits do not pay for themselves:  
          the state's last effort of "dynamic revenue analysis" indicates  
          that while dynamic effects are definitely present and visible,  
          their effects are generally relatively modest.  The Committee  
          may wish to consider whether the benefits resulting from this  
          incentive are worth the tradeoff of cuts in spending or taxes on  
          other activities.

          5.  Section 41  .  In 2014, The Legislature enacted SB 1335 (Leno,  
          2014), which added Revenue and Taxation Code §41 to apply the  
          same level of review used for government spending programs to  
          tax preference programs, including tax credits.  SB 1335  
          requires any bill introduced on or after January 1, 2015 that  








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          allows a new income tax credit to contain specific goals,  
          purposes, and objectives that the tax credit will achieve.  In  
          addition, Section 41 requires detailed performance indicators  
          for a future Legislature to use when determining whether the tax  
          credit meets its goals, purposes, and objectives.  SB 1272 seeks  
          to comply with SB 1335's requirements; however, the measure  
          directs FTB to collect information and prepare a written report  
          regarding the percentage of all employees who receive matching  
          funds, including employees who make under $40,000, which may be  
          difficult to implement.  Unless financial institutions,  
          employees, or employers specifically report this information,  
          FTB may not have sufficient data to prepare the report required  
          by the bill.  The Committee may wish to consider whether SB  
          1272's current information collection requirements will result  
          in sufficient information for a future Legislature to assess its  
          effectiveness.

          6.  Checklist  .  Eagle Lodge West is an annual gathering of  
          professional tax attorneys, FTB and Board of Equalization  
          attorneys and legislative tax staff intended to foster dialogue  
          and discussion on difficult tax issues.  In 2014, a part of the  
          conference drafted a checklist called "general considerations  
          for drafting credit statutes," which attempts to focus on more  
          technical aspects of tax credits important for implementation  
          and to prevent the need for subsequent clean-up bills.  While SB  
          1272 includes many items on the checklist, the measure doesn't  
          speak to:

                 Additional definitions for terms like "employee,"  
               "salary," "match," and "without limitation," to reduce  
               potential disagreements between taxpayers and FTB.

                 A requirement that the taxpayer claim the credit only on  
               a timely-filed original return, instead of amended returns,  
               where taxpayers can claim credits for contributions made in  
               previous year, negating any incentive effect.

                 Any documentation requirements necessary for FTB to  
               verify that both employees and employers made  
               contributions, and that the taxpayer meets the measure's  
               definition of small business,

                 Allowing FTB to issue rules, guidelines, and procedures  
               to implement the credit, which must be exempt from the  








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               Administrative Procedures Act for taxpayers to receive  
               timely guidance to claim the credit.

                 Clawback provisions to reclaim credits if employers  
               subsequently terminate of lay-off the employee, or the  
               employee withdraws funds from the plan,

                 Rules for pass-through businesses such as partnerships,  
               S-Corps, and Limited Liability Companies,

                 Denying business expense deductions for the same  
               expenses that generate the credit,

                 Applying the credit to reduce regular tax below  
               tentative minimum tax.

          7.  Technicals  .  FTB and Committee Staff recommend the following  
          technical amendments.

                 Conforming the measure's definition of "small business"  
               with terms and concepts used in the Revenue and Taxation  
               Code,

                 Clarify the application of the credit for combined  
               groups of corporations,

                 Specify allowable uses of contributed funds that  
               generate the credit, minimum periods of time for the funds  
               to be held in an account to generate a credit, and a means  
               to verify compliance with the bill's requirements.

                 Limit contributions that give rise to credits to those  
               made to employees in California.  



          Support and  
          Opposition   (4/21/16)


           Support  :  None received.


           Opposition  :  California Tax Reform Association (unless amended).








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