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 |
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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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