BILL ANALYSIS Ó
SENATE COMMITTEE ON APPROPRIATIONS
Senator Ricardo Lara, Chair
2015 - 2016 Regular Session
SB 1272 (Runner) - Income taxes: credit: small business
employee savings plan
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|Version: May 4, 2016 |Policy Vote: GOV. & F. 7 - 0 |
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|Urgency: No |Mandate: No |
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|Hearing Date: May 16, 2016 |Consultant: Robert Ingenito |
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This bill meets the criteria for referral to the Suspense File.
Bill
Summary: SB 1272 would enact a tax credit for certain employers
who contribute to an "Employee Savings Match Plan" on behalf of
employees.
Fiscal
Impact: The Franchise Tax Board (FTB) estimates that the bill
would result in a General Fund revenue loss of $2.7 million in
2016-17, $2.5 million in 2017-18, and $2.7 million in 2018-19.
FTB's administration costs have yet to be determined, and partly
depend upon how the bill is implemented.
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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:
This bill would allow a tax credit (against personal income tax
and corporation tax) during taxable years 2016 through 2020 for
qualified taxpayers in an amount equal to 50 percent of
dollar-for-dollar matching contributions to the account of an
eligible employee's Employee Savings Match Plan, up to $2,000
per employee per taxable year. The maximum amount of credit
allowed under this credit would be $1,000. The bill would allow
any unused credit to be carried forward for four years.
"Employee Savings Match Plan" would mean a savings plan
established by a qualified taxpayer that meets all of the
following:
A qualified taxpayer may match, on a dollar-for-dollar
basis, the voluntary contributions of participating
employees, as specified, without limitation. However,
contributions in excess of $2,000 per employee per taxable
year would ineligible for a credit under this bill.
Any employee who has California wages subject to income
tax withholding under Division 6 of the Unemployment
Insurance Code and has been continuously employed by the
qualified taxpayer for at least six months may participate
in and contribute to an Employee Savings Match Plan.
At least one-half of the participating employees earn
less than $40,000 during the taxable year in wages subject
to income tax withholding under Division 6 of the
Unemployment Insurance Code for work performed for the
employer contributing to the Employee Savings Match Plan.
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Contributions are held in an insured bank or other
financial institutions in individual accounts as separate
property of each participating employee and may be
withdrawn by employees, as provided.
If an employee withdraws funds from an Employee Savings
Match Plan less than 12 months after the employee's first
contribution, or less than 12 months after a previous
withdrawal, other than a qualified withdrawal, then a
qualified taxpayer is ineligible for a credit for any
matching contributions made with respect to contributions
made by that employee during the remainder of the taxable
year in which the withdrawal was made or the next taxable
year.
The bill would define certain terms, including, but not limited
to:
"Matching contributions" would mean any contributions
made by a qualified taxpayer for the benefit of employees
which are eligible to be taken into account for purposes of
computing this credit.
"Qualified taxpayer" would mean a taxpayer that, for the
taxable year for which a credit is allowed, satisfies both
of the following conditions: (1) has gross receipts, less
returns and allowances, derived from or reportable to this
state, for the taxable year of $10,000,000 or less, and (2)
has fewer than 100 employees at any time during the taxable
year.
The credit must be claimed on a timely filed original return.
The credit would be in lieu of any other credit or deduction
with respect to the matching contributions of a qualified
taxpayer that would be taken into account in computing the
bill's credit allowed
The qualified taxpayer would annually report the social security
number and account information for each employee participating
in and contributing to the Employee Savings Match Plan in the
form and manner prescribed by FTB.
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This bill would require that FTB annually prepare a written
report to the Legislature that contains specified information.
The first report to the Legislature would be due on or before
January 1, 2018, and each January 1 thereafter.
The bill would authorize FTB to prescribe rules, guidelines,
procedures, or regulations necessary or appropriate to carry out
the purposes of this bill.
Related
Legislation: SB 594 (Ashburn, 2009/2010) would have established,
under both the Personal Income Tax Law and the Corporation Tax
Law, a credit against income or franchise tax in the amount of
15 percent of administrative costs incurred by a qualified
taxpayer in connection with establishing or administering a
cafeteria plan that provides for the payment of health insurance
premiums of the taxpayer's employees. The bill failed passage in
the Senate Revenue and Taxation Committee.
Staff
Comments: Based on data from the U.S. Small Business
Administration, FTB estimates that there are 700,000 small
businesses in the State. FTB assumes that (1) 420,000 small
businesses (or 60 percent) pay at least half their employees
less than $40,000 in wages per year, and (2) 90 percent of small
business have annual gross receipts of less than $10 million.
The U.S. Government Accountability Office estimates that 15
percent of small businesses sponsor some type of retirement
plans; of this amount, FTB further assumes that 15 percent would
match employee contributions to an employee's savings plan.
Putting all of this together, FTB assumes that 8,500 small
businesses would qualify for the credit under the bill.
Next, FTB assumes (based on additional data from the U.S. Small
Business Administration) an average of six employees per small
business, and consequently estimates that 51,000 employees would
be eligible to participate. FTB assumes that 20 percent of those
employees would elect to participate in the Employee Savings
Match Plan. However, in the first year this amount is reduced by
25 percent to account for the timing of enactment and employers
having enough time to make timely contributions to match
employee's contribution. FTB assumes that employees would
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contribute on average $800 to the plan per year and employers
would match these contributions. Thus, FTB assumes total
contributions of $5.2 million in 2016; this amount includes an
assumption that a portion of contributions would be withdrawn
during the first 12 months.
Employers would not be allowed a credit for matching
contributions made to employees who withdrew contributions
within 12 months of their first contribution or 12 months after
their last withdrawal or the next taxable year. Therefore, for
future years, the estimate assumes the amount of employer's
matching contributions would be reduced due to the credit
restriction.
As noted previously, the credit generated would be 50 percent of
qualified contributions, resulting in an estimated $2.6 million
in credit generated in 2016. The amount of credit that each
qualified taxpayer could use would be limited by the qualified
taxpayer's current year tax liability. The estimate assumes 75
percent, or $1.9 million, of the credit generated would be used
in the year generated and the remaining credit would be carried
over and used within the next two years.
In addition, a qualified taxpayer may not claim a deduction for
the matching contributions used in computing the credit. FTB
assumes an average tax rate of 6 percent and consequently
estimates that a revenue gain of $300,000 would result, making
the bill's total 2016 revenue loss $1.6 million. The larger
fiscal year estimates reported by FTB reflect (1) increasing
participation in the out-years, and (2) the conversion of the
estimates from calendar years to fiscal years.
FTB's administration costs have yet to be determined, and would
depend on how the bill is implemented. If its current
implementation concerns are resolved, costs to FTB resulting
from the bill would likely be in the tens of thousands of
dollars annually.
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