BILL ANALYSIS
AB 340
Page A
Date of Hearing: January 11, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 340 (Knight) - As Amended: January 4, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: hiring credit
SUMMARY : Allows a tax credit, under both the Personal Income
Tax Law and the Corporation Tax Law, for each "qualified
employee" employed by a "qualified employer," as specified.
Specifically, this bill :
1)Allows, for each taxable year beginning on or after January 1,
2010, and before January 1, 2014, a credit for each "qualified
employee" employed during the taxable year by a "qualified
employer."
2)Provides that the per employee credit shall be:
a) $3,000; or,
b) $5,000, if the qualified employee's wage is 200% or more
than the average wage in the county in which the qualified
employee completes at least 50% of his/her work.
3)Defines a "qualified employee" as "an employee who was paid
qualified wages by the qualified employer for services
rendered for not less than an average of 35 hours per week and
not less than 1700 hours per annum."
4)Defines a "qualified employer" as a taxpayer engaged in a
trade or business within California that, on or after January
1, 2010, has either established a "headquarters" in California
or relocated a "headquarters" to California, and, as of the
last day of the preceding taxable year, employed 30 or more
employees located in California.
5)Defines "headquarters" as "the principal administrative office
in California of a qualified employer that employs 30 or more
qualified employees at that office."
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6)Defines "average wage" as the wage average of each county, as
determined by the Employment Development Department.
7)Defines "qualified wages" as wages subject to "Chapter 6
(commencing with Section 13000) of Part 6 of Division 6 of the
Unemployment Insurance Code."
8)Authorizes the Franchise Tax Board (FTB) to prescribe
appropriate regulations to administer the credit.
9)Provides that the credit shall be available to a qualified
employer for the first taxable year in which the qualified
employer's headquarters are established within, or relocated
to, California, and the succeeding taxable year.
10)Provides that, in cases where the credit allowed exceeds a
taxpayer's tax liability, the excess may be carried over to
reduce the taxpayer's liability in the following year, and the
succeeding 10 years if necessary, until the credit has been
exhausted.
11)Provides that this credit shall be in lieu of any other
credit or deduction the taxpayer may otherwise claim with
respect to qualified wages.
12)Sunsets on December 1, 2014.
13)Takes immediate effect as a tax levy.
EXISTING FEDERAL LAW : Allows employers who hire employees from
specified targeted groups to claim a "work opportunity credit"
generally equal to 40% of the qualified first year wages for
that year. The amount of qualified first-year wages that may be
taken into account with respect to any individual shall not
exceed $6,000 per year (or $12,000 per year in the case of
qualified veterans).
EXISTING STATE LAW :
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices.
2)Provides for the following geographically targeted economic
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development areas (G-TEDAs): Enterprise Zones, Manufacturing
Enhancement Areas, Targeted Tax Areas, and Local Agency
Military Base Recovery Areas. Special tax incentives are
provided to taxpayers conducting business activities within a
G-TEDA. These incentives include a hiring credit equal to a
percentage of wages paid to qualified employees.
3)Allows a credit for taxable years beginning on or after
January 1, 2009, to qualified employers equal to $3,000 for
each net increase in qualified full-time employees hired
during the taxable year. The credit is limited to small
businesses (i.e., taxpayers with 20 or fewer employees as of
the last day of the preceding taxable year). The credit is
capped at roughly $400 million for all taxable years.
FISCAL EFFECT : FTB estimates that this bill would reduce state
revenues by $1.6 million in fiscal year (FY) 2010-11, $7.9
million in FY 2011-12, and $15 million in FY 2012-13.
COMMENTS :
1)The author states:
The Arizona Chamber of Commerce in a recent newsletter
discusses that they intend to capitalize upon California's
anti-business climate. 'While it is glamorous to lure
companies from Germany and other countries to Arizona, our
golden opportunity is right next door. Although California
is home to beautiful beaches and temperate weather, people
- and companies - are fleeing the state.' And Arizona
isn't the only one that is profiting from California's
anti-business climate. Recently California lost a Toyota
Prius plant to Mississippi due to their lower business
costs, while California consumers make up more than 26% of
the Prius market. When the cost of shipping vehicles
across the nation outweighs the costs of doing business in
California it is time for us to rethink our tax policy.
So, to that end, we must stop spending. We must stop
taxing. We must stop forcing businesses and jobs out, with
higher taxes driving higher unemployment rates. This
vicious cycle must end now. The place to start is with job
creation. The private sector is where we will fix our
struggling economy, it is where we will begin to alleviate
our hefty unemployment rates by lowering the tax burden on
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Californians. This starts with the tax credits offered in
AB 340.
2)FTB notes that this bill contains provisions limiting the
credit to taxpayers employing California residents. As such,
this bill may be subject to a challenge under the commerce
clause of the United States Constitution because it appears to
favor employers that hire California residents.
3)Opponents state that this bill could adversely affect revenues
that might otherwise be made available for critical
firefighting and public safety services.
4)Committee Staff Notes:
a) Do Job Creation Tax Credits Actually Produce Jobs? :
With the national unemployment rate hovering around 10%,
some have advocated job creation tax credits as a means of
revitalizing the struggling economy. The question,
however, is whether such credits actually work. Recently,
Daniel Wilson, assistant director of the Center for the
Study of Innovation and Productivity at the Federal Reserve
Bank of San Francisco, attempted to answer this question.
In a paper co-authored with Robert Chirinko of the
University of Illinois at Chicago, Wilson examined the
period between January 1990 and August 2009, and found
that, among states where employers could qualify for
credits immediately after enactment of the credit
legislation, there was a slight employment increase of
0.12%. By contrast, states that offered the credits
retroactively actually saw a slight decline of 0.06% in
employment. These findings would suggest that hiring
credits, at least at the state level, are a blunt tool for
stimulating job growth.
b) What is this Credit Designed to Incentivize? : Tax
credits are generally implemented to either provide relief
to taxpayers who have incurred specified expenses or to
influence behavior, including business practices, in a
socially beneficial manner. The credit proposed by this
bill seeks to encourage businesses to either establish or
relocate a "headquarters" in California. A "headquarters,"
in turn, is defined as, "the principal administrative
office in California of a qualified employer that employs
30 or more qualified employees at that office." This
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raises at least two questions. First, while the creation
of a headquarters with 30 or more employees would entail
the creation of jobs, would it not make more sense to tie
the credit directly to net job creation, as the existing
small business hiring credit aims to do? Second, why does
it make sense to specifically tie the credit to the
creation of "administrative headquarters"? Are
administrative jobs somehow more valuable to the state's
economy than manufacturing or service sector jobs?
c) Clarifying Eligibility for the Higher Credit Amount :
This bill provides a higher credit amount ($5,000 instead
of $3,000) if a qualified employee's wage is 200% or more
than the average wage in the county where the employee
completes a majority of his or her work. The bill is
silent, however, regarding when or how a qualified
employee's wage should be gauged for purposes of this
calculation. This, in turn, creates a certain degree of
ambiguity. For example, would a taxpayer look at the
qualified employee's wage as of the last day of the taxable
year or would the taxpayer instead look to the average wage
of the qualified employee over the course of the taxable
year? Adopting the latter option would reduce
opportunities for gaming (i.e., taxpayers would not be
allowed to increase employee wages at the end of a taxable
year simply to qualify for the expanded credit). In either
case, Committee staff recommends amendments to make the
method of calculation clear.
d) Related Legislation : Committee staff note the following
related legislation:
i) SB 508 (Dutton) of the 2009 Legislative Session
would have provided a hiring credit based on wages paid
during the taxable year to each qualified employee of the
taxpayer. SB 508 was held by the Senate Committee on
Revenue and Taxation.
ii) SB 612 (Runner) of the 2009 Legislative Session
would have provided a specified tax credit for each
qualified employee who was receiving unemployment
insurance benefits when hired. SB 612 was never heard
in Committee.
iii) AB 2365 (Correa) of the 2003-04 Legislative Session
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would have provided a credit to qualified taxpayers
engaged in a manufacturing trade or business, as defined,
for hiring a qualified employee, as defined. AB 2365 was
held in the Assembly Appropriations Committee.
e) Suggested Technical Amendments :
i) On page 2, delete lines 36-38, and insert, "(5)
"Qualified wages" means the amount of wages subject to
Division 6 (commencing with Section 13000) of the
Unemployment Insurance Code."
ii) On page 4, delete lines 30-32, and insert, "(5)
"Qualified wages" means the amount of wages subject to
Division 6 (commencing with Section 13000) of the
Unemployment Insurance Code."
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Professional Firefighters
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098