BILL ANALYSIS
AB 1973
Page 1
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1973 (Swanson) - As Amended: April 5, 2010
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: qualified employees
SUMMARY : Allows a specified tax credit, under both the Personal
Income Tax Law and the Corporation Tax Law, for each "qualified
employee" employed by a taxpayer. Specifically, this bill :
1)Allows, for each taxable year beginning on or after January 1,
2010, a credit for each "qualified employee" employed by the
taxpayer during the taxable year.
2)Provides that the per employee credit shall be:
a) 20% of the gross salary for each "qualified employee,"
not to exceed $5,000, for the first year of employment;
and,
b) 20% of the gross salary for each "qualified employee,"
not to exceed $5,000, for the second year of employment.
3)Provides that the credit shall be allowed only with respect to
the first year of employment if the "qualified employee" is
employed for 12 consecutive months from the date of
employment. The credit shall be allowed only with respect to
the second year of employment if the "qualified employee" is
employed for 24 consecutive months from the date of
employment.
4)Defines a "qualified employee" as an individual who is an
ex-offender employed by the taxpayer in a part-time or
full-time position. A "qualified employee" shall not include
an ex-offender who is required to register as a sex offender
under Penal Code Section 290, or the equivalent in another
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state or territory, under military law, or under federal law.
In addition, a "qualified employee" shall not include an
ex-offender who was convicted of a serious or violent felony.
5)Provides that any deduction or credit otherwise allowed for
the salaries upon which this credit is based shall be reduced
by the amount of the credit.
6)Provides that, if the credit allowed exceeds the taxpayer's
tax liability, the excess credit amount may be carried over to
the following years until the credit is exhausted.
7)Takes immediate effect as a tax levy.
8)Provides that this act shall be known as the Reentry
Employment Business Tax Credit Act.
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
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
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the last day of the preceding taxable year). The credit is
capped at roughly $400 million for all taxable years.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates that
this bill would reduce General Fund revenues by $160 million in
fiscal year (FY) 2010-11, by $110 million in FY 2011-12, and by
$100 million in FY 2012-13.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
This measure was introduced to help ex-offenders find
employment upon returning to their communities. It is
clear that the formerly incarcerated have an extremely
difficult time finding employment, which is a major factor
contributing to California's astronomically high recidivism
rate. AB 1973 provides an opportunity for business and
government to work together to reduce recidivism, increase
the safety of our communities, and have a positive impact
on the General Fund by allowing ex-offenders to become tax
paying citizens.
2)Proponents state, "We believe that employment and having
access to employment should be human right. Someone should
not be automatically banned or dismissed because they have
made a mistake in their past and have spent time in prison.
Helping the formerly incarcerated by increasing their
opportunity for work not only helps each individual, but also
enhances the overall community by reducing homelessness,
addiction, and recidivism."
3)Opponents state, "While we appreciate the intent of this
measure, the cost of hiring even a low-wage employee,
including the associated capital costs and payroll costs, will
be at least of $25-$30,000. Your bill grants a $5,000 tax
credit for the first and second years of employment, which is
only a small fraction of the amount it costs to hire even a
low-wage employee. An employee hire will always be justified
by the real economics of the hire, based on cost and
productivity, not a tax credit. Employers hire based on skill
sets and ability to do the job and will not hire employees who
are unqualified."
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4)FTB has identified the following implementation concerns in
its staff analysis of this bill:
a) This bill uses a number of undefined terms and phrases
including "gross salary," "ex-offender," "part-time
position," "full-time position," and "serious or violent
felony." The absence of definitions for these terms could
lead to disputes with taxpayers and would complicate the
administration of this credit.
b) This bill provides a credit based on a percentage of
each qualified employee's gross salary. The term "salary"
could be interpreted to refer only to non-hourly wages. If
this is not the author's intent, FTB recommends amending
the bill to use the term "wages" to encompass both hourly
and salaried employees.
c) It is unclear if the $5,000 limitation language refers
to the maximum salary paid that would qualify for the
credit or the maximum credit amount for each qualified
employee. The lack of clarity on this issue could lead to
taxpayer disputes.
d) This bill requires a qualified employee to be employed
by the taxpayer for 12 consecutive months. As this bill is
currently drafted, it appears that current employees could
qualify for the credit. If this is not the author's
intent, FTB recommends amending the bill to clarify that
the credit would apply to qualified employees hired on or
after January 1, 2010.
e) It is unclear whether a qualified employee hired in 2010
and employed for 12 consecutive months would qualify the
taxpayer for a credit in 2010 or 2011. FTB recommends
amendments clarifying the author's intent on this issue.
f) This bill fails to specify a period of time for
classifying an individual as an "ex-offender." Without a
timeframe, an employee who was convicted of a felony 10
years ago could qualify the taxpayer for the credit. In
addition, it is unclear what qualifies someone as an
"ex-offender." At one extreme, someone could have a
traffic violation and be considered an ex-offender. If
this is not the author's intent, clarifying amendments
should be taken. Finally, it is unclear who would certify
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whether a particular employee is an ex-offender.
5)Committee Staff Comments
a) What is a "Tax Expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. According to legislative
analyses prepared for prior related measures, United States
Treasury officials and some Congressional tax staff began
arguing in the late 1960's that these features of the tax
law should be referred to as "expenditures," since they are
generally enacted to accomplish some governmental purpose
and there is a determinable cost associated with each (in
the form of foregone revenues). This bill would enact a
tax expenditure, in the form of a hiring credit, designed
to encourage the employment of specified ex-offenders.
b) How is a Tax Expenditure Different from a Direct
Expenditure? : As the Department of Finance notes in its
annual Tax Expenditure Report, there are several key
differences between tax expenditures and direct
expenditures. First, tax expenditures are reviewed less
frequently than direct expenditures once they are put in
place. This can offer taxpayers greater certainty, but it
can also result in tax expenditures remaining a part of the
tax code in perpetuity without demonstrating any public
benefit. Second, there is generally no control over the
amount of revenue losses associated with any given tax
expenditure. Finally, the vote requirements for direct
expenditures and tax expenditures are different. While it
takes a two-thirds vote to make a budgetary appropriation,
a tax expenditure measure can be enacted by a simple
majority vote. It should also be noted that, once
enacted, it generally takes a two-thirds vote to rescind an
existing tax expenditure. This effectively results in a
"one-way ratchet" whereby tax expenditures can be conferred
by majority vote, but cannot be rescinded, irrespective of
their efficacy, without a supermajority vote.
c) On Operative Dates and Sunsets : As currently drafted,
this bill allows tax credits for taxable years beginning on
or after January 1, 2010. This raises two issues. First,
tax credits are typically enacted to encourage specific
taxpayer behavior that ostensibly would not take place
absent the credit. As a tax levy, this bill would become
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operative upon enactment. Nevertheless, it is unlikely
this bill would be signed into law before late 2010. Thus,
it would give a tax break for hiring decisions made before
the credit became law, thereby providing an unanticipated
benefit instead of an incentive. To address this issue,
the author may wish to amend the bill to provide that the
credit will be allowed for taxable years beginning on or
after January 1, 2011. Second, the author may wish to
include a sunset date to allow the Legislature to
periodically review the efficacy of this tax credit in
incentivizing the hiring of ex-offenders. To this end, the
author may also wish to specify those criteria by which
this tax credit's efficacy will be judged in the future.
d) Unlimited Carryforward : As drafted, this bill would
allow any unused credit amount to be carried over for an
indefinite number of years. This would require FTB to
retain the credit on its forms indefinitely. Committee
staff suggests amending this bill to limit the carryover
period to eight years. Experience has demonstrated that
the vast majority of credits are fully utilized within this
period of time.
e) Technical Amendments : Committee staff suggests the
following technical amendments:
i) On page 2, line 2, insert "as" after "allowed";
ii) On page 2, line 3, delete "described" and insert
"specified";
iii) On page 2, line 36, insert "as" after "allowed";
iv) On page 2, line 37, delete "described" and insert
"specified"; and,
v) On page 3, lines 23 and 24, strike out "net tax" and
insert "tax".
f) Related Legislation : Committee staff note the following
related legislation:
i) AB 340 (Knight) of the 2009 Legislative Session
would have provided a hiring credit for each qualified
employee hired by a qualified employer. AB 340 was held
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in this Committee.
ii) 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.
iii) 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.
iv) AB 2365 (Correa) of the 2003-04 Legislative Session
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.
REGISTERED SUPPORT / OPPOSITION :
Support
Crossroads, Inc.
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098