BILL ANALYSIS
AB 1973
Page 1
ASSEMBLY THIRD READING
AB 1973 (Swanson)
As Amended May 28, 2010
Majority vote. Tax levy
REVENUE & TAXATION 9-0 APPROPRIATIONS 17-0
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|Ayes:|Portantino, DeVore, |Ayes:|Fuentes, Conway, Ammiano, |
| |Beall, | |Bradford, Charles |
| |Charles Calderon, Coto, | |Calderon, Coto, Davis, |
| |Fuentes, Harkey, | |Monning, Ruskin, Harkey, |
| |Nestande, Ma | |Miller, Nielsen, Norby, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Torrico |
| | | | |
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SUMMARY : Expands the existing hiring credit for small
businesses. Specifically, this bill :
1)Allows, for taxable years beginning on or after January 1,
2011, an expanded $5,000 credit for each net increase in
"qualified full-time employees" hired during the taxable year
by a qualified employer. For purposes of this expanded
credit, a "qualified full-time employee" is defined as an
individual who meets the criteria for the existing hiring
credit and who is an ex offender who was convicted of a
felony.
2)Specifies that the expanded credit shall not apply to sex
offenders or individuals convicted of a serious or violent
felony, as those terms are defined in the Penal Code.
3)Expands the definition of a "qualified employer" for purposes
of the existing hiring credit for small businesses, which
currently limits the credit to taxpayers with 20 or fewer
employees as of the last day of the preceding taxable year.
Provides that, for taxable years beginning on or after January
1, 2011, a "qualified employer" means a taxpayer with 30 or
fewer employees as of the last day of the preceding taxable
year.
4)Deletes duplicative sections of the Revenue and Taxation Code
as a housekeeping matter.
AB 1973
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5)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
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 : According to the Assembly Appropriations
Committee, no net impact on the total amount of revenue
reductions currently authorized under the hiring credit program
enacted in 2009. However, the increase in company size eligible
for the credit and the higher credit for ex offenders may
accelerate revenue losses from credit claims beginning in
2011-12.
COMMENTS : The author has provided the following statement in
support of this bill:
AB 1973
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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.
Committee Staff Comments:
1)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 an expanded hiring credit, designed to
encourage the employment of specified ex-offenders.
2)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
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conferred by majority vote, but cannot be rescinded,
irrespective of their efficacy, without a supermajority vote.
3)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.
4)Why expand the number of small businesses that qualify for the
existing credit?: The Franchise Tax Board reports that, as of
May 1, 2010, 2,718 personal income tax and business entity
returns had been filed, with cumulative hiring credits
totaling only $22.5 million. At this rate, it will take
several years for the existing $400 million cap to be reached
absent significant growth in the economy. By increasing the
number of employees a qualifying business may have, this bill
will likely accelerate usage of the existing credit
allocation, thereby providing greater short-term benefits.
5)Related legislation: Committee staff note the following
related legislation:
a) AB 340 (Knight) of 2009 would have provided a hiring
credit for each qualified employee hired by a qualified
employer. AB 340 was held in this Committee;
b) SB 508 (Dutton) of 2009 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;
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c) SB 612 (Runner) of 2009 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; and,
d) AB 2365 (Correa) of 2003-04 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.
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
FN: 0004555