BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
AB 1973 - Swanson
Amended: May 28, 2010
Hearing: June 23, 2010 Tax Levy Fiscal: Yes
SUMMARY: Expands the Existing Hiring Credit for Small
Businesses That Employ Ex-Offenders Who Have Been
Convicted of a Felony.
EXISTING LAW allows various tax credits designed to
provide tax relief for taxpayers who incur certain expenses
or to influence behavior, including business practices.
Current law 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.
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.
THIS BILL 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
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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.
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.
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.
FISCAL EFFECT:
Because this bill does not increase the $400 million
limit on tax credits in current law, it is estimated that
there would be no remaining amounts to be allocated for tax
credits in the 2011 tax year. Therefore, the Franchise Tax
Board (FTB) estimates that there would be no revenue impact
from the bill as amended May 28, 2010.
COMMENTS:
A. Purpose of the Bill
The author has provided the following statement in
support of this bill:
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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.
B.Background:
AB 1973 increases the credit amount and the number
of small businesses that qualify under the existing Jobs
Tax Credit. On February 20, 2009, Governor Schwarzenegger
signed into law AB 15 X3 (Krekorian), Chapter 10, Statutes
of 2009, as part of the 2009-10 Special Session Budget
Agreement. AB 15 X3 provided a $3,000 credit per qualified
full-time employee for employers with 20 or fewer
employees. AB 1973 expands the existing Jobs Tax Credit to
$5,000 per qualified full-time employee (ex-offenders
convicted of a felony) to employers with 30 or fewer
employees, for taxable years beginning on or after January
1, 2011, and continues to cap the credit at $400 million
for all taxable years.
C. Tax Expenditures
The Department of Finance defines a tax expenditure as
a "deduction, exclusion, exemption, credit, or any other
tax benefit as provided by the state." When policy makers
institute new tax expenditures, the state agrees to forego
tax revenues in the hopes of providing increased equity in
the tax system or seeking to change private investment
behavior. This bill would enact a tax expenditure in the
form of a hiring credit, designed to encourage the
employment of hard-to-hire individuals.
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As California faces another fiscal imbalance, policy
makers are increasingly interested in the state's tax
expenditures, their goals and objectives as well as their
efficacy. California foregoes approximately $50 billion in
revenue each year due to tax expenditures. These range
from the exclusion from income for pension contributions
and social security benefits to subsidies for other types
of economic behavior deemed preferable by the Legislature,
such as the mortgage interest deduction to spur
homeownership, the research and development credit to
stimulate high-paying jobs and new exciting consumer
products and services. Tax expenditures evoke passionate
and complicated debates, chiefly regarding whether state
legislative action to forego tax revenues from specified
taxpayers provides superior benefits than commensurate
direct spending programs or general tax reductions. Quite
different from direct spending measures, the Legislature
may only limit, reduce, or eliminate tax credits by 2/3
vote of each house of the Legislature.
C. Why expanding this Jobs Tax Credit now and to a
specific group?
Under the existing Jobs Tax Credit, the Franchise Tax
Board reports that, as of June 5, 2010, 3,214 personal
income tax and business entity returns had been filed, with
cumulative hiring credits totaling only $25.5 million. At
this rate, there is plenty of time for the existing $400
million cap to be reached.
Furthermore, AB 1973 expands the Jobs Tax Credit for
businesses hiring a specific group of invidividuals, i.e.
ex-offenders. However, there are other groups of
hard-to-hire individuals that are deserving of expanded
hiring opportunities, such as veterans, individuals who
have recently received public assistance, etc., yet these
groups are excluded under AB 1973.
The committee may wish to consider whether it is fair
and effective tax policy to expand the existing Jobs Tax
Credit for businesses hiring a specific group of
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individuals. Moreover, the committee may wish to consider
allowing the current credit to work before considering its
expansion.
D. Are Hiring Credits Effective?
A main question remains as to whether hiring credits
actually work. A recent paper -co-authored by Daniel
Wilson, assistant director of the Center for the Study of
Innovation and Productivity at the Federal Reserve Bank of
San Francisco and Robert Chirinko of the University of
Illinois-attempts to answer this question. The paper
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 not an effective
tool for stimulating job growth.
Moreover, the state already invests toward the goals
of spurring employment for hard to hire individuals, such
as job-training programs, welfare- to-work programs, and
G-TEDA tax credits. The Committee may wish to consider the
efficacy and efficiency of existing efforts of federal,
state, and local agencies to assist the targeted population
obtain employment before allowing the expansion of a tax
credit that may be duplicating current programs and could
further strain the state's finances if the credit
allocation is increased.
Support and Opposition
Support:California Black Chamber of Commerce, City of
Oakland, Crossroads, Inc.
AB 1973 - Swanson
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Oppose: California Tax Reform Association
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Consultant: Meg Svoboda