BILL ANALYSIS
AB 2630
Page 1
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2630 (Emmerson) - As Amended: May 3, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Personal Income Tax (PIT) Law: credit: full-time
employees: hires
SUMMARY : Allows a credit of $3,000 for each net increase in
"qualified full-time employees" hired during the taxable year by
a "qualified employer. Specifically, this bill :
1)Contains the following legislative findings:
a) California is facing one of the most severe economic
recessions in recent history;
b) Small businesses have been hit particularly hard in this
economy, which has caused high levels of unemployment
throughout the state; and,
c) As small businesses are the real force behind job
creation, it is necessary for California to assist them in
their effort to hire new employees and stimulate the
economy.
2)Allows, for taxable years beginning on or after January 1,
2011, a PIT credit of $3,000 for each net increase in
"qualified full-time employees" hired during the taxable year
by a "qualified employer."
3)Defines a "qualified full-time employee" as a qualified
employee who was:
a) Paid qualified wages by the "qualified employer" for
services of not less than an average of 35 hours per week.
b) A salaried employee and was paid compensation during the
taxable year for full time employment by the "qualified
employer."
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4)Specifies that a "qualified employee" shall not include an
employee:
a) Certified as a qualified employee in an enterprise zone
designated in accordance with state law;
b) Certified as a qualified disadvantaged individual in a
manufacturing enhancement area designated in accordance
with state law;
c) Certified as a qualified employee in a targeted tax area
designated in accordance with state law;
d) Certified as a qualified disadvantaged individual or a
qualified displaced employee in a local agency military
base recovery area (LAMBRA) designated in accordance with
state law; or,
e) Whose wages are included in calculating any other credit
allowed under the PIT Law.
5)Defines a "qualified employer" as a taxpayer that, as of the
last day of the preceding taxable year, employed a total of 50
or fewer employees.
6)Provides that in cases where the credit amount exceeds a
taxpayer's tax liability, the excess credit amount may be
carried over for eight years.
7)Specifies that any deduction otherwise allowed under the PIT
Law for qualified wages shall not be reduced by the amount of
the credit.
8)Provides that the credit shall be in lieu of any other credit
allowed by the PIT Law for each net increase in qualified
full-time employees during the taxable year.
9)Provides that credits must be claimed on a timely filed
original return received by the Franchise Tax Board (FTB) on
or before the "cut-off date" established by FTB. The "cut-off
date" shall be the last day of the calendar quarter within
which FTB estimates it will have received timely filed
original returns claiming credits that cumulatively total $50
million for all taxable years.
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10)Requires FTB periodically to provide notice on its website
regarding the total amount of credits claimed.
11)Provides for the automatic repeal of the credit provisions on
December 1 of the calendar year after the year of the cut-off
date.
12)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits under both the PIT Law and the
Corporation Tax (CT) Law. These credits are generally
designed to encourage socially beneficial behavior or to
provide relief to taxpayers who incur specified expenses.
2)Provides for the following geographically targeted economic
development areas (G-TEDAs): enterprise zones, manufacturing
enhancement areas, targeted tax areas, and LAMBRAs. 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 nearly identical 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 : Committee staff estimates that this bill would
reduce General Fund revenues by $6 million in fiscal year (FY)
2010-11, by $38 million in FY 2011-12, and by $16 million in FY
2012-13.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
While the economy is beginning to improve, California's
business climate is still amongst the worst in the nation.
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Forbes magazine rated California as having the highest
business costs in the country. A report by the nonpartisan
Milken Institute showed that California businesses are now
paying 23 percent more than the national average just to
operate here. As small businesses are the economic engine
for our state and are the real force behind job creation,
business conditions in California must improve to encourage
economic growth. According to the U.S. Small Business
Administration, companies with fewer than 20 employees
account for 18 percent of private sector jobs, and
companies with fewer than 100 employees comprise 36 percent
of these jobs.
AB 2630 is an important measure that will stimulate job
creation by offering a hiring tax incentive to businesses
that have the ability to employ new workers and expand
their current workforce.
2)Committee Staff Comments
a) What is a "Tax Expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. 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 increased employment in California.
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 without demonstrating any public benefit. Second,
there is less 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
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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) 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.
d) Why is this Credit So Familiar? : 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. Among other
things, AB 15 X3 implemented a nearly identical hiring
credit for taxable years beginning on or after January 1,
2009. There are, however, three main differences between
the existing hiring credit and the credit proposed by AB
2630. First, the existing credit is limited to taxpayers
with 20 or fewer employees as of the last day of the
preceding taxable year, while the credit proposed by AB
2630 would be available to taxpayers with up to 50
employees. Second, the existing credit is capped at
roughly $400 million for all taxable years, while the
credit proposed by AB 2630 would be capped at roughly $50
million. (In both cases, the credit program ends on the
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last day of the calendar quarter within which the
respective cap amount is reached.) Finally, the existing
credit was enacted under both the PIT Law and the CT Law,
while this bill would make the additional credit available
only to PIT taxpayers.
e) Would It Be Better to Simply Modify the Existing Credit
Program? : FTB reports that, as of May 1, 2010, 2,718 PIT
and business entity returns had been filed, with cumulative
credits totaling $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. If this
Committee determines that hiring credits are a useful tool
for promoting job creation, it may wish to modify the
restrictions that apply to the existing credit program,
which already has significant funds allocated to it. For
example, the Legislature could amend the program to allow
the credit to businesses with more than 20 employees.
Ostensibly, this would increase the short-term impact of
the credit, and would be more useful than implementing a
second tax credit program with an additional allocation of
funds.
f) Related Legislation : Committee staff notes the
following related legislation:
i) AB 1973 (Swanson), of the current Legislative
Session, would allow a specified tax credit, under both
the PIT Law and the CT Law, for each qualified employee
employed by a taxpayer. AB 1973 is currently pending on
this Committee's suspense file.
ii) AB 340 (Knight), of the current Legislative Session,
would have provided a hiring credit for each qualified
employee hired by a qualified employer. AB 340 was held
in this Committee.
iii) SB 508 (Dutton), of the current 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.
iv) SB 612 (Runner), of the current Legislative Session,
would have provided a specified tax credit for each
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qualified employee who was receiving unemployment
insurance benefits when hired. SB 612 was never heard
in Committee.
v) 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
None on file
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098