BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SBX6 11 - Dutton
Amended: February 24, 2010
Hearing: May 12, 2010 Tax Levy Fiscal: Yes
SUMMARY: Enacts a Tax Credit to Employers for Wages Paid to
Veterans, Parolees, a Person on Probation, and
Individuals who Received Unemployment of CalWORKs
Benefits
EXISTING LAW provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area (GTDA) credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
THIS BILL enacts a tax credit for taxpayers for hiring
a qualified employee beginning in the 2010 tax year.
Taxpayers must be a person or entity engaged in a trade or
business within California that has its principal office
located in California. A qualified employee is a CalWORKs
recipient, a parolee, a person on probation, a veteran, or
a person who previously received unemployment benefit. The
taxpayer may claim a credit equal to:
25% of wages paid or incurred by the
taxpayer during the taxable year for each
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qualified employee who worked between 120 and 400
hours during the taxable year.
40% of wages paid or incurred by the
taxpayer during the taxable year for each
qualified employee who worked at least 400 hours
in the taxable year.
THIS BILL provides that the credit applies only to the
first $6,000 in wages, and the taxpayer may carry over the
credit to future tax years; however, the taxpayer must
apply the credit to the earliest tax years possible.
Taxpayers must reduce deductions by the amount of the
credit. Taxpayers must receive a certification from the
Employment Development Department that the employee is
eligible for the credit, and must retain a copy of the
certification and provide it upon request to the Franchise
Tax Board (FTB). The measure also applies provisions of
law to limit a taxpayer from double-claiming the credit or
sharing a credit within the commonly controlled group,
determine proportional shares of a credit by using each
taxpayer's share of wage expenses, and clarifying
eligibility when another employer acquires a firm but the
employee keeps his or her job.
FISCAL EFFECT:
According to FTB, SBX6 11 results in revenue losses of
$3.5 billion in 2010-11, $4 billion in 2011-12, and $3.6
billion in 2012-13.
COMMENTS:
A. Purpose of the Bill
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The author provides the following statement:
"California, like the rest of the nation, is in the midst
of a severe economic downturn. The latest unemployment
rate is 12.4%, the highest it has been in over a decade,
and 5th highest in the nation. Something needs to be done
to stimulate economic growth and get California out of this
viscous economic cycle.
California currently spends nearly $40 billion on
Health and Human Services. Creating incentives and credits
to put people back to work would more than offset the costs
the State of California is now paying in welfare benefits.
Parolees also have a difficult time finding suitable
employment; studies show that this segment of the
population has an unemployment rate of at least 60 %.
Establishing the Work Opportunity Tax Credit (WOTC)
Program will not only stimulate the economy, but it will
also help the state's budget, as it will reduce state
expenditures for CalWORKs and unemployment benefits, while
increasing revenues as previously unemployed persons become
taxpayers."
B. Background: 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 policymakers
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
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employment of hard-to-hire individuals.
As California faces another fiscal imbalance,
policymakers 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.
C. Are Hiring Credits Effective?
SBX6 11 seeks to expand opportunities for hard-to-hire
individuals by allowing a tax credit for employers to hire
individuals who are either veterans, parolees, or have
recently received public assistance. The state already
invests toward these goals, such as job-training programs,
welfare to work programs, and GTEDA tax credits. A
question rises as to whether these programs are effective.
How will SBX6 11 complement existing efforts, or should it
supplant these programs because tax credits will better
accomplish public goals? 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 further straining its
finances by allowing a credit that may be duplicating
current programs. 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.
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D. GTEDA and WOTC Credits
SBX6 11 borrows eligibility criteria from the
enterprise zone program, but allows the credit for any
business in the state that employs a qualified employee.
The bill's tax credits are also much smaller, applying only
to the first $6,000 in wages, whereas GTEDA credits are 50%
wages in the first year (less 10% for every year thereafter
ending in the fifth year of employment) and may be claimed
on wages up to 150% of the minimum wage, around $20,000.
Taxpayers must also receive a certification; however, in
GTEDAs, taxpayers apply to the zone administrator, and SBX6
11 gives EDD this responsibility. In both cases, taxpayers
have unlimited amounts of time to claim the certification,
which allows them to claim credits for wages paid to
employees hired in past years, although SBX6 11 credits
would not apply for wages paid to employees before the 2010
tax year. Additionally, SBX6 11 allows employers within an
enterprise zone to claim this credit in addition to GTEDA
credits. Should the measure advance from the suspense
file, the Committee may wish to consider setting a deadline
for taxpayers to obtain certification to ensure that
taxpayers are changing decision making based on the credit,
instead of receiving a retroactive reward, and requiring
employers to choose between a GTEDA credit and a SBX6 11
credit.
Support and Opposition
Support:None received.
Oppose:California Tax Reform Association
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Consultant: Meg Svoboda