BILL ANALYSIS
SB 1391
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Date of Hearing: August 4, 2010
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 1391 (Yee) - As Amended: August 2, 2010
Policy Committee: Revenue and
Taxation Vote: 6-3
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill disallows job-related business tax incentives (BTIs)
enacted between January 1, 2011 and 2016 in cases where the
business taking the BTI subsequently has a decline in jobs.
Specifically, the bill:
1)Requires that, beginning on January 1, 2014, a company
showing a decline in its workforce, as measured by "full time
equivalent" jobs, will not be eligible for the BTI that year,
and will be liable for all tax savings related to the BTI
taken in all previous years.
2)Applies to BTIs that are enacted principally for the creation
of jobs.
3)Defines a net decrease in full time equivalent jobs, to be
equal to the average number of full time equivalent jobs in
the three preceding years minus the number of full time
equivalent jobs in the current year. The numbers are adjusted
for business acquisitions, but not for business sales.
4)Defines BTI as a credit, deduction, exclusion, exemption or
any other tax benefit that is added to the state tax code
after January 1, 2011, which is enacted principally for job
creation in the state, and is allowed to taxpayers engaged in
trade, business, profession, vocation or other commercial
activity.
5)Exempts businesses with gross receipts of less than $500,000.
FISCAL EFFECT
SB 1391
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1)Unknown, potentially significant increase in future revenues
to the extent that BTI's are disallowed due to job losses.
2)Absent clarifying language, potential litigation risk related
to determination of whether a tax expenditure was created for
job creation.
3)Unknown, potentially significant administrative costs to
taxpayers and the Franchise Tax Board, to the extent the bill
undermines tax conformity between state and federal law.
COMMENTS
1)Purpose . The bill is intended to increase accountability for
businesses that receive tax incentives. According to the
author, the bill "will set clear expectations for corporations
and guarantee that the state's investment will yield
measurable results in the form of job retention and creation.
The proponents of this bill, California Labor Federation,
assert that, while beneficiaries of state programs are subject
to considerable scrutiny, "corporations receive $14.5 billion
in tax expenditures annually with little to no accountability,
while beneficiaries of state programs are subject to
considerable scrutiny."
2)Opponents assert that the bill - particularly the provisions
requiring repayment of taxes saved from prior year usage of a
tax incentive - would undermine the effect of future tax
incentives by creating uncertainty for employers who might
wish to use them.
3)Other fiscal concerns . This bill could have unintended
consequences in cases where job losses are due to external
factors, such as a general recession or a downturn in a
specific industry or region. In the regard, the bill makes no
distinction between "good actors" - companies that add jobs
but subsequently must deal with negative economic conditions -
and companies that have utilized an incentive but then make a
strategic decision to shift operations out of state. As
currently drafted, it appears that a company taking a BTI and
creating 100 jobs in one year would be liable for all the tax
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savings from the credit if it reduced its workforce by even
one job in subsequent years.
Also, the bill is limited in its effect to tax incentives that
are principally designed to create jobs. However, it can be
argued that most business incentives are about fostering
economic and job growth. This raises the question of how it
would be determined which provisions are for the purpose of
job creation. For example, if the state were to conform to a
federal law increase in depreciation allowances, would such a
conformity provision be conditioned on job growth. Such
uncertainties could lead to endless appeals and litigation
regarding which BTI's are subject to the requirements of this
bill.
Given these concerns, the Legislature may wish to consider
whether to (a) make the repayment requirements proportional to
the job losses (in the above example, the payback would only
be for 1/100th of the savings claimed in previous years), (b)
make the application of this bill subject to a meaningful
threshold -- for example, a 25% decline in jobs, and (c)
require that the provisions only apply to measures in which
bill creating the BTI includes specific language stating that
it's intent is principally to create jobs.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081