BILL ANALYSIS
SB 1391
Page 1
SENATE THIRD READING
SB 1391 (Yee)
As Amended August 17, 2010
Majority vote
SENATE VOTE :22-11
REVENUE & TAXATION 6-3 APPROPRIATIONS 12-5
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|Ayes:|Portantino, Beall, |Ayes:|Fuentes, Bradford, |
| |Charles Calderon, Coto, | |Huffman, Coto, Davis, De |
| |Fuentes, Gatto | |Leon, Gatto, Hall, |
| | | |Skinner, Solorio, |
| | | |Torlakson, Torrico |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|DeVore, Harkey, Nestande |Nays:|Conway, Harkey, Miller, |
| | | |Nielsen, Norby |
| | | | |
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SUMMARY : Requires a taxpayer claiming a new business tax
incentive to report annually, for taxable years beginning on or
after January 1, 2011, the number of employees employed by the
taxpayer in the state for the current and preceding taxable years.
Provides that the new business tax incentive may be recaptured by
the state if the taxpayer has a "net decrease" in the number of
full-time equivalent employees, as specified. Specifically, this
bill :
1)Requires a taxpayer doing business in the state claiming any new
business tax incentive, as specified, under either the Personal
Income Tax (PIT) Law or the Corporation Tax (CT) Law to include
annually, for tax years beginning on or after January 1, 2011,
on the timely filed original return, in the form and manner
prescribed by the Franchise Tax Board (FTB), the number of
full-time employees, part-time employees, and temporary
employees, as defined, employed by the taxpayer in the state for
the current and preceding taxable years.
2)Exempts from these reporting requirements taxpayers with 25 or
fewer employees that have net business income, as defined, of
less than $500,000 for the taxable year.
3)Applies only to a business tax incentive that is allowed by an
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act that takes effect beginning on or after January 1, 2011, and
is enacted with the purpose of creating new jobs in the state.
4)Provides that, if a "disqualifying event" occurs before the
close of the "recapture period," the business tax incentive
claimed by the taxpayer will be subject to recapture and the
"recapture amount" will be added to the taxpayer's taxable
income or tax, as specified, with interest.
5)Defines "disqualifying event" as a net decrease in the number of
full-time equivalent employees, calculated as of the last day of
the current taxable year.
6)Defines" recapture period" as the first full taxable year
beginning after the close of the taxable year in which the
business tax incentive reduces either the taxpayer's taxable
income or tax, plus four succeeding taxable years.
7)Defines "recapture amount" as an amount computed by multiplying
the amount of business tax incentive allowed to the taxpayer in
the current tax year, plus any amount previously allowed in
prior taxable years, by a fraction, the numerator of which is
the net decrease in full-time equivalent employees and the
denominator of which is the cumulative increase in the full-time
equivalent employees, as specified. Excludes from the
calculations any previously recaptured amounts.
8)Specifies that the "net decrease" in full-time equivalent
employees shall be determined, on and after January 1, 2014, by
subtracting the total number of full-time equivalent employees
employed by the taxpayer in the current taxable year from the
average number of full-time equivalent employees employed by the
taxpayer during the three preceding taxable years. The average
number is calculated by dividing the total number of full-time
equivalent employees in the three preceding taxable years by
three. Excludes from these calculations employees who were
employed in any trade or business sold by a taxpayer.
9)Defines "full-time equivalent" as either of the following:
a) In the case of a full-time employee paid hourly qualified
wages, "full-time equivalent" means the total number of hours
worked for the taxpayer by the employee (not to exceed 2,000
hours per employee) divided by 2,000.
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b) In the case of a salaried full-time employee, "full-time
equivalent" means the total number of weeks worked for the
taxpayer by the employee divided by 52.
10)Specifies that all employees of the trades or businesses that
are treated as related under either Internal Revenue Code (IRC)
Section 267, 318, or 707 shall be treated as employed by a
single taxpayer.
11)Provides that the amount of business tax credits recaptured
shall include the credits reported by the taxpayer on previous
tax returns and interest computed using the adjusted annual
rate, as specified.
12)Defines "business tax incentive" as a credit, deduction,
exclusion, exemption, or any other tax benefit, added to either
Part 10 or Part 11 of the Revenue and Taxation Code (R&TC) by an
act that takes effect beginning on or after January 1, 2011, and
allowed to taxpayers engaged in or carrying on any trade,
business, profession, vocation or calling, or commercial
activity in the state.
13)Defines "full-time employee" as an employee who works an
average of 35 hours in a week, calculated monthly.
14)Defines "part-time employee" as an employee who works less than
an average of 35 hours in a week, calculated monthly.
15)Defines "temporary employee" as an employee who works less than
120 days per year.
16)Specifies that, in the case of any business tax incentive that
is allowed to be sold or transferred under the provisions of
R&TC Part 11, the seller must expressly agree to provide to the
buyer and the FTB any necessary information to calculate whether
a disqualifying event has occurred with respect to the seller.
Provides that, if a disqualifying event has occurred, then the
buyer is required to include in its net income or tax the amount
of any required recapture.
17)Declares that this bill does not limit FTB's authority to audit
the information reported by taxpayers on their tax returns.
18)Provides that Government Code (GC) Chapter 3.5 (commencing with
Section 11340) of Part 1 of Division 3 of Title 2 does not apply
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to any standard, criterion, procedure, determination, rule,
notice, or guideline established or issued by the FTB pursuant
to the provisions of this bill.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, unknown, potentially significant increase in future
revenues to the extent that Business Tax Incentives are disallowed
due to job losses.
COMMENTS : Author's statement. The author states, "SB 1391
brings much needed transparency and accountability to corporate
tax expenditures. This bill will allow the state to recoup, or
"clawback," any future tax expenditures given to a corporation
that fails to meet employment or investment commitments.
"Clawback provisions make tax expenditures more effective,
transparent, and accountable. This 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.
"California taxpayers should not annually provide upwards of $14
billion in corporate tax credits without transparency and
accountability. It is unconscionable to devastate social services
and education while big corporations are getting billions of
dollars in tax breaks without creating jobs or even staying within
California.
"Such information allows citizens to become more knowledgeable
about how their government works. A democracy depends upon an
informed citizenry to function properly."
Is Accountability Needed for Tax Expenditures in California?
Existing law provides various credits, deductions, exclusions, and
exemptions for particular taxpayer groups. Although there is no
requirement for the Legislature itself to review existing tax
expenditures, several state agencies are required to issue annual
tax expenditure reports. In 1985, the Legislature passed Assembly
Concurrent Resolution 17 (Bates), which called upon the
Legislative Analyst Office (LAO) to prepare a biennial "tax
expenditure" report. A recent report by LAO shows that tax
expenditure programs cost the state nearly $50 billion in fiscal
year 2008-09. The LAO report noted that resources are allocated
to a new tax expenditure program automatically each year, with
limited, if any, legislative review, and there is no limit or
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control over the amount of money forgone since the Legislature
does not appropriate funds for tax expenditure programs. The LAO
report also stated that the tax expenditure programs offer many
opportunities for tax evasion, given the relatively low level of
audits.
Additionally, the Department of Finance (DOF) currently publishes
an annual report on tax expenditures, pursuant to GC Section
13305, and provides it to the Legislature by no later than
September 15 of each year. The DOF report includes a list of tax
expenditures exceeding $5 million in annual cost. As DOF 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. Secondly, 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, which
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.
Finally, since 2007, the FTB is required to prepare an annual
report, "California Income Tax Expenditures," describing tax
expenditures found in the PIT and the CT laws.
Tax expenditures in California are designed to provide relief to
taxpayers who incur specified expenses or to encourage socially or
economically beneficial behavior. But, while those tax
expenditures are enacted with a view of achieving a certain set of
public benefits, a taxpayer's eligibility for claiming those
expenditures is not contingent upon the taxpayer's future
behavior. In contrast to a direct subsidy, be it in the form of a
grant or a loan, most tax expenditures are broad-based and do not
require a taxpayer to sign a contract with the state, create a
certain number of new jobs or meet any other target as a condition
of the taxpayer's eligibility to claim a tax expenditure. Nor
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does the state currently have a right to recapture any of the tax
expenditures claimed by the taxpayers even if those taxpayers have
created no new jobs or provided no other anticipated benefits to
the state. Indeed, once a tax expenditure is enacted, the state
does not have any control over the annual amount of foregone
revenue, regardless of whether or not the taxpayers have changed
their behavior. Thus, it is nearly impossible to quantify the
public benefits, if any, created by most state tax expenditures.
This Bill's Approach to Measure and Enforce the Effectiveness of
Tax Credits. Currently, some 20 states and dozens of cities use
"clawback" provisions in one or more of their subsidy programs.
(Reform #2: Clawbacks, or Money-Back Guarantees,
www.goodjobsfirst.org ). SB 1391 establishes very specific
criteria to measure the effectiveness of future business tax
incentives by reference to a number of new jobs created by
taxpayers in the state. Thus, it requires a taxpayer claiming an
existing business tax incentive on its tax return to also report
the number of taxpayer's full-time employees in California for the
current and preceding taxable years and the number of jobs created
by the tax credit. In addition, this bill provides that, in the
case of a new business tax incentive, the taxpayer will be
required to repay some or the entire amount of the tax credit if
the taxpayer's employment declines in subsequent years. The "net
decrease" in employment in a particular tax year is measured by
comparing the total number of the taxpayer's full-time equivalent
employees during a three-year period immediately preceding the tax
year in question, divided by three, with the total number of the
employees in the current tax year. The total number of the
taxpayer's full-time equivalent employees also includes employees
of any trade or business acquired by the taxpayer during the tax
year. The recapture provisions apply to tax years beginning with
the 2014 tax year, after three years of reporting following this
bill's effective date (2011, 2012, and 2013 tax years). Thus, SB
1391 is intended to recapture only those business tax incentives
that are enacted after the effective date of this bill.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098
FN: 0006039