BILL ANALYSIS
SB 1391
Page 1
SENATE THIRD READING
SB 1391 (Yee)
As Amended August 20, 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
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number of hours worked for the taxpayer by the employee
(not to exceed 2,000 hours per employee) divided by 2,000.
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
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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 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
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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
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.
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
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expenditure. Nor 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
SB 1391
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FN:
0006396