BILL ANALYSIS �
AB 11
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Date of Hearing: May 9, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 11 (Portantino) - As Introduced: December 6, 2010
2/3 vote. Tax levy. Fiscal committee.
SUBJECT : Taxes: credits: small businesses
SUMMARY : Allows a credit, under both the Personal Income Tax
(PIT) Law and the Corporation Tax Law, equal to 20% of annual
workers' compensation premiums paid by a "qualified taxpayer"
during the taxable year. Specifically, this bill :
1)Allows, for each taxable year beginning on or after January 1,
2011, a credit equal to 20% of the total amount of annual
workers' compensation premiums paid by a "qualified taxpayer"
during the taxable year.
2)Defines a "qualified taxpayer" as any taxpayer that meets both
of the following requirements:
a) Except for a taxpayer who first commences doing business
in California during the taxable year, the taxpayer
employed a total of 20 or fewer employees as of the last
day of the preceding taxable year; and,
b) The taxpayer has gross receipts, less returns and
allowances, reportable to this state of $1,000,000 or less.
3)Provides that a credit will only be allowed if it is claimed
on a timely filed original return received by the Franchise
Tax Board (FTB) on or before the specified "cut-off date."
The "cut-off date" shall be the last day of the calendar
quarter within which the FTB estimates that it will have
received returns claiming credits that cumulatively total $200
million for all taxable years.
4)Provides that, in cases where the credit exceeds the
taxpayer's tax liability, the excess credit amount may be
carried over for up to nine taxable years until the credit is
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exhausted.
5)Reduces the credit allocation for the existing small business
hiring credit from roughly $400 million to roughly $200
million. Specifically, provides that the "cut-off date" for
the existing small business hiring credit shall be the last
day of the calendar quarter within which the FTB estimates
that it will have received returns claiming credits that
cumulatively total $200 million (instead of $400 million) for
all taxable years.
6)Deletes duplicative sections of the Revenue and Taxation Code
(R&TC) as a housekeeping matter.
7)Takes immediate effect as a tax levy.
EXISTING LAW :
1)Allows various tax credits designed to provide tax relief for
taxpayers who incur certain expenses or to influence behavior,
including business practices.
2)Provides for the following geographically targeted economic
development areas (G-TEDAs): Enterprise Zones, Manufacturing
Enhancement Areas, Targeted Tax Areas, and Local Agency
Military Base Recovery Areas. 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 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.
4)Requires all employers to purchase or provide workers'
compensation benefits for their California employees.
Employers can satisfy their workers' compensation obligation
in one of three ways: (a) self-insurance; (b) private
insurance; or, (c) state insurance. Employers wishing to
self-insure must first obtain consent from the Department of
Industrial Relations.
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FISCAL EFFECT : The FTB estimates that this bill would result in
revenue gains of $25 million in fiscal year (FY) 2011-12, and
revenue losses of $14 million in FY 2012-13 and $6 million in FY
2013-14.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Small businesses are the engine of job growth in
California. AB 11 has been drafted to provide struggling
small business owners immediate relief in the current
economic climate by reducing a significant cost of doing
business by as much as 20%.
AB 11, in recognition of the dire condition of the state's
General Fund, responsibly pays for this credit by
reallocating underutilized funds already authorized for the
small business hiring credit.
2)Proponents state, "Small business is considered the backbone
of the economy and, in the past, led economic recovery. We
now need to work aggressively to assist small business. AB 11
is designed to provide immediate relief to small businesses
struggling in the current economic climate. Recognizing the
dire condition of the state's General Fund, this bill pays for
this credit by reallocating funds already authorized as part
of the existing small business hiring credit."
3)The FTB notes the following implementation and policy concerns
in its staff analysis of this bill:
a) "It is unclear whether the term "gross receipts less
returns and allowances reportable to the state" would be
based on a taxpayer's worldwide income or would be limited
to income attributable to California. In order to avoid
disputes between taxpayers and the department, it is
suggested that this term be amended for clarity."
b) "This bill uses the undefined term "annual workers'
compensation premiums." Specifying what would be
considered annual workers' compensation premiums would
prevent disputes between taxpayers and the department. For
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example, would amounts paid for premiums or benefits for
employees working outside of California be included? Would
amounts paid by self-insured taxpayers be included? Would
non-cash items, such as bonds, or pledged lines of credit
used by a self-insured taxpayer, be included?"
c) "A taxpayer, including any related parties, doing
business within the state would be limited to 20 or fewer
employees to be eligible for the �workers compensation
premiums (WCP)] credit, while a taxpayer that commences
doing business within California during the taxable year
could have an unlimited number of employees and could be
eligible for the WCP credit for that taxable year. If this
is inconsistent with the author's intention, this bill
should be amended."
d) "It is unclear how the determination of 20 or fewer
employees would be calculated. For example, would this be
a strict head count with a part-time employee and a
full-time employee counting equally? Also, because the
determination of the number of employees for a taxpayer
that is doing business within the state is done as of a
specified date, it is possible that a taxpayer could reduce
their workforce to reach the employee limitation required
to qualify for the WCP credit and rehire the employees the
day after the specified date. The author may wish to amend
this bill to clarify the meaning and calculation of "20 or
fewer employees" to avoid disputes between taxpayers and
the department."
e) "A taxpayer that had the WCP credit disallowed because
the $200 million cumulative WCP credit had been reached
would be subject to underpayment penalties. If it is the
author's intention that underpayment penalties would be
inapplicable in this situation, this bill should be
amended."
f) "This bill would allow tax credits for expenditures for
workers' compensation premium expenses that are required by
existing state and federal laws or regulations. Generally,
a credit is used as an incentive for future behavior rather
than a reward for complying with required behavior."
4)Committee Staff Comments:
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a) What is a "tax expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. In the late 1960's, United
States Treasury officials began arguing 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 new tax expenditure program, in the
form of an income tax credit, designed to provide tax
relief to small businesses. The credit would be capped at
roughly $200 million for all taxable years, and would be
allocated on a first-come-first-served basis. The credit
would be funded, at least in large measure, by reducing the
allocation for the existing small business hiring credit
from roughly $400 million to roughly $200 million.
a) 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,
unlike the capped and allocated credit proposed by this
bill, there is generally no control over the amount of
revenue losses associated with any given tax expenditure.
b) How would this bill effect the existing small business
hiring credit program? : The FTB reports that, as of April
2, 2011, 6,994 PIT and business entity returns had been
filed, with cumulative hiring credits totaling only $45.3
million. At this rate, it could take several years for the
existing $400 million cap to be reached absent significant
growth in the economy. As such, the author has proposed
re-allocating $200 million from the poorly-utilized hiring
credit to a new tax expenditure program that would
essentially defray some of the costs incurred by small
businesses in providing requiring workers' compensation
coverage.
c) Technical amendments :
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i) On page 3, lines 23-24, replace all references to
"tax" with "net tax";
ii) On page 11, lines 27-28, replace all references to
"net tax" with "tax";
iii) On page 11, line 33, strike "Section 23622.9" and
insert "Section 17053.76"; and,
iv) Replace all references to R&TC Section 17276 with
references to R&TC Section 17276.20 or 24416.20, as
appropriate.
d) Related legislation : Committee staff notes the
following related bills introduced in the current
Legislative Session:
i) AB 236 (Swanson) would expand the existing small
business hiring credit to encourage the employment of
specified ex-offenders and the chronically unemployed.
AB 236 is currently pending on this Committee's suspense
file.
ii) AB 1009 (Wieckowski) modifies and recasts the
existing hiring credit for small businesses. AB 1009 is
currently pending on this Committee's suspense file.
iii) AB 1195 (Allen) would, among other things, expand
the hiring credit's definition of a "qualified employer"
to mean a taxpayer with 40 or fewer employees as of the
last day of the preceding taxable year. AB 1195 is set
to be heard in this Committee on May 9, 2011, along with
this bill.
iv) SB 156 (Emmerson) would expand the existing small
business hiring credit to cover employers with up to 50
employees. SB 156 is currently pending in the Senate
Committee on Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
Small Business California
Valley Industry and Commerce Association
AB 11
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Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098