BILL ANALYSIS �
AB 236
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Date of Hearing: April 4, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 236 (Swanson) - As Introduced: February 3, 2011
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: qualified employees
SUMMARY : Expands the existing hiring credit for small
businesses. Specifically, this bill :
1)Allows, for taxable years beginning on or after January 1,
2011, an expanded $5,000 credit for each net increase in
"qualified full-time employees" hired during the taxable year
by a qualified employer. For purposes of this expanded
credit, a "qualified full-time employee" is defined as an
individual who meets the criteria for the existing hiring
credit and who is either an ex-offender who was convicted of a
felony, or a person who has been unemployed for 12 or more
consecutive months prior to being hired.
2)Specifies that the expanded credit shall not apply to sex
offenders or individuals convicted of a serious or violent
felony, as those terms are defined in the Penal Code.
3)Deletes duplicative sections of the Revenue and Taxation Code
as a housekeeping matter.
4)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
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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.
FISCAL EFFECT : The Franchise Tax Board (FTB) estimates revenue
losses of $16 million in fiscal year (FY) 2011-12, $2 million in
FY 2012-13, and $1 million in FY 2013-14.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
By providing employment opportunities for individuals who
are most in need, including persons who have been
unemployed for one year or longer, and ex-felons who are
often discriminated against in the employment arena for
their criminal pasts, AB 236 provides a simple answer to a
very complex problem.
During this severe economic downturn, the tax incentive
provided in AB 236 could be a decisive factor in keeping
some small businesses open. At the same time, the bill
provides a smart fix to our state's 70 percent recidivism
rate and 12.4 percent unemployment rate by expanding the
employment opportunities available to ex-offenders and the
chronically unemployed.
It is well known that the formerly incarcerated and the
unemployed are a great burden on governmental resources.
They become reliant on the ever decreasing safety net to
support themselves and their families. Rather than taking
from limited state and local resources, we need these
individuals to pay taxes and spend money to support
commerce.
2)Proponents state, "Having a criminal record and being out of
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touch from the working world are factors which create a
barrier to being hired in the public and private sectors.
Work opportunities provide hope and a chance for achieving
success. These tax credits will encourage employers to
participate in creating opportunities to help individuals
become law-abiding, productive citizens. Employing a hard to
hire candidate gives them a chance to share in the American
dream, provides an employer with a skilled and motivated
worker and the common good is served by making our community
safer."
3)Opponents state, "We do not believe that employment decisions
are motivated by tax breaks, and evidence for that position is
the meager usage of the employee tax credit passed by the
legislation �sic]. However, we would not oppose this bill if
it came from the currently appropriated funds for the employee
tax credit, before it expires. Otherwise, the current budget
situation cannot sustain additional new tax credits."
4)FTB notes the following implementation and technical concerns
in its staff analysis of this bill:
a) "This bill would increase the amount of the credit from
$3,000 to $5,000 for ex-offenders. The $3,000 credit would
continue after 2010. Additionally, the existing credit is
not a per employee credit. It is based on a "net increase
in full-time employees" determined on a full-time
equivalent basis. These two rules are conflicting and
could cause computational issues for the credit. It is
recommended �that] the author amend the bill to clarify how
to apply the $5,000 credit and the computation of the two
separate credit pools."
b) "This bill fails to specify a timeframe that an
individual would be considered an "ex-offender" or
"unemployed." For example, without a timeframe, an
employee that was convicted of a felony ten years ago could
qualify the taxpayer for this credit. As well as, if an
employee that was unemployed for 12 consecutive months 10
years ago could qualify the taxpayer for the credit. The
author may consider further defining "qualified employee"
by adding a timeframe for which the criteria would apply."
c) "The bill references California Revenue and Taxation
Code (CR&TC) sections that have been renumbered. All
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references to CR&TC section 24416 should be deleted and
replaced with CR&TC section 24416.20 and all references to
CR&TC section 17276 should be deleted and replaced with
CR&TC section 17276.20."
5)Committee Staff Comments:
a) What is a "Tax Expenditure"? : Existing law provides
various credits, deductions, exclusions, and exemptions for
particular taxpayer groups. According to legislative
analyses prepared for prior related measures, United States
Treasury officials and some Congressional tax staff began
arguing in the late 1960's 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
tax expenditure, in the form of an expanded hiring credit,
designed to encourage the employment of specified
ex-offenders and the chronically unemployed.
b) 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 in perpetuity without demonstrating any public
benefit. Second, there is generally no control over the
amount of revenue losses associated with any given tax
expenditure. Finally, it should also be noted that, once
enacted, it generally takes a two-thirds vote to rescind an
existing tax expenditure absent a sunset date. This
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.
c) Do Job Creation Tax Credits Actually Produce Jobs? :
With the national unemployment rate hovering around 9%,
some have advocated job creation tax credits as a means of
revitalizing the struggling economy. The question,
however, is whether such credits actually work. Recently,
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Daniel Wilson, assistant director of the Center for the
Study of Innovation and Productivity at the Federal Reserve
Bank of San Francisco, attempted to answer this question.
In a paper co-authored with Robert Chirinko of the
University of Illinois at Chicago, Wilson examined the
period between January 1990 and August 2009, and found
that, among states where employers could qualify for
credits immediately after enactment of the credit
legislation, there was a slight employment increase of
0.12%. By contrast, states that offered the credits
retroactively actually saw a slight decline of 0.06% in
employment. These findings would suggest that hiring
credits, at least at the state level, are a blunt tool for
stimulating job growth.
d) How Would the Expanded Credit Effect the Existing Small
Business Hiring Credit Program? : The Franchise Tax Board
reports that, as of March 5, 2011, 5,580 personal income
tax and business entity returns had been filed, with
cumulative hiring credits totaling only $38.5 million. At
this rate, it will take several years for the existing $400
million cap to be reached absent significant growth in the
economy. By providing an expanded credit for certain
disadvantaged employees, this bill will likely accelerate
usage of the existing credit allocation, thereby providing
greater short-term benefits.
e) Incentive vs. Reward : As noted above, credits are
typically provided to incentivize socially useful behavior
- in this case, the hiring of disadvantaged individuals.
As currently drafted, however, this bill would provide the
expanded credit for hiring decisions made in taxable year
2011, before the bill's effective date. The author may
wish to consider amendments providing that the expanded
credit will be available in taxable years beginning on or
after January 1, 2012.
f) Related Legislation : This bill is substantially similar
to AB 1973 (Swanson) of the 2009-10 Legislative Session.
AB 1973 was held by the Senate Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
AB 236
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California Catholic Conference
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098