BILL ANALYSIS �
AB 304
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Date of Hearing: May 16, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 304 (Knight) - As Introduced: February 9, 2011
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: credits: hiring credit
SUMMARY : Allows a tax credit, under both the Personal Income
Tax Law and the Corporation Tax Law, for each "qualified
employee" employed by a "qualified employer," as specified.
Specifically, this bill :
1)Allows, for each taxable year beginning on or after January 1,
2011, and before January 1, 2015, a credit for each "qualified
employee" employed during the taxable year by a "qualified
employer."
2)Provides that the per employee credit shall be:
a) $3,000; or,
b) $5,000, if the qualified employee's wage is 200% or more
than the average wage in the county in which the qualified
employee completes at least 50% of his/her work.
3)Defines a "qualified employee" as "an employee who was paid
qualified wages by the qualified employer for services
rendered for not less than an average of 35 hours per week and
not less than 1700 hours per annum."
4)Defines a "qualified employer" as a taxpayer engaged in a
trade or business within California that, on or after January
1, 2011, has either established a "headquarters" in California
or relocated a "headquarters" to California, and, as of the
last day of the preceding taxable year, employed 30 or more
employees located in California.
5)Defines "headquarters" as "the principal administrative office
in California of a qualified employer that employs 30 or more
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qualified employees at that office."
6)Defines "average wage" as the wage average of each county, as
determined by the Employment Development Department.
7)Defines "qualified wages" as wages subject to Division 6
(commencing with Section 13000) of the Unemployment Insurance
Code.
8)Authorizes the Franchise Tax Board (FTB) to prescribe
appropriate regulations to administer the credit.
9)Provides that the credit shall be available to a qualified
employer for the first taxable year in which the qualified
employer's headquarters are established within, or relocated
to, California, and the succeeding taxable year.
10)Provides that, in cases where the credit allowed exceeds a
taxpayer's tax liability, the excess may be carried over to
reduce the taxpayer's liability in the following year, and the
succeeding 10 years if necessary, until the credit has been
exhausted.
11)Provides that this credit shall be in lieu of any other
credit or deduction the taxpayer may otherwise claim with
respect to qualified wages.
12)Sunsets on December 1, 2015.
13)Takes immediate effect as a tax levy.
EXISTING FEDERAL LAW : Allows employers who hire employees from
specified targeted groups to claim a "work opportunity credit"
generally equal to 40% of the qualified first year wages for
that year.
EXISTING STATE 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
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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.
FISCAL EFFECT : The FTB estimates revenue losses of $450,000 in
fiscal year (FY) 2011-12, $3.4 million in FY 2012-13, and $4
million in FY 2013-14.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Assembly Bill 304 attempts to address the exodus of
businesses from California by lessening the financial
burden and stimulating job growth through focused tax
credits. California's business climate continues to be one
of the worst in the nation. Recently, California was
ranked in a report completed by the Small Business &
Entrepreneurship Council as 48 of 51 (the report includes
the District of Columbia) only ahead of the District of
Columbia, New Jersey and Minnesota. This negatively
affects businesses and our residents as they flee the state
for more affordable housing, jobs, and most importantly the
burden of high taxes and regulations.
2)Opponents state, "Employers hire based on an individual's
qualifications and their ability to perform the job, and will
not hire employees based on a marginal tax credit. An
employee hire will always be justified by the real economics
of the hire, based on cost and productivity. Your bill would
merely reward employers for hiring the employees they would
hire regardless of this incentive, at a great cost to the
state."
3)FTB notes the following in its staff analysis of this bill:
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a) "The bill fails to define "located in California." This
may be interpreted to mean that employees must reside in
California. A requirement that an employee reside in
California may be subject to constitutional challenge under
the Commerce Clause of the United States Constitution. This
challenge could be avoided if the bill instead required
that employees be employed in California for the employer
to claim the credit and then basing the credit on
California wages paid or incurred."
b) "This credit would be limited to an employer whose
principal central administrative office would be located in
California. Although the principal office could be the
location of where the operation is managed, not where the
work is performed, restrictions based on the location of a
business could be subject to challenge as unconstitutional
discrimination in favor of local commerce in violation of
the Commerce Clause of the United States Constitution."
c) "The bill currently requires that a taxpayer establish a
headquarters in California and that as of the proceeding
taxable year employ 30 or more employees in California.
This would mean that the taxpayer would have already had to
have a presence in California to qualify for the credit. If
this is contrary to the author's intent, the author may
wish to amend the bill to specify the intent."
4)Committee Staff Notes:
a) 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,
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
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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.
b) What is this Credit Designed to Incentivize? : Tax
credits are generally implemented to either provide relief
to taxpayers who have incurred specified expenses or to
influence behavior, including business practices, in a
socially beneficial manner. The credit proposed by this
bill seeks to encourage businesses to either establish or
relocate a "headquarters" in California. A "headquarters,"
in turn, is defined as, "the principal administrative
office in California of a qualified employer that employs
30 or more qualified employees at that office." This
raises at least two questions. First, while the creation
of a headquarters with 30 or more employees would entail
the creation of jobs, would it not make more sense to tie
the credit directly to net job creation, as the existing
small business hiring credit aims to do? Second, why does
it make sense to specifically tie the credit to the
creation of "administrative headquarters"? Are
administrative jobs somehow more valuable to the state's
economy than manufacturing or service sector jobs?
c) Clarifying Eligibility for the Higher Credit Amount :
This bill provides a higher credit amount ($5,000 instead
of $3,000) if a qualified employee's wage is 200% or more
than the average wage in the county where the employee
completes a majority of his or her work. This bill is
silent, however, regarding when or how a qualified
employee's wage should be gauged for purposes of this
calculation. This, in turn, creates a certain degree of
ambiguity. For example, would a taxpayer look at the
qualified employee's wage as of the last day of the taxable
year or would the taxpayer instead look to the average wage
of the qualified employee over the course of the taxable
year? Adopting the latter option would reduce
opportunities for gaming (i.e., taxpayers would not be
allowed to increase employee wages at the end of a taxable
year simply to qualify for the expanded credit). In either
case, Committee staff recommends amendments to make the
method of calculation clear.
d) Related Legislation : Committee staff notes the
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following related legislation:
i) AB 340 (Knight) of the 2009-10 Legislative Session
contained provisions nearly identical to this bill. AB
340 was held in this Committee.
ii) SB 508 (Dutton) of the 2009-10 Legislative Session
would have provided a hiring credit based on wages paid
during the taxable year to each qualified employee of the
taxpayer. SB 508 was held by the Senate Committee on
Revenue and Taxation.
iii) SB 612 (Runner) of the 2009-10 Legislative Session
would have provided a specified tax credit for each
qualified employee who was receiving unemployment
insurance benefits when hired. SB 612 was never heard
in Committee.
iv) AB 2365 (Correa) of the 2003-04 Legislative Session
would have provided a credit to qualified taxpayers
engaged in a manufacturing trade or business, as defined,
for hiring a qualified employee, as defined. AB 2365 was
held in the Assembly Appropriations Committee.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
California Tax Reform Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098