BILL ANALYSIS �
SB 364
Page 1
Date of Hearing: June 27, 2011
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
SB 364 (Yee) - As Amended: June 14, 2011
Majority vote. Fiscal committee.
SENATE VOTE : 22-17
SUBJECT : Future business tax incentives and tax credits:
reporting information: penalty.
SUMMARY : Imposes a penalty on a qualified taxpayer that claims
a business tax incentive or a tax credit, enacted after January
1, 2012, but fails to maintain the requisite number of full-time
equivalent employees in subsequent years, as provided.
Specifically, this bill :
1)States the legislative findings and declarations relating to
California's economic climate and the need to create qualified
jobs in the state.
2)Declares the legislative intent to do all of the following:
a) Encourage economic recovery and a deep and lasting
employment through transparency and accountability at all
levels;
b) Encourage the state to invest in ensuring high-qualify
employment through transparency and accountability at all
levels of business; and
c) Provide tax incentives only to businesses that share the
vision and commitment of a transparent, highly functioning,
high-employment state.
3)Amends the Sales and Use Tax (SUT) Law to do all of the
following:
a) Require a qualified taxpayer that benefits from a
business tax incentive under the SUT Law to include
annually, on a timely filed original return, in the form
and manner prescribed by the State Board of Equalization
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(BOE), the number of annual full-time equivalent (FTE)
employees employed by the taxpayer in the state for the
current calendar year and the preceding calendar year;
b) Impose a penalty of $5,000 for each failure to provide
the required information, unless that failure is due to
reasonable cause and not due to willful neglect;
c) Impose a penalty on the qualified taxpayer that has
benefited from a business tax incentive, but subsequently
experiences a net decrease in the number of annual FTE
employees in a calendar year that is equal to or greater
than 10% of the total annual FTE employees in this state in
the preceding calendar year;
d) Prescribe that this penalty be computed by subtracting
the annual number of FTE employees in the current calendar
year from the 90% of the taxpayer's annual FTE employees
for the prior calendar year, multiplied by $5,000 per
annual FTE employees;
e) Specify that, for purposes of calculating this penalty,
the employees of any trade or business acquired by the
qualified taxpayer during the current calendar year shall
be aggregated with the taxpayer's existing employees;
f) Provide that the penalty amount may not exceed the
amount of business tax incentives that reduced the
qualified taxpayer's tax liability on its tax returns for
the three preceding years;
g) Define a "qualified taxpayer" as a person that is a
manufacturer or a person that engages in research and
development activities in this state, and that pays
qualified wages to more than 100 FTE employees in this
state; and
h) Define a "business tax incentive" as an exemption or
exclusion from the taxes imposed under the SUT Law that is
based on qualified wages or the number of employees and is
enacted by an act that takes effect after January 1, 2012.
4)Amends the Personal Income Tax (PIT) and Corporation Tax (CT)
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Laws to do all of the following:
a) Require a qualified taxpayer doing business in the state
that claims any business tax credit under either the PIT
Law or the CT Law to include annually, on a timely filed
original return in the form and manner prescribed by the
Franchise Tax Board (FTB), the number of FTE employees, as
defined, employed by the taxpayer in the state for the
current taxable year and the preceding taxable year;
b) Impose a penalty of $5,000 for each failure to provide
the required information, unless that failure is due to
reasonable cause and not due to willful neglect;
c) Impose a penalty on a qualified taxpayer that claims a
business tax credit, but subsequently experiences a net
decrease in the number of annual FTE employees in a taxable
year that is equal to or greater than 10% of the total
annual FTE employees in this state in the preceding taxable
year;
d) Prescribe that this penalty be computed by subtracting
the qualified taxpayer's annual FTE employees for the
current calendar year from the 90% of the taxpayer's annual
FTE employees for the prior calendar year, multiplied by
$5,000 per annual FTE employees;
e) Specify that, for purposes of calculating this penalty,
the employees of any trade or business acquired by the
qualified taxpayer during the current calendar year shall
be aggregated with the taxpayer's existing employees;
f) Provide that the penalty amount may not exceed the
amount of business tax credits that reduced the qualified
taxpayer's tax liability, as reflected on the qualified
taxpayer's income or franchise tax returns for the three
preceding taxable years;
g) Define a "qualified taxpayer" as a person that is
engaged in or carrying on a trade, business, profession,
vocation, calling or commercial activity in this state, and
that pays qualified wages to more than 100 FTE employees in
this state; and
h) Define "business credit" as a credit that is:
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i) Enacted after January 1, 2012;
ii) Is based on qualified wages or the number of
employees employed; and,
iii) May be claimed against the "net tax," as defined in
Revenue and Taxation Code (R&TC) Section 17039, or
against the "tax," as defined in R&TC Section 23036.
5)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 an employee (not
to exceed 1,820 hours per employee) divided by 1,820.
b) In the case of a salaried full-time employee, "full-time
equivalent" means the total number of weeks worked for the
taxpayer by an employee divided by 52.
6)Defines "qualified wages" as wages subject to Unemployment
Insurance Code Division 6 (commencing with Section 13000).
7)Specifies that, for purposes of determining whether a person
is a "qualified taxpayer," all employees of the trades or
businesses that are treated as related under Internal Revenue
Code (IRC) Section 267, 318, or 707 shall be treated as
employed by a single taxpayer.
8)Requires taxpayers that sell, assign, or transfer business tax
credits to other members of the combined reporting group to
continue to report the information necessary to determine if a
penalty should be imposed.
9)Declares that this bill does not limit BOE's or FTB's
authority to audit the information reported by taxpayers on
their tax returns.
10)Authorizes the BOE and FTB to prescribe rules, guidelines, or
procedures necessary or appropriate to carry out the purposes
of this bill.
11)Provides that Government Code (GC) Chapter 3.5 (commencing
with Section 11340) of Part 1 of Division 3 of Title 2 does
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not apply to any standard, criterion, procedure,
determination, rule, notice, or guideline established or
issued by either the BOE or the FTB pursuant to the provisions
of this bill.
EXISTING LAW :
1)Provides various tax credits, deductions, exclusions, and
exemptions. Some of these tax expenditures are designed to
provide relief to taxpayers who incur specified expenses
(e.g., costs incurred in adopting a child). Other tax
expenditures are designed to encourage socially or
economically beneficial behavior.
2)Requires, under GC Section 13305, the Department of Finance
(DOF) to provide an annual report to the Legislature on tax
expenditures by no later than September 15 of each year.
FISCAL EFFECT : According to the Senate Appropriations Committee
analysis of this bill, neither the FTB nor the BOE attributes a
revenue impact to SB 364 because any changes in revenue would be
related to the enactment of a future business tax incentive.
The BOE indicates that this bill would result in unknown
one-time administrative costs, while FTB estimates a cost in the
range of $150,000 to $300,000 in one-time administrative costs
related to this bill.
COMMENTS :
1)Author's Statement . The author states, "Under existing law,
it is nearly impossible to track which companies are receiving
expenditures and if those subsidies are meeting the goals of
the expenditure by creating jobs. Corporations are permitted
to take taxpayer money and run - relocating jobs in other
states and leaving taxpayers with no recourse to get millions
of dollars in state money back. SB 364 brings much needed
transparency and accountability to corporate tax expenditures.
This bill will require corporations that claim tax breaks
with the goal of job creation to annually submit to the
Franchise Tax Board specified information relating to the
number and type of employees for the current and preceding
taxable years.
"Clawback provisions make tax expenditures more effective,
transparent, and accountable. This bill will set clear
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expectations for corporations and guarantee that the state's
investment will yield measurable results in the form of job
retention and creation."
2)Arguments in Support . The proponents of this bill argue that,
while currently corporations receive "an estimated $14.5
billion in tax expenditures annually, including $9 billion in
sales tax exemptions," it is nearly impossible to track if
those subsidies contribute to the creation of jobs in
California. The proponents also note that, as dollars flow
out to corporations without oversight, the state is facing a
jobs crisis and "public services are being devastated by
budget cuts that touch every sector from education to health
care." The proponents state that beneficiaries of state
programs, such as CalWORKS, are required to "provide
fingerprints, report their income every three months, be
checked continuously for fraud," and prove that they found
work for thirty-two hours per week to keep their grants and
assistance. In contrast, "corporations receive billions of
state dollars in the form of tax breaks and are not required
to demonstrate any measurable results." Finally, the
proponents assert that clawback provisions "make tax
expenditures more effective, transparent and accountable" and
would "guarantee that the state's investment will yield
measurable results in the form of job retention and creation."
3)Arguments in Opposition . The opponents state that, while they
"understand the desire to insure that new tax incentives are
effective in achieving their stated goals, the basic approach
used by SB 364 does nothing to help the Legislature evaluate
tax incentives, or to modify them to make them more
effective." They argue that the policy rationale of this bill
is to penalize "taxpayers whose overall employment is reduced
year-over-year without any necessary connection between the
failure of the business and the failure of the tax incentive."
However, "actual tax incentives do not work in such a
simplified way, " since many factors affect state employment
and not "all incentives ? produce the desired job growth ? in
a predictable and uniform manner for each and every taxpayer."
The opponents also assert that the $5,000 per-job penalty is
too high and "could far exceed the actual tax benefits
received by a taxpayer for any incentive." Finally, opponents
conclude that "the mere possibility that a company could be
penalized for temporary contractions of jobs due to outside
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economic conditions could be fatal to attraction and expansion
within the California life sciences industry."
4)"Clawback" Provisions in Other States . 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 ). For example,
the State of Arizona requires recipients of the economic
development assistance above $1 million, including loans,
grants, tax credits, job training and improvements, to enter
into a memorandum of understanding with the state containing
performance standards the company is expected to meet within
the first five years after the assistance is received. If the
company fails to comply with the terms of the agreement, the
state can stop, readjust, or recapture all or part of the
assistance. Similarly, in Georgia, if a taxpayer fails to
meet minimum job creation requirements of the Business
Expansion Tax Credit Program, the state may recapture the
subsidy. The State of Connecticut authorizes a recapture of
the full value of any financial assistance given to a company
by the state's department of economic development, development
authority, or Connecticut Innovations, Inc., if the company
relocates outside the state within 10 years or during the term
of the aid, whichever is longer. In Nevada, a company that
ceases to operate or fails to meet investment, employment,
wage, or health benefits requirements under the Business Tax
Abatement Program is subject to the recapture provisions. In
Ohio, the Corporate Franchise and State Income Tax credits are
subject to recapture if a taxpayer that claimed any of those
credits fails to maintain operations at the project location
for at least twice the number of years as the term of the tax
credit. Finally, the State of Virginia enacted the Major
Business Facility Job Tax Credit Program that requires
taxpayers to maintain a certain number of qualified full-time
employees every year, and, if the number drops below the
average number employed during the first year of the credit,
the state will recalculate the original credit and will either
increase the tax or recapture the credit.
5)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
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Legislature passed ACR 17 (Bates), which called upon the
Legislative Analyst's Office (LAO) to prepare a biennial "tax
expenditure" report. A recent report by the 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 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 DOF 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 costs.
As the 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
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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 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 forgone 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.
6)This Bill's Approach to Measure and Enforce the Effectiveness
of Tax Incentives . SB 364 establishes very specific criteria
to measure the effectiveness of future tax incentives by
reference to a number of jobs created or retained by a
taxpayer that has claimed the incentives. Thus, it requires a
company claiming a business tax incentive on its tax return to
also report the number of its full-time equivalent employees
in California for the current and preceding taxable or
calendar years, whichever is applicable. If the company's
employment declines in each subsequent year by more than 10%,
as compared to the immediately preceding year, the company
will be subject to a penalty of $5,000 for each full-time
equivalent employee terminated by the company, after the first
10%. However, the penalty may not exceed the total amount of
credit or tax incentive claimed by the taxpayer for the three
preceding years.
The provisions of this bill would apply only to businesses with
more than 100 FTE employees in the state, beginning with the
2012 tax and calendar years. The total number of the
taxpayer's FTE employees also includes employees of any trade
or business acquired by the taxpayer during the tax year.
Thus, SB 364 is intended to recapture only those tax benefits
that are based on wages or the number of taxpayer's employees
and that are enacted after the effective date of this bill.
7)Cost-Benefits Analysis . The purpose of imposing a penalty for
failure to maintain a requisite number of employees is to
ensure that companies that avail themselves of tax credits or
incentives retain or create additional jobs in the state.
Arguably, unless the penalty amount exceeds the benefit of
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non-compliance, there is very little incentive for taxpayers
to comply with the requirements of this bill. SB 364 imposes
a penalty of $5,000 for each employee who originally qualified
the taxpayer for a tax credit but was later terminated. This
penalty may be substantially less than $5,000, because it may
not exceed the aggregate amount of tax benefits claimed by the
taxpayer in the three preceding years. But what if the
taxpayer claims a tax credit in the amount that far exceeds
$5,000? Furthermore, what if the cost of retaining an
employee is more than $5,000? While SB 364 is trying to
change the taxpayer's cost-benefit calculation by imposing a
penalty, it is unclear how effective it will be in achieving
the stated goal of retaining and creating jobs.
8)The Difference Between This Bill and "Clawback" Provisions in
Other States . The approach taken by this bill is somewhat
different from the "clawback" provisions enacted in other
states. A brief survey of other states' similar programs
indicates that those provisions are either included in the
subsidy contracts negotiated and signed by governments and
taxpayers, or added, via legislation, to targeted development
subsidy programs. As discussed earlier, the subsidy programs
encompass all sorts of economic development assistance,
including loans, grants, loan guarantees, targeted tax
credits, job training, and interest rate subsidies. In the
case of a subsidy program that requires a formal agreement
signed by a taxpayer and the government, the taxpayer agrees
to abide by the terms of the contract to qualify for the
subsidy. If a subsidy does not require a formal contract,
such as, for example, corporate tax credits or targeted jobs
development credits, the statute authorizing the subsidy
expressly sets forth the requirements and goals that must be
met by the taxpayer in order to qualify for the subsidy.
SB 364 does not require a qualified taxpayer to enter into a
formal contract with the state in order to qualify for certain
business tax credits or incentives. Nor does it require a
recapture of tax credits already claimed or business tax
incentives already utilized. Instead it simply imposes a
penalty for failure to meet specified performance measures,
which may or may not approximate the value of the actual tax
incentive or credit. While SB 364 attempts to create an
accountability mechanism for tax credits claimed by businesses
in California, it assumes that the effectiveness of all new
business credits and incentives may be measured only by the
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number of new jobs created in the state, without taking into
account the quality of those jobs. However, some jobs, e.g.,
high paying jobs, with good benefits, may be more attractive
to the states than others. Thus, a high-tech company that
lays off two minimum-wage workers and, instead, hires one
highly-skilled engineer may be subject to the penalty under
this bill, even though the company has created a more valuable
job in the state.
9)SUT Exemptions and Exclusions . SB 364 applies to taxpayers
who claim tax credits under either the PIT or CT Law and to
business tax incentives under the SUT Law. Unlike income tax
credits that are claimed by taxpayers on their income tax
returns, SUT exemptions are not reported on a purchaser's tax
returns. Instead, the purchaser simply does not pay the sales
or use tax at the time of purchase. A business tax incentive
is defined by this bill as a SUT exemption or exclusion based
on qualified wages paid by the purchaser or the number of
employees employed by the purchase. In practice, it would be
difficult, if not impossible, for the BOE to determine which
purchaser benefited from the exemption. In addition, as
pointed out by the BOE staff, "�o]ften, budget bills are
enacted that provide exemptions or exclusions without any
indication what the basis for that exemption or exclusion
was."
10)Binding Future Legislature ? This bill requires the future
legislature to limit the availability and the utilization of
new tax credits. However, one legislative body may not limit
or restrict its own power or that of subsequent legislatures,
and the act of one Legislature may not bind its successors
�County of Los Angeles v. State of California (1984) 153
Cal.App.3d 568, 573]. In practical terms, it means that
subsequent legislatures are under no legal obligation to
comply with the provisions of this bill. Furthermore, since
this bill is a statutory, and not a constitutional, measure,
any subsequent legislature could easily dispense with this
requirement by simply including a provision in a statute that
would override this bill's provisions.
11)Suggested Technical Amendments . The FTB staff identified
several implementation and technical issues with SB 364 and
suggested technical amendments in its analysis of this bill.
12)Related Legislation.
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SB 1391 (Yee), introduced in the 2009-10 legislative session,
would have required a taxpayer doing business in the state and
claiming any new business tax incentive, as specified, under
either the PIT or CT Law, to include annually on its timely
filed original return, the number of employees employed by the
taxpayer in the state, as provided. It would have required a
recapture of the business tax incentive claimed by the
taxpayer if the taxpayer had a "net decrease" in the number of
FTE employees, as specified. SB 1391 was vetoed by the
Governor.
AB 2666 (Skinner), introduced in the 2009-10 legislative
session, would have required a taxpayer doing business in
California to submit to the FTB, under penalty of perjury,
specified information relating to the amount of tax credits
claimed by the taxpayer. Requires the State Chief Information
Officer to publish this information on the Reporting
Transparency in Government Internet Website. AB 2666 was
vetoed by the Governor.
AB 2230 (Charles Calderon), introduced in the 2009-10
legislative session, would have required FTB to post on its
website, by March 31, 2011, and annually thereafter, a list of
the 100 largest publicly traded corporations disclosing
certain tax-related information reported by those
corporations, as specified. AB 2230 was put on an inactive
file by the author.
SB 1272 (Wolk), introduced in the 2009-10 legislative session,
would have required any bill that creates a new tax credit to
include specific goals, purposes, and objectives of the
credit, performance measures for the credit within the
language of the bill, and repeal dates that are five years
after the enactment date of the bill. SB 1272 was vetoed by
the Governor.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation (source)
California Nurses Association
California School Employees Association, AFL-CIO
CalPIRG
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Having our Say Coalition
Opposition
BICOM
California Aerospace Technology Association
California Chamber of Commerce
California Asian Pacific Chamber of Commerce
California Grocers Association
California Taxpayers Association
TechAmerica
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098