BILL ANALYSIS �
SB 364
Page 1
Date of Hearing: August 17, 2011
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Felipe Fuentes, Chair
SB 364 (Yee) - As Amended: August 15, 2011
Policy Committee: Revenue and
Taxation Vote: 6-3
Urgency: No State Mandated Local Program:
No Reimbursable:
SUMMARY
This bill imposes a penalty for tax credit programs enacted
after January 1, 2012 on a qualified taxpayer that claims a tax
credit but fails to maintain the requisite number of full-time
equivalent employees in subsequent years, as provided.
Specifically this bill:
1)Requires a qualified taxpayer, as defined, that claims any
business tax credit under either the personal income tax or
the corporate tax to include annually, on a timely filed
original return, in the form and manner prescribed by the
Franchise Tax Board (FTB), the number of full-time-equivalent
(FTE) employees of the taxpayer, as defined, in the state for
the current taxable year and the preceding taxable year.
2)Imposes a penalty of $5,000 for each failure to provide the
required information, unless that failure is due to reasonable
cause and not willful neglect.
3)Imposes a penalty of $5,000 per annual FTE on a qualified
taxpayer who claims a business tax credit, but whose
employment level within the state decreased by more than 10 %
from the prior year.
FISCAL EFFECT
1)FTB would incur initial costs of approximately $275,000 to
develop new reporting forms and procedures for collecting and
storing the data. Ongoing costs to input taxpayer information
on employment and administer the program would be
approximately $25,000 annually.
SB 364
Page 2
2)No direct impact on state revenues because the bill applies
prospectively, and future legislation could be drafted to
exempt itself from the requirements of SB 364.
3)However, the bill could result in unknown, but potentially
significant increases in revenues to the extent the clawback
requirements are operative and tax payers are required to pay
penalties for tax credits they have taken.
COMMENTS
1)Purpose . The author states it is nearly impossible to track
which companies are receiving tax expenditures and if those
subsidies are meeting the goals of the expenditures 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. The author argues that SB 364 brings much needed
transparency and accountability to corporate tax expenditures.
The author states this bill will require corporations that
claim tax breaks with the goal of job creation to annually
submit to the FTB specified information relating to the number
and type of employees for the current and preceding taxable
years.
2)Background . 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 small number of audits.
3)Clawback Provisions in Other States . Currently, some 20
states and dozens of cities use clawback provisions in their
subsidy programs. For example, the State of Arizona requires
recipients of 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
SB 364
Page 3
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.
4)Binding future legislatures. Codifying a requirement for tax
credits that are not yet enacted could be seen as attempting
to bind future Legislatures. One Legislature cannot bind the
actions of future Legislatures and there is nothing to prevent
future tax measures from containing language that exempts
future legislation from the provisions of this bill.
5)Previous legislation. SB 1391 (Yee), 2009-10, 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.
6)Support . 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.
7)Opposition . The opponents state that, while they understand
the desire to insure that new tax incentives are effective in
achieving their stated goals, 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. They argue 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. Opponents also assert the penalty is too high and
could exceed the actual tax benefits received by a taxpayer
for any incentive. Finally, opponents contend a company could
be penalized for temporary reduction of jobs due to outside
SB 364
Page 4
economic conditions.
Analysis Prepared by : Roger Dunstan / APPR. / (916) 319-2081