BILL ANALYSIS �
SB 364
Page 1
SENATE THIRD READING
SB 364 (Yee)
As Amended August 15, 2011
Majority vote
SENATE VOTE :22-17
REVENUE & TAXATION 6-3 APPROPRIATIONS 11-5
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|Ayes:|Perea, Beall, Charles |Ayes:|Fuentes, Blumenfield, |
| |Calderon, Cedillo, | |Bradford, Charles |
| |Fuentes, Wieckowski | |Calderon, Davis, Gatto, |
| | | |Hall, Hill, Lara, |
| | | |Mitchell, Solorio |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Donnelly, Harkey, |Nays:|Harkey, Donnelly, |
| |Nestande | |Nielsen, Norby, Wagner |
| | | | |
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SUMMARY : Imposes a penalty on a qualified taxpayer that claims
a business tax credit, enacted after January 1, 2012, but fails
to maintain the requisite number of full-time equivalent (FTE)
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)Requires a qualified taxpayer doing business in the state that
claims any business tax credit under either the Personal
Income Tax Law or the Corporation Tax 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.
3)Imposes 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.
4)Imposes a penalty of $5,000 per annual FTE on a qualified
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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.
5)Specifies that, for purposes of calculating this penalty, the
employees of any trade or business acquired by the qualified
taxpayer during the current taxable year shall be aggregated
with the taxpayer's existing employees. Provides that the
employees of any trade or business that is disposed of, or
otherwise is no longer a related entity, during the current
taxable year shall be excluded from the qualified taxpayer's
existing employees.
6)Provides 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 year.
7)Defines "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.
8)Defines "business credit" as a credit that is:
a) Enacted after January 1, 2012;
b) Is based on either employee compensation, including
qualified wages, or the number of employees employed; and,
c) 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.
9)Defines "annual full-time equivalent" as either of the
following:
a) In the case of an employee paid hourly qualified wages,
it 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.
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b) In the case of a salaried employee, it means the total
number of weeks worked for the taxpayer by an employee
divided by 52.
10)Defines "qualified wages" as wages subject to Unemployment
Insurance Code Division 6 (commencing with Section 13000).
11)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 Section 267, 318, or 707 shall be treated as employed by
a single taxpayer.
12)Provides that any business tax credit that is sold, assigned,
or otherwise transferred to another taxpayer shall be treated
as reducing the "net tax" or the "tax" of the qualified
taxpayer for the taxable year for which the assignment, sale
or transfer was made.
13)Provides that Government Code (GC) Chapter 3.5 (commencing
with Section 11340) of Part 1 of Division 3 of Title 2 does
not apply to any standard, criterion, procedure,
determination, rule, notice, or guideline established or
issued by the FTB pursuant to the provisions of this bill.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, the 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. This bill is estimated
to have no direct impact on state revenues because it applies
only prospectively. However, it could result in unknown, but
potentially significant increases in revenues to the extent the
clawback requirements are operative and taxpayers are required
to pay penalties for tax credits they have taken.
COMMENTS :
Author's statement . The author states, "Under existing law, it
is nearly impossible to track which companies are receiving
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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
expectations for corporations and guarantee that the state's
investment will yield measurable results in the form of job
retention and creation."
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 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 Department of Finance (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
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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 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.
This bill's approach to measure and enforce the effectiveness of
tax incentives . This bill 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 credit on its tax return to report also the number
of its full-time equivalent employees in California for the
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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, this bill
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.
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
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 this bill 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.
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
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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.
This bill 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. 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 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 may be measured only by the 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, 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.
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
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provisions.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
FN: 0002183