BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1197 HEARING: 5/9/12
AUTHOR: Calderon FISCAL: Yes
VERSION: 2/22/12 TAX LEVY: Yes
CONSULTANT: Grinnell
TAX CREDIT FOR HIRING VETERANS
Enacts a tax credit for paying wages to a qualified veteran
Background and Existing Law
The Federal Work Opportunity Tax Credit (WOTC), allows
employers to claim a tax credit equal to 40% of qualified
first year wages paid to employees that are members of a
"targeted group," including qualified veterans. Employers
must submit a pre-certification request before they hire
the employee, then request certification from the WOTC
Center at the California Employment Development Department
within 28 days of the hire date. As amended by the VOW to
Hire Heroes Act of 2011, signed by the President on
November 1, 2011, federal law caps qualified wages based on
the employee's targeted group. In the 2012 tax year, cap
amounts are:
$6,000 for qualified veterans receiving
Supplemental Nutrition Assistance Program benefits,
formerly Food Stamps, for at least three months during
the 15 months prior to the hire date, or unemployed
between four weeks and six months in the last year.
$12,000 for qualified veterans certified as
eligible for benefits for a service-connected
disability hired within one year of discharge or
release from active duty, or who began work before
November 22, 2011 and was unemployed at least six
months in the last year.
$14,000 for qualified veterans began work after
November 22, 2011, and was unemployed at least six
months in the last year.
$24,000 for qualified veterans certified as
eligible for benefits for a service-connected
disability hired within one year of discharge or
release from active duty, and who began work after
SB 1197 -- 2/22/12 -- Page 2
November 22, 2011 and was unemployed at least six
months in the last year
State law allows taxpayers to claim tax credits designed as
incentives for taxpayers to incur certain expenses, such as
child adoption, or to influence behavior, including
business practices and decisions, such as research and
development credits and Geographically Targeted Economic
Development Area credits. The Legislature typically enacts
such tax incentives to encourage taxpayers to do something
but for the tax credit, they would otherwise not do.
In Geographically Targeted Economic Development Areas
(GTEDAs), employers paying qualified wages to members of
targeted groups may claim a tax credit equal to 50% of
qualified wages paid in the first year of employment up to
150% of the minimum wage, 40% in the second year, declining
ten percent each year, ending in the sixth year. Any
employer located within a GTEDA who pays qualified wages to
an individual simply eligible for the WOTC may also claim
the credit.
Proposed Law
Senate Bill 1197 allows employers to claim a credit against
the Personal Income Tax or the Corporation Tax equal to an
unspecified percentage of wages paid to qualified veterans.
The bill employs definitions from the WOTC for qualified
wages and qualified veterans. The taxpayer may carry over
the credit until exhausted.
The bill allows the Franchise Tax Board (FTB) to proscribe
rules, guidelines, or procedures necessary to implement the
credit, and exempts them from the Administrative Procedures
Act.
State Revenue Impact
Without a specified percentage to calculate the value of
the credit, no fiscal estimate exists.
Comments
SB 1197 -- 2/22/12 -- Page 3
1. Purpose of the bill . The purpose of the bill appears
is to boost employment of veterans.
2. Checking in . Previous studies by academics, the
Government Accountability Office, and the United States
Department of Labor indicated that the WOTC had minimal
effects on employer decisions; however, the most recent
study of the credit by the RAND corporation found that the
2007 credit expansion that allowed the credit for employers
paying qualified wages to disabled or unemployed veterans
boosted employment for those groups. However, the study
didn't speak to the efficacy of state tax credits, and the
Legislative Analyst's Office often cautions that drawing
conclusions about the effectiveness of tax credits is
analytically difficult to impossible. With that said, SB
1197 contains no sunset provision, performance
measurements, or study requirement. The Committee may wish
to consider enacting a permanent tax credit without a
credible study measuring its performance using established
metrics.
3. Pump it up . Taxpayers employing qualified veterans may
claim the WOTC to reduce federal tax. Additionally,
taxpayers within Geographically Targeted Economic
Development Areas can also claim another credit against
state tax for paying wages to the qualified veteran, as the
definitions are the same. Should SB 1197 be enacted, the
same taxpayer could claim a credit for the same employee
against state tax, and can additionally deduct from income
the same wages that qualify for the credit from income.
The Committee may wish to consider requiring the taxpayer
to choose between the credits, and disallow business
expense deductions for those wages that qualify for the
credit.
4. 28 days later . WOTC serves as a good model for tax
credit administration. Prior to the hire, the employer
must submit a precertification form to EDD to qualify for
the credit, then follow up with a certification request
within 28 days, although these deadlines were temporarily
eased by the VOW to Hire Heroes Act. The process ensures
that employers that make a conscious decision to hire a
member of a targeted group instead of another applicant
that isn't. This safeguard stands in stark contrast to the
Geographically Targeted Economic Development Area credits,
where taxpayers can apply at any time for certification.
SB 1197 -- 2/22/12 -- Page 4
As such, those credits often serve as rewards for firms
employing individuals hired up to four years prior, thereby
failing to meet the stated goal of increasing employment
among specified populations.
5. Copycats . SB 1197 seeks to duplicate a federal benefit
in state law, similar to the state's research and
development credit and mortgage interest deduction. While
duplicating tax benefits eases taxpayer compliance by
reducing the difference between state and federal taxes, it
can also attempt to direct specified kinds of economic
activity in California instead of other states. However, a
duplicating state credit provides a windfall for those
taxpayers that act to obtain the federal benefit. What
evidence exists that allowing a state tax credit that
rewards the same activity as a federal credit will justify
the measure's fiscal costs? Are there many firms that
currently won't hire veterans because the federal benefits
are insufficient, but will if the state offers a tax break?
The Committee may wish to cost-effectiveness of copying
the federal government.
6. Of holes and digging . The Department of Finance
defines a tax expenditure as a "deduction, exclusion,
exemption, credit, or any other tax benefit as provided by
the state." Tax expenditures result in foregone tax
revenues in the hopes of providing increased equity in the
tax system or changing private investment behavior. This
bill enacts a tax expenditure designed to encourage the
employment of hard-to-hire individuals, adding to
California's approximately $50 billion tax expenditure
portfolio, which ranges from the exclusion from income for
pension contributions and social security benefits to the
mortgage interest deductions, and research and development
credits. Tax expenditures evoke passionate and complicated
debates, chiefly regarding whether state legislative action
to forego tax revenues from specified taxpayers provides
superior benefits than commensurate direct spending
programs or general tax reductions. Quite different from
direct spending measures, the Legislature may only limit,
reduce, or eliminate tax credits by a 2/3-vote of each
house of the Legislature.
7. Suggested Amendments . Committee staff and FTB
recommend the following amendments:
Inserting a percentage in the blank space (Page 1,
SB 1197 -- 2/22/12 -- Page 5
Line 5 and Page 2, Line 21).
The measure relies on the definition of qualified
veteran and qualified wages in federal law as of the
conformity date of January 1, 2009, which doesn't take
into account the VOW to Hire Heroes Act's changes to
WOTC. To allow the state tax credit to apply to
changes Congress made after 2009, as well as any
future ones, the measure should state that qualified
veteran and qualified wages include those amounts that
qualify for the federal WOTC in the current taxable
year (Page 2, lines 1 through 4 and 24 through 28).
SB 1197 allows wages paid inside and outside the
state to be eligible for the credit. To limit the
credit to only those wages paid within the state, the
definition should be clarified to state that
"qualified wages" means "wages subject to Division 6
(commencing with Section 13000) of the Unemployment
Insurance Code)" (Page 2, lines 4 and 28).
Specify that taxpayers must apply to the California
Employment Development Department to certify
eligibility for the credit.
Support and Opposition (5/2/12)
Support : Unknown.
Opposition : Unknown.