BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 2517 HEARING: 6/25/14
AUTHOR: Daly FISCAL: No
VERSION: 5/15/14 TAX LEVY: No
CONSULTANT: Grinnell
TAX CREDIT CERTIFICATIONS (URGENCY)
Extends the deadline for local agencies to issue
geographically targeted economic development area hiring
credit vouchers to January 1, 2016.
Background and Existing Law
Taxpayers located in geographically targeted economic
development areas, such as enterprise zones, local agency
military base recovery areas, manufacturing enhancement
areas, and targeted tax areas can claim a hiring credit for
wages paid on or before January 1, 2014. The credit is
equal to 50% of the wages paid to a qualified employee in
the first year, 40% in the second year, 30% in the third
year, 20% in the fourth year, and 10% in the fifth year, up
to 150% of the minimum wage.
Businesses or consultants submit applications to qualify
employees to zone managers, who grant the firm or
consultant a voucher certifying eligibility if the employee
qualifies. The taxpayer then claims the credit on his or
her tax return, but cannot without a voucher. Qualified
employees include individuals:
Eligible for job training programs,
Eligible for most social welfare programs,
Economically disadvantaged,
A "dislocated worker," as defined,
A disabled individual who is eligible or enrolled
in a state rehabilitation plan,
Service connected veteran,
Ex-offender,
Member of a federally recognized Indian tribe.
Employers may also claim the hiring credit for residents of
Targeted Employment Areas (TEAs), in addition to the
criteria listed above. Cities and counties managing
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enterprise zones may draw TEAs to contain census tracts
where 51% or more of the individuals are low or moderate
income, meaning 80% of the area wide, or countywide,
median. In other words, local agencies draw TEAs to
include communities where only half of the residents are
actually or somewhat low-income, but anyone living in one
qualifies his or her employers for the hiring credit
regardless of their own economic status or employability.
TEAs need not be contiguous to, or within the enterprise
zone's boundaries.
At first, the program resulted in annual revenue losses of
less than $10 million. However, beginning in 1998, the
program's costs began to significantly grow as an
industrious cottage industry of accounting firms and tax
credit consultants discovered its profit potential.
Taxpayers can also receive a certification qualifying an
employee for an enterprise zone hiring credit at any time.
Tax credit consultants look through a company's books to
see if they can certify employees who currently work or
previously worked for a taxpayer in an enterprise zone in
past years, then submit claims for refunds for previous
taxes paid to FTB based on those certifications under
California's general four year statute of limitations for
amending past returns, a practice known as
"retro-vouchering." Consultants found that the program
could be marketed to taxpayers, often under contingency
arrangements, so that the larger the amount of previous
taxes paid received by the taxpayer, the larger the tax
credit consultant's compensation.
Because of its consistent failings to increase employment
or decrease poverty within zones, and its rapidly
escalating cost in foregone revenue to the state, the
Legislature repealed the past geographically targeted
economic development area as well as legal provisions
allowing designations of the areas (AB 90, Committee on
Budget, 2013). The Legislature instead provided three new
tax benefits:
Tax credits for wages paid by taxpayers to
qualified employees within former enterprise zones,
and other areas that suffer from high levels of
poverty and unemployment. The credit lasts from the
2014 taxable year until the 2019 taxable year,
A sales and use tax exemption on purchases of
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manufacturing equipment made by taxpayers within
specific North American Industrial Classification
System codes, capped at $200 million annually per
taxpayer, effective July 1, 2014, and ending July 1,
2022.
The California Competes Tax Credit, where the
California Competes Tax Credit Committee can award
various tax credits up to an annually capped amount to
taxpayers who apply.
AB 93 repealed the program as of December 1, 2014, and only
allowed wages paid before January 1, 2014 to qualify for
the credit. In response to tax credit consultants' wanting
more time to certify employees, the Legislature allowed
local agencies to grant vouchers until January 1, 2015 (AB
106, Committee on Budget, 2013). Tax credit consultants
want to extend this date to January 1, 2016 to ensure that
all eligible taxpayers can receive certifications necessary
to claim the credit.
Proposed Law
Assembly Bill 2517 provides that local agencies have until
January 1, 2016 to issue certifications for the former
hiring credit allowed to taxpayers in enterprise zones,
local agency military base recovery areas, manufacturing
enhancement areas, and targeted tax areas.
State Revenue Impact
Franchise Tax Board states: "This bill would extend by one
year the deadline for a local entity to issue
certifications. If this extension results in additional
amended returns being filed claiming the credit, there may
be an additional revenue loss to the state, but it is
unknown to what extent."
Comments
1. Purpose of the bill . According to the author, "AB 2517
is a commonsense measure aimed to assist California
businesses currently transitioning into a new business
environment as a result of the recent Enterprise Zone
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reforms by allowing all businesses to have the opportunity
to claim tax credits prior to the passage of AB 106
(Committee on Budget, 2013). Last year, AB 106 made
several changes to the Enterprise Zone repeal statute,
including a requirement that all employees qualifying for
the tax credit for hiring certain disadvantaged individuals
to be issued a voucher by December 31st of this year.
Unfortunately, the state imposed deadline is forcing local
governments to issue early, arbitrary deadlines for
submission of the documentation required for businesses to
obtain hiring credit vouchers for those local
jurisdictions. "
2. Time is money . When a taxpayer or tax credit
consultant submits information to a local agency to obtain
a voucher, the local agency generally verifies the
documentation to ensure that the employee qualified under
the law. Some local agencies can do this quickly, others
take more time, but without the voucher, the taxpayer can't
claim the credit. Many local agencies have set up
deadlines as early as June 30th to ensure that they can
complete the voucher verification process, while others
will accept applications until the end of December. These
deadlines vary from local agency to local agency, but
reflect their best guess of when they can return a voucher
before the state's current legal deadline of January 1,
2014. Taxpayers and tax credit consultant may not be able
to claim as many vouchers as they would like, but the
deadline that AB 2517 wants to change is reasonable and
reflect a choice made by the state last year to limit its
losses from a program it repealed because of the program's
famously poor track record at increasing employment and
reducing poverty.
3. Tradeoffs . Vouchering data supplied by the Department
of Housing and Community Development (HCD), the state
agency that administered the program, shows that while
local agencies are issuing fewer vouchers, the reduction
since the program was repealed last summer isn't big. The
data suggests that tax credit consultants are trying to
obtain as many vouchers as possible before the legal
deadline. The combination of the current state and legal
deadlines discussed in Comment #2 serve as a hard limit on
vouchering; tax credit consultants know that they won't be
able to claim credits for taxpayers, and earn contingency
fees, if the local agency doesn't issue the voucher on
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time. AB 2517's deadline extension allows consultants to
continue to apply for vouchers past the local deadlines and
up until December 31, 2014, because local agencies will
have until January 1, 2016 to issue the voucher. Each
voucher will result in foregone revenue to the state,
diverting funds away from other state purposes. The
Committee may wish to consider whether foregoing more
revenue on a program it repealed is superior to other
purposes for which that revenue can be used.
4. HCD . On May 28th, HCD issued Management Memo 14-02
stating it was beginning a request for proposals process to
issue certifications for geographically targeted economic
development area credits. The memo stated: "In those
situations where a jurisdiction elects to discontinue
vouchering operations far in advance of the December 31,
2014 deadline, HCD will enter into a Memorandum of
Understanding (MOU) with a qualified third-party to provide
for the acceptance and processing of tax credit voucher
applications and the issuance of tax credit vouchers." If
HCD is establishing a process to grant certifications when
the local agency stops, why is AB 2517 necessary?
5. Urgency . AB 2517 declares that because it's necessary
to ensure that taxpayers can timely obtain certifications
from local entities to be eligible for hiring credits, its
provisions must take effect immediately. Because of the
urgency clause, Legislative Counsel keyed the measure a 2/3
vote.
6. Fiscal ? Legislative Counsel keyed AB 2517 non-fiscal;
however, given its potential fiscal impacts, the Committee
on Rules referred the measure to the Committee on
Appropriations after this Committee.
Assembly Actions
Assembly Floor 75-0
Assembly Revenue and Taxation 9-0
Support and Opposition (06/19/14)
Support : California Bankers Association; California
Business Properties Association; California Chamber of
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Commerce; California Grocers Association; California
Independent Bankers Association; California Manufacturers
and Technology Association; California Retailers
Association; Coalition of Small and Disabled Veteran
Businesses; League of California Cities; National
Federation of Independent Business.
Opposition : None received.