REVISED (3/21/11)
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 156
AUTHOR: Emmerson
VERSION: 3/15/11
CONSULTANT: Miller
HEARING: 3/23/11
FISCAL: Yes
TAX LEVY: Yes
JOBS CREDIT
Expands the Jobs Tax Credit to taxpayers that employ 50 or fewer employees
Background and Existing Law
The February, 2009 Budget Agreement included a Jobs Tax credit beginning in
the taxable year 2009 of $3,000 per full time employee hired for an employer that
employs fewer than 20 employees (AB 3x 15, Chapter 10, Statutes of 2009 & SB 3x
15, Chapter 17, statutes of 2009). The credit is capped at $400 million for all taxable years and allocated by the Franchise Tax Board (FTB). The credit remains in
effect until the total amount is exhausted. The bill requires the FTB to disallow
credits claimed on returns filed after the end of the calendar quarter in which the
FTB believes the cap will be reached. Any credits not used in the taxable year
may be carried forward up to eight taxable years.
Current law also contains anti-abuse laws that prevent a company from qualifying as “first commencing business in the state” if the company only changes
structures. For example, if Gracie Mae Kids Clothes changes from a sole proprietorship to an S-Corporation, it would not be considered a new business.
Proposed Law
This bill changes the current requirement that taxpayers have 20 or fewer employees to qualify for the credit to 50 or fewer employees.
This bill also repeals the anti-abuse laws described above.
State Revenue Impact
This bill expands an existing capped and allocated credit but does not expand it,
so there is no revenue impact or state cost associated with it.
SB 156 -- 3/15/11 -- Page 2
Comments
1. Purpose of the bill. In 2009, $400 million was set aside in the budget to allow
small businesses with 20 or fewer employees to earn a $3,000 tax credit for every
new employee hired. To date, less than $40 million has been utilized for this
program, leaving over $360 million still available. SB 156 would not increase the
funding available in the existing tax credit but would simply expand the number
of businesses that would be eligible for this tax credit to those that have 50 or
fewer employees. This expansion is intended to help spur job creation and expedite California’s economic recovery.
2. Too Late? The bill enacting the credit requires the FTB to disallow credits
claimed on returns filed after the end of the calendar quarter in which the FTB
believes the cap will be reached. The FTB currently projects that the existing Jobs
Tax credit will be exhausted during the 2011 taxable year based on historic
trends of credit usage. If so, there will be no available credits on January 1, 2012
when this bill takes effect which may make this bill unnecessary.
3. What a way to make a living. This credit has been in effect since 2009 and
there is little evidence that it has affected unemployment in this state. California
experienced steep employment declines during the recent recession and the
state’s unemployment rate is persistently higher than the national average. Academic literature suggests that no state tax policy can affect high unemployment
in this state. A recent study by David Neumark at the Public Policy Institute of
California (PPIC) suggests two direct job creation policies: hiring credits and
worker subsidies such as the federal Earned Income Tax Credit. At the February
16th hearing of this committee, Mr. Neumark presented his findings. He argues
that hiring credits act to increase the demand for labor and are the best policy response to spur a recovery from the recession. He suggests that hiring credits
should focus broadly on the recently unemployed and establish incentives for
new hires rather than increases in the work hours of existing employees. In order to be effective, the credits would need to be between $9,100 to $75,000 per
employee so state funding would contribute only modestly at best to the credit.
4. Enterprise Zones: Most other states’ hiring credits look more like California’s
enterprise zones than a stand-alone per employee credit. Florida, New York,
and Illinois all offer credits within these zones. Proponents of the Enterprise
Zone program state that it is the state’s best tool for economic development and
decreasing unemployment, citing accounts from taxpayers who say that they locate in California largely because of enterprise zone program incentives, which
overcome disadvantages posed by California's tax and regulatory system. Supporters argue that the tax credits draw investment into economically distressed
communities and provide incentives for firms to employ hard-to-hire individuals. However, detractors state that the program offers a poor return on the state's
investment, especially the Targeted Employment Area (TEA) criterion, and the
practice of “retro-vouchering.”
SB 156 -- 3/15/11 -- Page 3
5. Pro-abuse? This bill repeals the existing anti-abuse laws that do not allow
companies a new business advantage when changing corporate structures from a
sole proprietorship to an LLC for example.
The committee may wish to reinstate these rules as they ensure that taxpayers do not
“double dip” on any business incentives. If the committee wishes to amend the bill,
the language on page 7, lines 28-31 of the bill, would be reinstated.
6. Technical Amendment: The author has agreed to take a technical amendment
on page 13, line 36, to strike out (f) of section 17276 and insert “(g) of section
24416.”
Support and Opposition (3/21/11)
Support: None received.
Opposition: American Federation of State, County and Municipal Employees
(AFSCME), California Tax Reform Association.