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SB 974 Hearing and Analysis

Senator Steinberg’s bill to gut the Enterprise Zone program, SB 974, will be heard in the Senate Rev. & Tax. Committee tomorrow afternoon (5/12 at 1:30 in room 3191 if you are in the neighborhood). A coalition of business, business associations and local government bodies has issued a joint letter in opposition to the bill.

The Committee has published an analysis which can be found here. SB 974 seeks to make two substantial changes to the Enterprise Zone program which would greatly decrease its value to employers as a means of funding an unrelated tax credit for providing vocational training. The changes to the Enterprise Zone program would be the elimination of the Targeted Employment Area (TEA) qualification category and the elimination of taxpayers’ ability to claim credits retroactively. Regarding these changes the Committee analysis explains:

Targeted Employment Areas : An individual meeting any one of the existing criteria qualify an employer in an enterprise zone for a tax credit; however, the TEA criterion is the only one that allows an individual to qualify an employer for a tax credit not based on who they are, but where they live. Zone administrators issue vouchers based solely on residence within a zip code range listed on his or her employment records. Enterprise Zones draw TEAs according to census data, and anyone inside regardless of individual economic disadvantage or barrier of employment qualifies their employer for a tax credit.

Until AB 1550 (Lowenthal, 2006), TEAs were based on the census data at the time the zone was formed, not the most recent census data available. TEA opponents state that the criterion allows tax credits for individuals who would be hired anyway; proponents say that TEAs are necessary because qualifying employees under other criteria requires invasive questioning of an employee’s economic circumstances, and encourage local hiring.

Retro-Vouchering : Under current law, taxpayers can receive a certification qualifying an employee for an enterprise zone hiring credit at any time. Taxpayers may certify employees who worked for them 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. Opponents of retro-vouchering state that employers are essentially getting a check from the state for hiring done years prior, undermining the intent of an incentive program. In practice, retro-vouchering constitutes a non-means tested grant program to businesses based on past behavior. Proponents state that retro-vouchering helps taxpayers previously unaware of tax credits get benefits to which they’re lawfully entitled, and the attendant tax refunds can be reinvested in productive capital and additional employees. Proponents also state that retro-vouchering is necessary because small businesses that hire qualified workers may not be profitable, and therefore not have a tax liability, for several years; however, this argument is not valid because enterprise zone hiring credits have infinite carry-forward periods, meaning that the taxpayer can apply the credit in any future taxable year. SB 974 merely requires the taxpayer to seek certification 21 says after hiring a qualified employee instead of waiting for up to four years after the hirdate.

Taxpayers use the TEA criterion and retro-vouchering together to check payroll records for zip codes of employees employed in the last four years to identify qualified employees, apply for certifications to the local zone administrator, and then file claims for refunds with the state. Often times, this process will be performed by payroll companies, accounting firms, or tax credit consultant who are paid on contingency arrangements based on a percentage of the taxpayers refund amount.

A couple of points. The analysis says that since the tax credits carry forward indefinitely, the argument that taxpayers should be able to make retroactive claims because they may not be able to take advantage of the credit immediately is invalid. The invalidation of this argument is invalid. The analysis fails to take into consideration the fees associated with vouchering employees (over $100 per application is some jurisdictions), or the recapture provisions in existing law which cancel the tax credit under certain conditions. In other words, there are specific out-of-pocket costs to obtain a voucher without any certainty of future benefit. This policy would create a situation for businesses that is antithetical to the purpose of the program; instead of helping businesses thrive and grow in struggling communities, the change would put them in the position of having to comply with strict bureaucratic rules and pay fees for the pleasure of doing so.

Secondly, I don’t understand the attack against tax professionals that assist taxpayers with this matter. If that is a criteria, then great sections of the tax code should be eliminated because of the ubiquitous necessity of relying on tax professionals for preparing tax returns.

The Committee analysis offers a few suggested amendments:

Replace the prohibition on zones certifying tax credits after 21 days with 28 days to account for changes to the federal Work Opportunity Tax Credit.

Extend the time for taxpayers to obtain a credit from 21 days to 42 days to allow sufficient time for zones to verify eligibility documentation.

For purposes of eliminating retro-vouchering, clarify that the bill applies to employees hired after January 1, 2011.

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