By Craig Winchester and Chris Micheli
In 2013, at the request of Governor Jerry Brown, the Legislature passed and the Governor signed Assembly Bill 93 (Budget Committee; Ch. 69) to repeal the Enterprise Zone Program (“EZ “) of California and replace the program with three other incentive programs:
- $100 million a year in a California Competes grant program administered by GO-Biz;
- a partial sales/use tax exemption for certain manufacturing equipment; and
- a new employment credit (“NEC”).
Opponents of AB 93, which included most of the business community, argued at the time that it was not a “revenue neutral” package (at that time, a revenue-neutral tax bill required only a majority vote for passage, while a non-revenue-neutral tax bill would have required a California constitution requiring a 2/ 3). It was feared that the NEC would never result in the tax benefits promised to the state’s business community. AB 93 barely adopted by a majority of votes.
Due to business opposition to AB 93, a provision of the NEC requires an annual report from the Franchise Tax Board (“FTB”) containing recommendations for increasing the use of the NEC. Accordingly, pursuant to Sections 17053.73 and 23626 of the Revenue & Taxation Code, the FTB reported annually by March 1 to the Joint Legislative Budget Committee on the use of the NEC. This annual report provides the Joint Legislative Budget Committee with the total amount of NEC appropriations claimed, a comparison of the total dollar amount of appropriations claimed under this section against the FTB’s estimate, and identification of options for increase annual credit claims to meet estimated amounts.
As feared by the business community, the NEC program was particularly challenged to achieve the promised goals. In the last five years tracked by California FTB companies, they have only claimed $11.9 million in credits of the $1.2 billion in promised credits. The following statement is taken from the FTB’s most recent report to the JLBC on the NEC: “Claims claimed: estimates and actual data: At the time AB 93 was written, the FTB had published estimates that 172 million of credits would be claimed for the 2017 tax year and $229 million for the 2018 tax year. As of the date of this report, taxpayers have reported $2.5 million claimed on tax year 2017 returns and $2.7 million claimed on tax year 2018 returns..” (Emphasis added) The following table shows estimated versus actual NEC usage:
There have been proposals for the legislature to expand the use of the new jobs credit. For example, this year’s AB 2035 of Assemblyman Carlos Villapudua (D-Stockton) would adopt a number of proposals contained in the FTB’s annual report. It would make minor changes to the eligibility conditions and the starting point of the eligible salary. Additionally, AB 2035 would enact changes to benefit the California restaurant community, which has been denied benefits under the NEC. This is particularly problematic after the restaurant industry was decimated due to government-ordered shutdowns during the pandemic. At the time AB 93 was passed, it was believed that the restaurant industry did not need government assistance. That’s clearly not the case for California restaurants facing lingering pandemic-related issues, including unprecedented labor shortages, increased supply costs and reduced demand.
It is also important to note that AB 2035 would maintain NEC geographic boundaries, retain reservation requirements, and maintain the same credit percentages. The NEC is scheduled to end over the next three years ending in 2025. All of these safeguards will continue to meet the policy intent of the original NEC program, which is modest assistance to businesses that have increased employment and opportunities for workers. hard to hire areas of California. with the highest unemployment rate.
At this point, the California business community has lost over $1 billion in promised tax relief as a result of the enactment of AB 93. The Governor and Legislature are expected to correct this situation by passing AB 2035 , making it possible to grant essential relief to companies in difficulty.
Craig Winchester is leading a coalition to pass legislation exempting Restaurant Revitalization Fund grants from California income tax and the effort to include restaurants/bars as eligible for the NEC program. To participate in this operation, please contact [email protected].