The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws.

This bill would allow, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, a tax credit under both laws in an amount equal to 50% of the qualified taxpayers matching contributions to an the account of an eligible employees Employee Savings Match Plan, as provided. provided, not to exceed $1,000.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws.

This bill would allow, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, a tax credit under both laws in an amount equal to 50% of the qualified taxpayers contributions to a qualified employee savings plan, an Employee Savings Match Plan, as provided.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws.

This bill would allow, for taxable years beginning on or after January 1, 2016, and before January 1, 2021, a tax credit under both laws in an amount equal to 50% of the qualified taxpayers contributions to a qualified employee savings plan, as provided.

This bill would take effect immediately as a tax levy.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2015 - 2016 Regular Session

SB 1272 (Runner) - Income taxes: credit: small business employee savings plan

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 1272 would enact a tax credit for certain employers who contribute to an “Employee Savings Match Plan” on behalf of employees.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in a General Fund revenue loss of $2.7 million in 2016-17, $2.5 million in 2017-18, and $2.7 million in 2018-19. FTB’s administration costs have yet to be determined, and partly depend upon how the bill is implemented.

Background:

California law allows various income tax credits, deductions, and sales and use tax exemptions to provide incentives to compensate taxpayers that incur certain expenses, such as child adoption, or to influence behavior, including business practices and decisions, such as research and development credits. The Legislature typically enacts such tax incentives to encourage taxpayers to do something that but for the tax credit, they would not do. The Department of Finance must annually publish a list of tax expenditures; according its most recent report, the Department estimates tax expenditures result in $57 billion in foregone revenue in 2015-16.

Proposed Law:

This bill would allow a tax credit (against personal income tax and corporation tax) during taxable years 2016 through 2020 for qualified taxpayers in an amount equal to 50 percent of dollar-for-dollar matching contributions to the account of an eligible employee’s Employee Savings Match Plan, up to $2,000 per employee per taxable year. The maximum amount of credit allowed under this credit would be $1,000. The bill would allow any unused credit to be carried forward for four years.

“Employee Savings Match Plan” would mean a savings plan established by a qualified taxpayer that meets all of the following:

• A qualified taxpayer may match, on a dollar-for-dollar basis, the voluntary contributions of participating employees, as specified, without limitation. However, contributions in excess of $2,000 per employee per taxable year would ineligible for a credit under this bill.
• Any employee who has California wages subject to income tax withholding under Division 6 of the Unemployment Insurance Code and has been continuously employed by the qualified taxpayer for at least six months may participate in and contribute to an Employee Savings Match Plan.
• At least one-half of the participating employees earn less than $40,000 during the taxable year in wages subject to income tax withholding under Division 6 of the Unemployment Insurance Code for work performed for the employer contributing to the Employee Savings Match Plan.
• Contributions are held in an insured bank or other financial institutions in individual accounts as separate property of each participating employee and may be withdrawn by employees, as provided.
• If an employee withdraws funds from an Employee Savings Match Plan less than 12 months after the employee’s first contribution, or less than 12 months after a previous withdrawal, other than a qualified withdrawal, then a qualified taxpayer is ineligible for a credit for any matching contributions made with respect to contributions made by that employee during the remainder of the taxable year in which the withdrawal was made or the next taxable year.

The bill would define certain terms, including, but not limited to:

• “Matching contributions” would mean any contributions made by a qualified taxpayer for the benefit of employees which are eligible to be taken into account for purposes of computing this credit.
• “Qualified taxpayer” would mean a taxpayer that, for the taxable year for which a credit is allowed, satisfies both of the following conditions: (1) has gross receipts, less returns and allowances, derived from or reportable to this state, for the taxable year of $10,000,000 or less, and (2) has fewer than 100 employees at any time during the taxable year.

The credit must be claimed on a timely filed original return. The credit would be in lieu of any other credit or deduction with respect to the matching contributions of a qualified taxpayer that would be taken into account in computing the bill’s credit allowed

The qualified taxpayer would annually report the social security number and account information for each employee participating in and contributing to the Employee Savings Match Plan in the form and manner prescribed by FTB.

This bill would require that FTB annually prepare a written report to the Legislature that contains specified information. The first report to the Legislature would be due on or before January 1, 2018, and each January 1 thereafter.

The bill would authorize FTB to prescribe rules, guidelines, procedures, or regulations necessary or appropriate to carry out the purposes of this bill.

Related Legislation:

SB 594 (Ashburn, 2009/2010) would have established, under both the Personal Income Tax Law and the Corporation Tax Law, a credit against income or franchise tax in the amount of 15 percent of administrative costs incurred by a qualified taxpayer in connection with establishing or administering a cafeteria plan that provides for the payment of health insurance premiums of the taxpayer’s employees. The bill failed passage in the Senate Revenue and Taxation Committee.

Staff Comments:

Based on data from the U.S. Small Business Administration, FTB estimates that there are 700,000 small businesses in the State. FTB assumes that (1) 420,000 small businesses (or 60 percent) pay at least half their employees less than $40,000 in wages per year, and (2) 90 percent of small business have annual gross receipts of less than $10 million. The U.S. Government Accountability Office estimates that 15 percent of small businesses sponsor some type of retirement plans; of this amount, FTB further assumes that 15 percent would match employee contributions to an employee's savings plan. Putting all of this together, FTB assumes that 8,500 small businesses would qualify for the credit under the bill.

Next, FTB assumes (based on additional data from the U.S. Small Business Administration) an average of six employees per small business, and consequently estimates that 51,000 employees would be eligible to participate. FTB assumes that 20 percent of those employees would elect to participate in the Employee Savings Match Plan. However, in the first year this amount is reduced by 25 percent to account for the timing of enactment and employers having enough time to make timely contributions to match employee’s contribution. FTB assumes that employees would contribute on average $800 to the plan per year and employers would match these contributions. Thus, FTB assumes total contributions of $5.2 million in 2016; this amount includes an assumption that a portion of contributions would be withdrawn during the first 12 months.

Employers would not be allowed a credit for matching contributions made to employees who withdrew contributions within 12 months of their first contribution or 12 months after their last withdrawal or the next taxable year. Therefore, for future years, the estimate assumes the amount of employer’s matching contributions would be reduced due to the credit restriction.

As noted previously, the credit generated would be 50 percent of qualified contributions, resulting in an estimated $2.6 million in credit generated in 2016. The amount of credit that each qualified taxpayer could use would be limited by the qualified taxpayer’s current year tax liability. The estimate assumes 75 percent, or $1.9 million, of the credit generated would be used in the year generated and the remaining credit would be carried over and used within the next two years.

In addition, a qualified taxpayer may not claim a deduction for the matching contributions used in computing the credit. FTB assumes an average tax rate of 6 percent and consequently estimates that a revenue gain of $300,000 would result, making the bill’s total 2016 revenue loss $1.6 million. The larger fiscal year estimates reported by FTB reflect (1) increasing participation in the out-years, and (2) the conversion of the estimates from calendar years to fiscal years.

FTB’s administration costs have yet to be determined, and would depend on how the bill is implemented. If its current implementation concerns are resolved, costs to FTB resulting from the bill would likely be in the tens of thousands of dollars annually.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Robert M. Hertzberg, Chair

2015 - 2016 Regular

Income taxes: credit: small business employee savings plan

Enacts a credit for employers who contribute to an “Employee Savings Match Plan” on behalf of employees.

Background

California law allows various income tax credits, deductions, and sales and use tax exemptions to provide incentives to compensate taxpayers that incur certain expenses, such as child adoption, or to influence behavior, including business practices and decisions, such as research and development credits. The Legislature typically enacts such tax incentives to encourage taxpayers to do something that but for the tax credit, they would not do. The Department of Finance must annually publish a list of tax expenditures; according its most recent report, the Department estimates tax expenditures result in $57 billion in foregone revenue in 2015-16.

Proposed Law

Senate Bill 1272 enacts a credit against the Personal Income Tax and Corporation Tax in an amount equal to 50% of an employer’s contribution to an “Employee Savings Match Plan,” beginning in the 2016 taxable year, and ending in the 2020 taxable year. The measure limits the credit to $2,000 per employee per taxable year, and is only available to taxpayers meeting the Government Code’s definition of small business, which requires all of the following be true to qualify:

• The firm is an independently owned and operated business that is not dominant in its field of operation,
• The firm’s principal office is located in California, and its officers are domiciled in the state, and
• When combined with affiliates, employs 100 or fewer employees, and average annual gross receipts of ten million dollars ($10,000,000) or less over the previous three years, or is a manufacturer, as defined, with 100 or fewer employees.

The measure defines “Employee Savings Match Plan” as a savings plan established by the taxpayer that meets all of the following conditions:

• Allows the employer to match voluntary contributions of participating employees, without limitation,
• An employee who has an annual salary of at least $12,000, and has been continuously employed by the taxpayer for at least six months may contribute to the plan,
• At least one-half of participating employees earn less than $40,000 during the calendar year for work performed by the employer contributing to the plan,
• Deposits are held in an insured bank or other financial institution subject to withdrawal, and
• Employees who withdraws funds from a plan less than one year after the employee’s first contribution, or less than one year after a previous withdrawal shall not be eligible to participate in that plan for the remainder of the year in which that withdrawal was made or during the next calendar year. The bill provides that a transfer of funds from an Employee Savings Match Plan into an IRA or other deferred compensation plan shall not be considered a withdrawal.

The measure allows the credit to be carried over for three years. The bill also provides that contributions to, and income from, a plan shall be treated as ordinary income. SB 1272 sunsets the credit on December 1, 2021

In 2014, The Legislature enacted SB 1335 (Leno, 2014), which added Revenue and Taxation Code §41 to apply the same level of review used for government spending programs to tax preference programs, including tax credits. To satisfy these requirements, the bill states that the intent of its tax expenditure is to promote savings for employees, especially young and low-income workers who have no savings and no retirement options other than social security. To measure whether the bill accomplishes the goal, SB 1272 directs the Franchise Tax Board (FTB) to annually prepare a written report of:

• The percentage of employees under age 30 who are receiving matching funds,
• The percentage of employees earning less than $40,000 per annum who are receiving matching funds.

State Revenue Impact

According to the Franchise Tax Board (FTB), SB 1272 results in revenue losses of $8.9 million in 2016-17, $7.5 million in 2017-18, and $7.8 million in 2018-19.

Comments

1. Purpose of the bill. According to the author, “SB 1272 establishes a ‘qualified savings plan’ program to encourage small businesses, and their workers employees to participate in payroll based savings. The program would create tax incentives for participating small businesses by providing a partial tax credit for matching amounts contributed to an employee’s savings account. The program would be limited to businesses with fewer than 100 employees and require that at least half of the participating employees earn less than $40,000 per year. Payroll savings plans can provide ease and incentives which reduce resistance to savings. A plan that includes an employer contribution may be hard to resist. A payroll savings plan can establish a regular pattern of savings which serve young employees well. In the contemporary workplace, the average person may have ten or more jobs in their lifetime. Company benefits, when offered, are often lost when an employee leaves while accumulations in a payroll saving plan move with the employee. An incentive that attracts employees also benefits employers; especially if that incentive helps the worker maintain financial stability”

2. Retirement savings. According to news reports, more than half of all Americans are not financially prepared for retirement. Fewer employers today offer traditional, defined-benefit pensions than in the past, and an estimated one in three workers don’t have access to a savings plan, such as a 401(k). SB 1272 would create an incentive for employers to create such savings plans, and to contribute to them on behalf of their employees, by enacting a tax credit beyond the general treatment of employer contributions to employee retirement savings plans as deductible business expenses. However, there are other ways of increasing retirement savings without relying on the inefficiency inherent in tax expenditures. In 2012, the Legislature enacted the California Secure Choice Retirement Savings Trust Act, administered by the California Secure Choice Retirement Savings Investment Board, housed in the State Treasurer’s Office, and created by the Act (SB 1234, De León). While enactment is contingent on subsequent legislation, the program could provide a voluntary, automatic-enrollment retirement savings plan for more than 6 million California workers who currently lack access to retirement savings plans through their employers. The measure would require private employers with five or more employees not currently offering a retirement savings plan to provide their employees access to, and payroll deductions for, Secure Choice retirement accounts. The bill directed the Board to commission a study to determine whether the legal and practical conditions for implementation can be met. On March 17^th, 2016, Overture Financial, the contractor selected to complete the program design, market analysis, and financial feasibility study work streams, issued its findings, which can be found here: http://www.treasurer.ca.gov/scib/report.pdf. In short, Overture found that the program could be financially viable and self-sustaining even under adverse conditions with poor investment returns and high opt-out rates. The Committee on Public Employment, Retirement, and Social Security recently approved legislation that would express legislative approval for, and direct the Board to implement, the program (SB 1234, De León, 2016). The bill is currently awaiting hearing in the Committee on Appropriations. While SB 1272 takes a different approach to encouraging retirement savings, this bill could instead be harmonized with Secure Choice by amending it to allow employers a credit only when they contribute to their employees’ Secure Choice accounts, contingent on that program’s implementation.

3. Will it work? Tax benefits directed at specific products do two things: First, they reward behavior that would have occurred without the subsidy, so-called “deadweight loss.” Some employers may contribute to their employees’ retirement accounts without any incentive, so the bill will give these taxpayers a windfall benefit equal to the sales tax not paid, providing no marginal benefit. Second, the bill may alter decisions at the margin; the incentive of the credit may spur employers to begin contributing to an account, or increase current levels to match higher employee contributions. A successful tax incentive causes more economic activity at the margin than its deadweight loss, but no tax credit has yet conclusively demonstrated that its benefits outweigh its costs. Additionally, because California taxes a business’s net income, not its gross, a tax credit will only benefit profitable firms, which often isn’t the case for newer, smaller businesses. The Committee may wish to consider how much additional retirement savings SB 1272 will spur versus its deadweight loss.

4. New tax expenditure. Enacting a new tax exemption results in foregone revenue, which requires cuts in spending or higher taxes, all else equal. Tax credits do not pay for themselves: the state’s last effort of “dynamic revenue analysis” indicates that while dynamic effects are definitely present and visible, their effects are generally relatively modest. The Committee may wish to consider whether the benefits resulting from this incentive are worth the tradeoff of cuts in spending or taxes on other activities.

5. Section 41. In 2014, The Legislature enacted SB 1335 (Leno, 2014), which added Revenue and Taxation Code §41 to apply the same level of review used for government spending programs to tax preference programs, including tax credits. SB 1335 requires any bill introduced on or after January 1, 2015 that allows a new income tax credit to contain specific goals, purposes, and objectives that the tax credit will achieve. In addition, Section 41 requires detailed performance indicators for a future Legislature to use when determining whether the tax credit meets its goals, purposes, and objectives. SB 1272 seeks to comply with SB 1335’s requirements; however, the measure directs FTB to collect information and prepare a written report regarding the percentage of all employees who receive matching funds, including employees who make under $40,000, which may be difficult to implement. Unless financial institutions, employees, or employers specifically report this information, FTB may not have sufficient data to prepare the report required by the bill. The Committee may wish to consider whether SB 1272’s current information collection requirements will result in sufficient information for a future Legislature to assess its effectiveness.

6. Checklist. Eagle Lodge West is an annual gathering of professional tax attorneys, FTB and Board of Equalization attorneys and legislative tax staff intended to foster dialogue and discussion on difficult tax issues. In 2014, a part of the conference drafted a checklist called “general considerations for drafting credit statutes," which attempts to focus on more technical aspects of tax credits important for implementation and to prevent the need for subsequent clean-up bills. While SB 1272 includes many items on the checklist, the measure doesn’t speak to:

• Additional definitions for terms like “employee,” “salary,” “match,” and “without limitation,” to reduce potential disagreements between taxpayers and FTB.
• A requirement that the taxpayer claim the credit only on a timely-filed original return, instead of amended returns, where taxpayers can claim credits for contributions made in previous year, negating any incentive effect.
• Any documentation requirements necessary for FTB to verify that both employees and employers made contributions, and that the taxpayer meets the measure’s definition of small business,
• Allowing FTB to issue rules, guidelines, and procedures to implement the credit, which must be exempt from the Administrative Procedures Act for taxpayers to receive timely guidance to claim the credit.
• Clawback provisions to reclaim credits if employers subsequently terminate of lay-off the employee, or the employee withdraws funds from the plan,
• Rules for pass-through businesses such as partnerships, S-Corps, and Limited Liability Companies,
• Denying business expense deductions for the same expenses that generate the credit,
• Applying the credit to reduce regular tax below tentative minimum tax.

7. Technicals. FTB and Committee Staff recommend the following technical amendments.

• Conforming the measure’s definition of “small business” with terms and concepts used in the Revenue and Taxation Code,
• Clarify the application of the credit for combined groups of corporations,
• Specify allowable uses of contributed funds that generate the credit, minimum periods of time for the funds to be held in an account to generate a credit, and a means to verify compliance with the bill’s requirements.
• Limit contributions that give rise to credits to those made to employees in California.
  

Support and Opposition

(4/21/16)

Support: None received.

Opposition: California Tax Reform Association (unless amended).

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