The Personal Income Tax Law and the Corporation Tax Law allow various credits against the taxes imposed by those laws. Existing law provides for the establishment of apprenticeship programs in various trades, to be approved by the Chief of the Division of Apprenticeship Standards in any trade in the state or in a city or trade area whenever the apprentice training needs justify the establishment.

This bill, for taxable years beginning on or after January 1, 2019, and before January 1, 2024, would allow a credit against the taxes imposed under those tax laws in an amount equal to 50% of wages paid by the taxpayer to a registered apprentice during the taxable year or $2,500, whichever is less, year, not to exceed $2,500, for each registered apprentice trained by the taxpayer in that the taxable year. The bill would limit the aggregate amount of credits that may be allocated and certified pursuant to those provisions to $10,000,000 per fiscal year for income tax credits and $10,000,000 per fiscal year for corporate tax credits. The bill would require the Division of Apprenticeship Standards to perform certain duties in order to allocate and certify these credits.

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. Existing law provides for the establishment of apprenticeship programs in various trades, to be approved by the Chief of the Division of Apprenticeship Standards in any trade in the state or in a city or trade area whenever the apprentice training needs justify the establishment.

This bill, for taxable years beginning on or after January 1, 2019, and before January 1, 2024, would allow a credit against the taxes imposed under those tax laws in an amount equal to 50% of wages paid in the taxable year to an apprentice or $2,500, whichever is lesser, in the first year of a two-year term of a qualified apprenticeship program, as provided. by the taxpayer to a registered apprentice during the taxable year or $2,500, whichever is less, for each registered apprentice trained by the taxpayer in that taxable year. The bill would limit the aggregate amount of credits that may be allocated and certified pursuant to those provisions to $10,000,000 per fiscal year for income tax credits and $10,000,000 per fiscal year for corporate tax credits. The bill would require the Division of Apprenticeship Standards to perform certain duties in order to allocate and certify these credits.

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. Existing law provides for the establishment of apprenticeship programs in various trades, to be approved by the Chief of the Division of Apprenticeship Standards in any trade in the state or in a city or trade area whenever the apprentice training needs justify the establishment.

This bill, for taxable years beginning on or after January 1, 2019, and before January 1, 2024, would allow a credit against the taxes imposed under those tax laws in an amount equal to 50% of wages paid in the taxable year to an apprentice or $2,500, whichever is lesser, in the first year of a two-year term of a qualified apprenticeship program, as provided.

This bill would take effect immediately as a tax levy.

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 1211 (Anderson) - Income taxes: credits: apprenticeships

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

Bill Summary:

SB 1211 would create a tax credit for wages paid to an apprentice.

Fiscal Impact:

The Franchise Tax Board (FTB) estimates that the bill would result in General Fund revenue losses of $2.0 million in 2018-19, $4.8 million in 2019-20, and $5.8 million in 2020-21. FTB’s costs to implement the bill have yet to be determined.

Additionally, the Division of Apprenticeship Standards (DAS) within the Department of Industrial Relations (DIR) would incur additional workload as a result of the bill, including allocating and certifying tax credits and related duties. A fiscal estimate also has yet to be determined.

Background:

Tax expenditure programs (TEPs) are special tax provisions that reduce the amount of revenues the “basic” tax system would otherwise generate in order to provide (1) benefits to certain groups of taxpayers, and/or (2) incentives to encourage certain types of behavior and activities, such as charitable giving. Specifically, current law provides for, among other things, various income and corporation tax credits and deductions, as well as exemptions from the sales and use tax. The Department of Finance is required to publish a list of TEPs (currently totaling several hundred), which currently $61 billion annually.

Apprenticeships provide paid on-the-job training to workers in various trades. An apprenticeship pairs students and adults with skilled workers for supervised hands-on learning. The Legislative Analyst’s Office’s (LAO) notes that the State has 80,000 registered apprentices in more than 50 trades, ranging from glazing to motion picture work. The most common apprenticeships are in the construction trades, which comprise 70 percent of the total. This category includes carpenters, plumbers, and electricians, among others. Apprenticeships typically are sponsored by both businesses and labor unions who design and support the programs, as well as recruit the apprentices.

Apprenticeships also have a classroom component, in which apprentices take classes relevant to their trade. These are known as related supplemental instruction (RSI). The program sponsors must find a school district or community college that will affiliate with their program. To become a state-approved program, both the sponsors and affiliated education agency submit their apprenticeship program plans to DAS, which (1) reviews the curriculum, and (2) certifies that the programs meet industry standards. The State then funds a portion of the apprenticeship instruction by providing support for RSI costs. Currently, 55 percent of RSI funding is associated with school districts, while the remaining 45 percent is associated with community colleges.

The State currently has two apprenticeship programs. The first is the State’s longstanding Apprenticeship Program, which focuses on traditional apprenticeship fields. In 2015-16, the State created the Apprenticeship Initiative, which provided funding for nontraditional programs, such as healthcare, advanced manufacturing, and information technology. The Apprenticeship Initiative also created pre-apprenticeship programs, which prepare students for an apprenticeship.

The federal Workforce Innovation and Opportunity Act of 2014 required each state to submit a plan for addressing its workforce needs. California’s plan sets a goal of doubling apprenticeships by 2027, to 160,000. According to the State’s plan, research indicates that the apprenticeship model is an effective way to train people for jobs.

Proposed Law:

This bill would allow employers to take a tax credit equal to 50 percent of the wages paid, up to $2,500 annually, to an apprentice in a qualified apprenticeship program. The bill would limit the aggregate amount of credits that may be allocated to $10 million for income tax credits and $10 million for corporate tax credits.

The bill would define “apprentice” as an individual who has entered into an apprenticeship agreement (as described in Labor Code Section 3077) with the employer, and is trained by the employer through a qualified apprenticeship program. The bill defines an apprenticeship program as one that (1) is approved by the Chief of the DAS, as specified, (2) requires at least 4,000 hours, but not more than 8,000 hours of apprenticeship training to occur during a term that is no more than three years, and (3) provides recognition of the registered apprentice as a qualified professional, technical, craft, or trade worker upon satisfactory completion of the program.

DAS must (1) allocate and certify the tax credits on a first come, first served basis, and (2) provide employers with a certificate which can be remitted to FTB upon request. The bill would require DAS to provide FTB with a list of employers’ names who have received certificates. Additionally, if the registered apprentice is terminated before the completion of the apprenticeship program, the bill would provide that the previously claimed credit must be recaptured unless the termination is due to the following: (1) the apprentice voluntarily leaves, (2) the apprentice becomes disabled and can no longer perform the services of that program, (3) the apprentice is terminated for misconduct, or (4) the apprentice is terminated due to substantial reduction in the trade or business operations of the employer. The credit is recaptured by increasing the tax imposed — during the termination year — by the tax amount originally reduced by the credit.

In instances where the credit allowed exceeds the tax owed, the bill would allow the excess to be carried over for up to five years until the credit is exhausted. The credit is allowed for each taxable year for taxable years 2019 through 2023.

Related Legislation:

AB 1904 (Cervantes, 2017/20018) would create a tax credit in an amount equal to $1 for each hour a registered apprentice worked during the taxable year up to $1,000 for each registered apprentice. The bill is currently pending before the Assembly Appropriations Committee.

Staff Comments:

Based on DIR data pertaining to the number of apprentices (1) entering programs requiring between 4,000 to 8,000 hours of training, and (2) who completed their first year of apprentice training, FTB estimates that there would be 28,000 qualified apprentice employees in 2019. This population was then reduced by 96 percent to include only the first 10 qualified apprentices for each employer.

FTB assumes that each apprentice would generate the maximum credit of $2,500 per year. The estimated number of qualified apprentices was multiplied by the maximum credit, resulting in total estimated credit generated of $8 million in 2019. FTB reduced the first year of credit generation by 10 percent to reflect the short implementation period. Additionally, the department estimates that neither personal income taxpayers nor corporate taxpayers will reach their respective $10 million credit caps, and instead assumes that taxpayers will use 65 percent of the credit, or $4.5 million, in the year generated and the remaining 35 percent over the next four years. It is further assumed that 30 percent would be used by personal income taxpayers and 70 percent by corporate taxpayers.

To arrive at the offsetting tax effect of wage deduction that would otherwise be allowed under current law, FTB (1) estimated that qualified taxpayers would have been able to deduct approximately $4.5 million wages, (2) multiplied by the average tax rate of 6 percent, resulting in an estimated offsetting revenue gain of $250,000 in taxable year 2019. This results in an estimated net revenue loss of $4.2 million.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Income taxes: credits: apprenticeships

Creates a tax credit equal to 50 percent of wages paid — up to $2,500 — to an apprentice in a qualified apprenticeship program.

Background

Tax expenditures. State law allows various income tax credits and deductions, as well as sales and use tax exemptions. The Legislature enacts such tax incentives to either compensate taxpayers for incurring certain expenses, such as child adoption, or to influence certain behavior, such as charitable giving. The Legislature uses tax incentives to encourage taxpayers to do something that but for the tax credit, they would otherwise not do. The Department of Finance is required to annually publish a list of tax expenditures, currently totaling around $61.3 billion per year.

Apprenticeships in California. Apprenticeships provide paid on the job training to workers in various trades. An apprenticeship pairs students and adults with skilled workers for supervised hands-on learning. According to the 2018 Legislative Analyst’s Office’s (LAO) Apprenticeship Programs report, the state has 80,000 registered apprentices in more than 50 trades, ranging from glazing to motion picture work. The most common apprenticeships are in the construction trades, making up about 70 percent of apprentices in the state. These apprenticeships include training for carpenters, plumbers, and electricians, among others. The second most common apprenticeships are in public safety, primarily for correctional workers and firefighters. Apprenticeships typically are sponsored by both businesses and labor unions who design and support the programs as well as recruit the apprentices.

Apprenticeships also have a classroom component, in which apprentices take classes relevant to their trade, known as related supplemental instruction (RSI). The program sponsors must find a school district or community college that will affiliate with their program. To become a state approved program, both the sponsors and affiliated education agency submit their apprenticeship program plans to the Division of Apprenticeship Standards (DAS) in the California Department of Industrial Relations. DAS reviews the curriculum and certifies that the programs meet industry standards. The state then funds a portion of the apprenticeship instruction by providing support for RSI costs. Currently, 55 percent of RSI funding is associated with school districts and the remaining 45 percent is associated with community colleges.

The state currently has two apprenticeship programs. The first is the state’s longstanding Apprenticeship Program, which focuses on traditional apprenticeship fields. In 2015-16, the state created the Apprenticeship Initiative, which provided funding for nontraditional programs such as healthcare, advanced manufacturing, and information technology. The Apprenticeship Initiative also created pre-apprenticeship programs which prepared students for an apprenticeship.

The federal Workforce Innovation and Opportunity Act of 2014 required each state to submit a plan for addressing its workforce needs. California’s plan sets a goal of doubling apprenticeships by 2027 — from roughly 80,000 apprentices to 160,000. According to the state’s plan, research has indicated that the apprenticeship model is an effective way to train people for jobs.

The author wants to increase apprenticeship opportunities in the state by providing a tax credit to employers who participate in apprenticeship programs.

Proposed Law

Senate Bill 1211 allows employers to take a tax credit equal to 50 percent of the wages paid — up to $2,500 wages paid annually— to an apprentice in a qualified apprenticeship program. The bill limits the aggregate amount of credits that may be allocated to $10 million for income tax credits and $10 million for corporate tax credits.

SB 1211 defines apprentice as an individual who has entered into an apprenticeship agreement — as described in Section 3077 of the Labor Code — with the employer, and is trained by the employer through a qualified apprenticeship program. The bill defines an apprenticeship program as:

• Is approved by the Chief of the Division of Apprenticeship Standards, as specified;
• Requires at least 4,000 hours, but not more than 8,000 hours of apprenticeship training to occur during a term that is no more than three years; and
• Provides recognition of the registered apprentice as a qualified professional, technical, craft, or trade worker upon satisfactory completion of the program.

The Division of Apprenticeship Standards must allocate and certify the tax credits — on a first come, first served basis — and provide employers with a certificate which can be remitted to the Franchise Tax Board (FTB) upon request. SB 1211 requires the Division of Apprenticeship Standards to provide FTB with a list of employers’ names who have received certificates. Additionally, if the registered apprentice is terminated before the completion of the apprenticeship program, SB 1211 provides that the previously claimed credit must be recaptured unless the termination is due to the following:

• The apprentice voluntarily leaves;
• The apprentice becomes disabled and can no longer perform the services of that program;
• The apprentice is terminated for misconduct; or
• The apprentice is terminated due to substantial reduction in the trade or business operations of the employer.

The credit is recaptured by increasing the tax imposed — during the termination year — by the tax amount originally reduced by the credit.

In the case where the credit allowed exceeds the tax owed, SB 1211 allows the excess to be carried over for up to 5 years until the credit is exhausted. The credit is allowed for each taxable year beginning on or after January 1^st, 2019, and before January 1^st, 2024; and is excluded from following Section 41.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “California is one of the most expensive states to live and it is the middle class that disproportionately bears that burden. Millions of workers were displaced from long-term jobs during the recession. While some were reemployed at lower wages than at their previous jobs, others remained unemployed due to skill deficits. Many of today’s jobs did not previously exist, and have become prevalent with advances in technology and artificial intelligence. This measure seeks to create career opportunities for Californians and close the wealth and education disparity for an ever shrinking, and challenged middle class.”

2. Revenue loss. Existing tax law provides various credits, deductions, exclusions, and exemptions for certain taxpayers. Since these items are enacted to accomplish some governmental purpose and determined to have a cost — in the form of foregone revenues — state law refers to them as "tax expenditures." This bill would create a new tax expenditure, costing the General Fund thousands in foregone revenue in the first year alone. As a result, the state will have to reduce spending or increase taxes to match the foregone revenue. The Committee may wish to consider weather SB 1211 is worth the tradeoff of spending cuts and/or raising taxes.

3. Where are the women? As of December 31^st, 2017, there were 80,464 active apprentices in California.^[1] Non-whites represented 64.5 percent of active apprentices and women represented only six percent.^[2] According to the DAS Annual Report 2015, there were 73 different programs with five or more apprentices enrolled that have no women participants. While that number represents improvement over the 87 programs with no women in 2014, women remain underrepresented among the ranks of apprentices. If apprenticeships are an effective way to train people for jobs, and the state wants to invest in these opportunities, should the state be doing more to make sure these opportunities are also pursued by women?

4. Disconnected youth. Measure of America is a non-partisan, non-profit initiative of the Social Science Research Council in Brooklyn, New York. I t conducts research and analysis primarily on human development data from the United States at the national, state, and county levels. According to their Halve the Gap By 2030 report, one in every seven Americans between the ages of 16 and 24 (or about 5.8 million people) is neither working nor in school and thus, considered a disconnected youth. The highest rate of youth disconnection among the country's most populous 25 metro areas was found in the Riverside and San Bernardino metro area: nearly one in five young people — or 117,000 of approximately 620,000 teens and young adults — were neither working nor in school. According to the report, some of the factors associated with youth disconnection are high rates of poverty and unemployment, low levels of educational attainment, and high rates of disconnection identified over a decade ago. While youth disconnection is a complex problem and has no easy solution, the U.S Department of Labor has identified approaches that show great promise. The key component of the overall strategy is a focus on job readiness and training, which apprenticeships provide. SB 1211 creates an incentive for businesses to offer apprenticeship opportunities — which according to the U.S Department of Labor — are a key factor to helping engage youth who are neither working nor in school. With high levels of disconnection, California could benefit from more apprenticeships.

5. Right way? SB 1211 enacts a new tax expenditure to create incentives for businesses to participate in apprenticeship programs. Successful tax expenditures cause taxpayers to do something, that but for the tax expenditure, they might otherwise not do. However, when tax expenditures reward behavior that would have occurred without the subsidy, it’s considered “a windfall benefit”. SB 1211 could create windfall benefits by giving an increased tax expenditure to an employer who would have already hired an apprentice, regardless of the subsidy. Tax expenditures are not the only strategy the Legislature can use to increase access to apprenticeships. For example, the Legislature could increase funding for the state’s existing Apprenticeship Program, the state’s existing Apprenticeship Initiative, or for RSI. The Committee may wish to consider whether an increase of funding to existing apprenticeship programs would be a better way to increase apprenticeship opportunities throughout the state.

6. Related legislation. Assembly Bill 1904 (Cervantes) is similar to SB 1211 and would also create a tax credit for each apprentice trained by a business. AB 1904 passed the Assembly Revenue and Taxation Committee on March 12^th, 2018, on a vote of 6 to 0, and the Assembly Appropriations Committee referred the bill to its suspense file.

7. Section 41. On September 29, 2014, Governor Brown signed SB 1335 (Leno, 2014), which added Revenue and Tax Section 41. SB 1335 recognized that the Legislature should apply the same level of review used for government spending programs to tax preference programs, including tax credits. Thus, Section 41 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 the Legislature to use when measuring whether the tax credit meets the goals, purposes, and objectives. SB 1211 provides that Section 41 shall not apply to this credit. The Committee may wish to consider the appropriateness of this Section 41 exemption.

8. Technical amendments. Committee staff recommends the following technical amendments:

• In Section 17053.40, after “by the taxpayer to a registered apprentice during the taxable year or two thousand five hundred dollars ($2,500)” insert “wages paid”.
• In Section 23640, after “by the taxpayer to a registered apprentice during the taxable year or two thousand five hundred dollars ($2,500)” insert “wages paid”.

Support and Opposition

(5/2/18)

Support: Black Business Association; Board of Equalization Member Jerome Horton; Plumbing-Heating-Cooling Contractors Association of California; San Diego, Southern California and Central California Chapters of Associated Builders and Contractors; and Western Electrical Contractors Association.

Opposition: Unknown.

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1. California Apprenticeship Council Newsletter, 1^st Quarter 2018, p.3 ↑

2. Ibid. ↑