Assembly Budget Subcommittee No. 4 on State Administration

Good afternoon and welcome to our Assembly Budget Subcommitee Four hearing. This hearing is taking place in room 447 today. We are covering the remaining items for the Franchise Tax Board. We will be accepting public comment at the end of this hearing, both in the hearing room and on the phone. The phone number to connect is on the Committee website and should be displayed on the screen.

If you are watching this hearing online, the phone number is toll free 877-692-8957 and the public access code is 131-5447 if you encounter any problems, please contact the Assembly Budget Committee at 916-319-2099 and a staff Member will assist you. We encourage the public to provide written testimony before the hearing. Please send your written testimony to budgets of four at ASM CA Gov with that roll call, please.

Carrillo, here. Lee. Patterson. Rayes, here. Wicks, here.

We will now begin on the vote only calendar. We have four items for consideration which are listed on the agenda for your reference. We are approving the staff recommendations as listed. Thank you. Great. Can I get a roll call, please?

Carrillo, aye. Lee. Patterson. Rayes, Aye. Wicks, Aye.

Thank you. And we're going to go out of order for a moment. We're going to start by going by Issue three. That's right, issue three data Sharing trailer Bill Language for this panel. Please come forward. Please begin when you're ready.

Good afternoon. Dirk Simmons, Department of Finance. This trailer Bill Language as you know, FTB has been working with CDSs and DHCs to draft language that allow the sharing amongst the organizations to support the outreach to Cal EITC non filers that are participants in a public service program to support FTB outreach, as well as to other filers, non filers that appear eligible for Cali EITC.

I'm going to ask if you can speak closer. Sorry, we can't hear you very well. The Echo is bad here.

Okay, so this is outreach sharing of language between FTB CDSs, the California Department of Social Services DHCs, and this will allow sharing for EITC outreach for Individuals as well as other filers, non filers that appear eligible for Cal EITC but have not taken the steps to claim the credit. This language will also enhance notification requirements to statewide employees by their employer and public assistance program participants by Administration entities to include information on free filing as well as the anti Poverty Tax credit and outreach twice annually.

Currently, it's only been done once a year, and other than that, I'd be glad to answer any questions you may have.

Thank you. LEO, please.

Brian Euler LEO no concerns on this item.

Any comments or questions from Committee?

Madam Majority Leader, this is such an easy one. We've got to do that outreach for Kelly ITC. Make sure that everybody who's eligible applies and receives this benefit. It's one of the greatest benefits that California offers. So thank you.

Thank you.

Thank you, Madam Chair.

Thank you. I would just add, in previous conversations related to those that can benefit from CaliITC, we had a discussion about the FTB responsibility or opportunity to create a pathway or an easier pathway for more itin taxpayers that can take advantage of the benefit. There are about 2 million undocumented workers in the State of California and only about 70,000 to 75,000 that are actually ITIn taxpayers.

So there's a big, as we think about the safety net and the work that is being done to ensure that all Californians have access. Want to figure out a way in which the state can create more Itin taxpayers that can actually benefit from this program as well. The trailer Bill is consistent with our past actions to ensure cooperation between the state agencies to increase outreach and education, which is important to all of us on the Earned Income Tax Credit.

The staff recommendation is to adopt placeholder trailer Bill Language. Can I get a motion in a second roll call, please?

Carrillo, aye. Lee. Patterson. Rayes, aye. Wicks, aye.

Thank you very much.

Thank you.

We are going to go back to issue in order. We're going to go to issue one incomplete non granter trust. Let's begin. For this issue, we will hear the governor's proposed trailer Bill Language on the incomplete Non Grantor Trust. Department of Finance, you may present your proposal, please.

Hi, I'm Robin Finnesed with the Department of Finance. A trust is a commonly used estate planning tool that allows one person to hold assets on behalf of one or many beneficiaries. There are two main types of trusts, grantor and non grantor trust. A Grantor trust is revocable, allows the grantor administrative control over the trust and the income and tax attributes of the trust flow to the grantor. Non grantor trusts, on the other hand, grant control of the trust to a trustee and are considered irrevocable.

The grantor gives up right title and interest in the principal to the trust. The Non Grantor trust is treated as a separate taxable entity and is responsible for the tax consequences of income deductions and credits. Generally, a grand Tour residing in California that moves assets to a non grand tour trust in another state would shield those assets from California State taxes. But the gift to the Ungrandor Trust would make the grand Tour subject to federal gift taxes or a reduction in their estate exemption.

A more complex version of the Non Grantor trust is the incomplete gift non grantor trust, or INGs, which has been.

Closer to the mic, please of course.

Which has been used in recent years to help high net worth individuals move assets out of state and avoid federal gift taxes while shielding the assets from state taxation. INGs are often formed in states such as Nevada or Delaware that do not tax income of trusts.

The trusts straddle a line where the Grand Tour retains enough control of the trust for its gift to be incomplete and therefore not trigger federal gift taxes, but still maintains the non Grand Tour status of the trust, which means the Grand Tour is not taxed. IRS rulings since 2013 have generally affirmed this strategy, and New York passed legislation in 2014 that closed the loophole for their state.

This proposal follows this successful example of the New York legislation and requires the net income derived from an INC trust to be included in the grantor's gross income. This will close this particular loophole and is expected to increase revenues by 30 million in 2324 and 17 million in subsequent years and affect 1300 taxpayers in the first year and roughly 600 in subsequent years. Thank you, and happy to answer any questions.

LIO.

Bran Euler LIO, we don't have any concerns with this proposal. It does appear to us to be primarily a tool used by high wealth individuals to avoid paying taxes, and as the Department of Finance mentioned, it is following a model that has been in place in New York since 2014. And as far as we're aware, no major issues have been raised with New York's policy. So we don't have any concerns on this one.

Thank you. Just a couple of questions. How long have ING trusts been around and what states are they typically used in?

They've been around for a while, but they have recently become more popular with tax preparers as they have become more well known, especially after the IRS issued a letter ruling letter in 2013 that allowed for the INGs to be to avoid taxation.

Are there other states, though, that you think, or to your knowledge, that you may know use this program more than others?

I'm not sure at this time, but we know that specific states like Nevada and Delaware have these types of programs and encourage their use.

Thank you. And can you discuss the structure of a charitable remainder trust compared to an ING trust?

A charitable remainder trust is an irrevocable trust conforming with federal code 664, and it's set up by the grand Tour to give income to charities and also draw an annual income. They have a very specific structure to allow for this, and the remainder interest is exempt from income tax. InG trusts, on the other hand, are designed to avoid taxation, but have no such requirement for charitable donations. The assets go directly to beneficiaries instead.

We're working on a more technical, complete comparison, and we can follow up with the Committee tomorrow.

Thank you. Any additional comments or questions? No, we are holding this item open for now. Thank you very much.

Thank you.

We're going to move on to issue number two, new employment credit exemption for semiconductor companies. Please begin when you're ready.

Thank you. Madam Chair, Colby White, Department of Finance so the Administration is proposing an expansion of the state's new employment credit for tax years 2023 through 2025 by exempting certain semiconductor companies from the geographic requirements of that credit. The purpose of this is to better. It's part of the state's overall strategy to compete for CHiPS act dollars to expand semiconductor development in the state. The qualifying companies would fall under NAICS Code 3344, which is semiconductor companies electronic components.

And the proposal allows for self certification that the Companies plan to apply for funding. Due to the uncertain timing of the CHIPS act application process and the possibility for companies to use the new employment credit in their applications for federal dollars, companies who apply for the. I'm sorry, companies who apply for the new employment credit would still be subject to all of the other requirements of the new employment credit. So this can be viewed as a bit like a hard to hire credit, so to speak.

You have to meet employee a qualifying employee has to meet certain eligibility requirements, such as being an ex offender, Cal Works recipient, EITC recipient, and there are a few others. And the credit itself is good for up to five years. But the language includes authorization for the FTB to request documentation each year that the company did indeed apply for federal funding under the CHIPS Act.

So along with other proposals, including the extension of the Calcompetes Grant program, as well as existing programs such as the R D Tax credit and the sales and use tax exemption for manufacturing, this is part of our strategy, the state's strategy, to encourage California based companies to leverage federal dollars under the CHIPS Act. The fiscal impact of this proposal is estimated at 1.1 million annually in 2324 through 2526 and with that, I'm happy to answer any questions.

We think that this proposal is worth consideration as a relatively Low cost way for the state to attempt to draw down additional federal ChiPs act funds. As is kind of noted in your agenda, there are a number of state tax credit and grant proposals, mostly in the California Competes program, that are aimed also at drawing in chips dollars. And this is in recognition that the federal guidance has suggested that they will be looking for evidence that grant applicants are receiving state support in their projects.

One thing that makes the new employment credit distinct somewhat from the Cal competes pieces is, as the Department of Finance mentioned, the hard to hire targeting component of it, which additionally could help California grant applicants satisfy some of the additional federal guidelines that are looking for efforts to promote kind of diverse workforce and targeting disadvantaged communities. So by complementing the California competes pieces with this new employment credit could help the California grant applicants be more likely to receive those funds.

Thank you. What is the purpose of eliminating the designated census track or economic development areas?

So when we looked at development of this proposal, we looked at, first of all, we were realistic about the size of this incentive and what we're hoping to do here. So this is a relatively small incentive in relation to, for example, some of the incentives that other states are offering to have companies build new fabrication facilities in other states. So we see this more as helping to facilitate expansion of existing facilities within the state.

And when we looked at where these semiconductor facilities were located, most of them were not located within those census tracts that would qualify for the new employment credit.

And how does the elimination fit with the readiness to hire or the need to hire?

I'm sorry?

How does the elimination fit with the hard to hire piece?

Well, the other components of this tax credit are still in place, and in particular, the designation that the employee must be unemployed for six months prior to hire.

Unemployed.

Unemployed is one of the criteria. If they're unemployed for six months prior, prior to hire, that meets one of the hard to hire thresholds. All the other components of the tax credit are in place. It's for good paying jobs. The credit is calculated based on 150% to 350% of minimum wage. So if the calculation of the credit, it's required to have a good paying job, but mainly those hard to hire categories are still in place to facilitate the hiring of those workers, those individuals.

Does the Department of Finance anticipate more interest in the tax credit if those restrictions are eliminated?

We do. And our revenue estimate is predicated on some uptake in that area. Yeah.

Okay. Any additional comments? Yes, majority leader.

So the purpose, as I understand, as it says, to provide tax credit for businesses that operate in high poverty areas and provide long term employment for specified populations. And I assume that's why the geographic boundaries was part of this, because you look at the areas that need the most help, that have the highest poverty rate. And so you're trying to zero in on those areas to provide more employment opportunities and then provide long term employment, is that right?

Yes. What you're describing is the original structure of the new employment credit. Yes.

So if we're saying then that we're going to take out or eliminate the geographic boundaries, then those very people that we want to help get employed and to provide this long term employment to are not going to be the emphasis of this tax credit.

Yeah. This particular exception. So this would accept them from the geographic requirement. It doesn't make an exception for all those other hard to hire components. So just because a business is located outside of the census tract, then you could envision a potential employee being located within one of those high poverty areas. But also, realistically, also, there are still hard to hire populations outside those census tracts as well. But this is also targeted specifically for this particular opportunity. So the nexus with the CHIPS Act.

And just realistically, these semiconductor companies are not currently located. Most of them are not located within those census tracts. So it was just a recognition of that. California has more semiconductor employment than any other state, but we don't necessarily envision that we're going to be able to attract those large fabrication facilities to these. To the areas within those designated tracks, because we would need much larger incentives to compete with other states in order to do that.

And I recognize what the LAO is saying is to draw down on the additional federal chips, grant money. So the money is sitting there because you're not able to use it for the very purpose that it was written for. I get what you're just. It just seems to me that if that was the purpose of it is to get those geographic areas, there was a reason for that, and it's because there's a group of people that normally are not going to get these jobs.

So if we use the money to try to figure out how to employ them and give them those opportunities, that's what the tax credit was for, right?

Yes. And the existing tax credit is still in place for all other industries, but. Yes, you're correct.

Thank you.

Would you be able to provide us with an example of where these businesses might be? The question following the majority leader is if the business is outside the census track. Right. Ideally or potentially, are they in the Bay Area, are they in LA? And how close in proximity are the hard to hire workers in terms of how will they be able to get to that potential job?

Yeah, I can follow up with the Committee with more information on that. Some of them are, as I recall, in the Bay Area. But, yeah, I can follow up and provide more detail on where the semiconductor employment, the data we have is employment. So the economic data that we have is census data. It's on employment. So we have employment by, for example, in various counties and things like that, which can give you an idea of where these businesses are located.

Okay. I'm just thinking counties are big, right? Los Angeles County is huge. I'm just curious if the location of the business, if it's outside of the census track, how challenging, difficult, or maybe not, is it for those hard to hires to get there in thinking about just transportation, relocation opportunity? Just curious as to where they are and where the workers are.

Yeah. I'll follow up and provide the Committee some more concrete data on that.

Okay. Yes.

As a follow up to your question, Madam Chair, if we're trying to bring people in who are from these geographic areas, then perhaps the employer, knowing they're going to get these tax incentives, would then be more inclined to provide other benefits to that employee, maybe relocation or what have you, so that they can then meet the requirements of the geographic boundaries.

It just seems that we're giving up on this part of it rather than trying to be creative and figuring out how we bring those employees in and provide that employment so that the purpose for which this was written initially, originally, could still be that we could still comply with it.

Yeah. I think the location of the business, some of these businesses are quite large, and they can't just move the facility.

I'm talking about moving the employee. So if you get an employee from that geographic area for which it was originally written for, if there is an incentive to bring them in to help with their relocation, then they've complied. The employer gets a tax credit, but the employee then gets to have this employment and long term employment very specifically.

Yeah. So it sounds like what you're describing is a variation of the current structure for the. Because right now it's where the business is located. So the business has to be located within the designated geographic area in order to get the tax credit. So bringing in an employee from a high poverty area doesn't qualify you for the tax credit under current law.

Very good. Thank you for clarifying that. Thank you. Thank you, Madam Chair.

Thank you very much. We're going to hold this item open for the moment and go on to issue number four, the Film and Television Tax Credit Administration. I want to welcome our guests who are here for a must see TV and also must see budget hearing. Thank you for joining us in the Capitol. Please begin when you're ready. The final issue is the resources for the Film Tax credit for the Franchise Tax Board. To accompany any passage of the 4.0 tax program. Please begin.

Good afternoon. Dirk Simmons, Department of Finance. Under the Governor's 2324 budget proposal, the Film and tax credit program would continue to earmark 330,000,000 for film and TV tax incentives each year starting in fiscal year 2526 through fiscal year 2031. The Administration proposes funding FTB to ensure tax returns are processed and returns are issued timely, as well as ensuring improper payments of this refundable tax credit are minimized. I'd be glad to answer any additional questions.

LEO

No concerns. No concerns.

Thank you. Thank you for the presentation. We will consider this proposal in conjunction with the larger conversation related to the Film tax credit program, but understand that even within those conversations, we need to provide the necessary resources for the Department to be able to enact those programs. Any questions?

Just want to make a comment that when we're talking about this film and television tax credit, it's something that's really important to California and making sure that should that be included in our budget, we do as the chair has indicated. We do need to provide the funding for the employees and everything else that is needed. But the bigger picture is the tax credit itself, and I look forward to getting that resolved for California's sake.

Thank you.

Thank you.

Thank you very much. We're going to hold this item open for the moment, and that believe concludes one of our shortest budget hearings that we have had thus far. We will be accepting public comment at the hearing room and on the phone. The phone number to connect is on the Committee website and should also be on the screen if you are watching over the interwebs.

The number is toll free 877-692-8957 the public access code is 131-5447 I want to thank all of our panelists for all of the presentations today. Are there any additional public comments in the room? Seeing none, we're going to go to our comments over the phone. Operator, you may begin.

Ladies and gentlemen, if you wish to make a public comment, please press one, then zero. You hear a tone indicating you've been placed into the queue. You may remove yourself from the queue at any time by pressing one, then zero again. And there's currently no one queuing up. Madam Chair.

That's never happened, ever, in this Committee, which I believe then means we're done. If there are no additional. Is Mr. Patterson on his way? Okay, we will hold for an additional five minutes before we conclude. Thank you, everyone, and welcome to a very exciting, but very short budget sub four hearing. Thank you. Thank you for being our audience for today. Live from the Capitol, it's budget sub four. Thank you. For those watching, we will be back on Monday for May. Revision upon adjournment of session.

Welcome, Mr. Patterson. We're going to proceed with your vote.

The first motion is to adopt a staff recommendation on the vote only calendar. Patterson, Aye. And the second one is on issue three is to adopt placeholder trailer Bill Language. Patterson.

Thank you. That concludes our budget sub four hearing. We are now adjourned. Thank you.