Senate Standing Committee on Governance and Finance

Our IT personnel will put you back on mute when you are done. Once recognized to speak, please make sure you can be seen on the screen. State your name, and then you are ready to address the Committee. For today's hearing, we will be hearing all of the panels of witnesses on the agenda prior to taking any public comment. Once we have heard all of the witnesses, we will have a public comment period for those who wish to comment on the topics on today's agenda.

So welcome to our oversight hearing on the new employment credit. Before we begin, I'd like to ask you to please turn off all your cell phones and take conversations outside of the room so we can hear the testimony presented today. The new employment credit was originally enacted in 2014 and has remained unchanged since its enactment. We're here today to hear about the progress and discuss the successes and challenges of the credit.

We regularly have conversations here in the Legislature about whether the tax credits are achieving the goals that we set out and if they're being really distributed with equity in mind. And so, this is a really important time for us to have those conversations, and hopefully we can address some of those. The Committee will first receive an overview from the Franchise Tax Board of how much the credit has been claimed and what boundaries have prevented businesses from claiming the credit.

Second, the Committee will hear from the Legislative Analyst Office, and after that, we'll hear from the Department of Finance as they review the Governor's budget proposal to expand the new employment credit for chip manufacturers. Finally, the Committee will hear from businesses and advocates that have experience with the credit. The new employment credit has the potential to help encourage hiring in our state and hiring in particular regions and particular individuals.

This hearing will help us evaluate whether or not it may be time to rework or modify the credit. Also, thank you to our Vice Chair for being here today and want to thank the Members as well. And we're going to start and hear our first presenters, and we'll start with the Franchise Tax Board. Susan Maples, the Director of Economic and Statistical Research Bureau, and Denis Armstrong, the Director of Legislative Service Bureau. Welcome.

Good morning, Madam Chair and Committee Members. My name is Denis Armstrong, and I am the Legislative Director for the Franchise Tax Board. Along with me today is Susan Maples, Director of our Economic and Statistical Research Bureau. Today, we are happy to present some key aspects of the new employment credit, also known as NEC. First, I would like to discuss the eligibility requirements to claim the credit. This credit is available to qualified employers who hire qualified employees, receive a credit reservation, have an increase in employment, and pay qualified wages for work performed in a designated geographical area.

Additionally, qualified employers must pay qualified wages that exceed 150 but do not exceed 350% of the minimum wage at the time of hire. For qualified employees, they must have been hired after their work location was deemed part of the geographical area and perform at least 50% of their services in that area. In addition, they must meet at least one of the following criteria at the time of hire. They must have been unemployed for at least six of the previous months.

Separated from the United States Armed Forces within the previous 12 months. Received the federal earned income credit in the previous taxable year. Been an ex-offender, qualified an ex-offender of a felony. Or be a recipient of Cal Works or County General Assistance. In order to claim the credit, the employer must receive a tentative credited credit reservation from the Franchise Tax Board within 30 days of completing the EDD's new hire reporting requirements. This credit reservation requires the employer to provide specific information to confirm credit eligibility.

The employer would then claim the credit the following tax year on a timely filed original return. To date, this credit has not been utilized to the degree that was originally estimated. Though the Franchise Tax Board can't say with certainty why this is, and we do not opine on policy matters, we can point out the practical application of the requirements to maybe shine some light on the usage of the credit. First is the minimum wage requirement. Again, qualified wages for this credit are those that exceed 150 but do not exceed 350% of the minimum wage.

With California's minimum wage being $15.50 an hour, an employer would need to pay wages of at least $23.25 an hour to be eligible. Some employers may see this wage amount as high for a newly employed employee. Next is the calculation of the credit, which is rather complex. First, you multiply the qualified wages, the amount above 150% of minimum wage by 35%, then you determine the applicable percentage by dividing the net increase in full time employees by the amount of full time employees. In total, you multiply the qualified wages by 35% and then by the applicable percentage.

This equals the allowable credit, which ends up being an amount that the employer may deem too small to go through requesting the credit. Also, employers may find it difficult to find employees that meet the qualified employee requirements listed above. Two final items of note. One is that certain businesses are excluded from utilizing this credit. Temporary help, retail trade services, theater companies, food services, casinos and casino hotels, and alcoholic drinking places are all excluded from claiming this credit.

Finally, this credit is required to be filed on a timely filed original return. This means that a taxpayer is precluded from claiming this credit if they either filed their income tax return late or perhaps forgot to claim the credit on their original return. This concludes my portion of the presentation and I will now turn it over to Susan to discuss FTB's reporting requirements of the NEC.

Thank you, Denis. Each year, the Franchise Tax Board is required to produce a report on the new employment credit, which I'll refer to as NEC, and provided to the Joint Legislative Budget Committee by March 1st. The report includes information about the number and the dollar amounts claim of the credit claimed for the most recent tax year available. In addition, the report provides a comparison of the total dollar amount of credits claimed under this section with respect to the department's estimate.

For the most recent tax years for which we have data, 2019 through 2021, nearly 12.8 million in new employment credits were allowed on approximately 1,100 returns over that three year period. This amounts to an average of around 363 taxpayers and 4.2 million per year. New reservations over this same period averaged around 1,100 per year, with annual recertifications required in order to continue to generate qualified wages during the five year period allowed.

Those averaged nearly 2,200 each year from 2019 through 2021. During the first few years of the program, FTB identified that some returns claiming NEC did not qualify and discovered that some tax preparer software inadvertently claimed the NEC in lieu of other credits, such as the enterprise zone credit. In other cases, FTB disallowed a number of first and second year NEC claims for not making a reservation. As a result, FTB undertook multiple outreach efforts over the years to try to help educate taxpayers and tax professionals about the credit as well as boost uptake.

These efforts included distributing informational brochures at small business events throughout the state, including information about NEC and California tax update presentations to tax professionals, publishing articles in FTB's tax news online newsletter, working with the state treasurer's office for the California Business Incentive Gateway, also known as CBIG portal, to include NEC information, maintaining an interactive website with credit information as well as online mapping, reservation and employment certification tools, and working with the California Department of Technology to keep the DGA map for census tracks functioning and useful for taxpayers.

However, despite these efforts, FTB did not see the number of reservations increase substantially in subsequent years. In our most recent new employment credit report, published in March of 2023, we did see the number of returns claiming the credit decline from 403 in 2019 to 378 in 2020 and 309 in 2021. However, total credits claimed rose from 3.6 million in 2019 to 4.2 million in 2020 and 4.9 million in 2021, with not all timely returns having been processed at the time of this publication.

And while it's difficult to say specifically from year to year which industries benefit from this credit, it does appear that skilled trade industries such as construction, electrical, plumbing, roofing, and welding type companies have been regular recipients of this credit over the years. A list of companies claiming NEC tax credits by tax year, along with amounts claimed and the number of new jobs created, is available on FTB's website. At this time, we'd be happy to take any questions you might have. Thank you.

Thank you very much. You know what? I neglected to also introduce Brian Uhler from the Legislative Analyst Office. So if we could welcome him to the table while we could take questions at the end of the entire panel. So my apologies. You could have spent this whole time sitting there. Welcome.

Thank you, Madam Chair. Brian Uhler from the LAO. And so, I want to focus my comments today on kind of this issue that we've heard a little bit from the FTB about the underutilization of the credit, especially compared to what was expected early on when the credit was adopted. So to give a little bit of context, when the credit was put in place in 2014, the Department of Finance estimated that it would cost the state $69 million in 2015, and so we've heard from FTB that that number is more like 3 to 5 million a year.

And so, the first question that comes to mind is, why are so few businesses using the credit? We heard a little bit from FTB again, and just to add a little bit more detail on that. So, one is that the wage threshold is relatively high, especially when considering the target population. So if we look at kind of occupational wage data that's maintained by EDD, of the occupations that they track wages for, about half of them have starting wages that are below the 150% of the minimum wage.

So you're immediately kind of ruling out about half of the occupations in the state, and then only about 6% of occupations have starting wages that are within $5 of the 350% that's required to get kind of the full benefit of the credit. So you have kind of a pretty narrow subset of workers who this can apply to. A second element is that the credit is a small share of the hiring costs in most cases. So while an employer might be able to get 20% of their total wage costs for someone if they're paying the maximum amount of 350% of minimum wage, in most cases, most of these workers are probably going to be hired at something closer to the 150%.

And for those workers, the credit represents more like a few percent of the total wage costs for the employer, which may not be enough to really move the needle for a lot of employers. So another question then is whether or not the fact that the credit is being used so seldom, is that a problem or not? And I think it's important to kind of start out from a big picture and think about the trade offs that economic development programs face. On the one hand, of course, we want the programs to be attractive to the target population.

We want businesses to want to use the programs, but there is a trade off we face. We also want to make sure that we're targeting the financial incentives only towards employers, encouraging them to do activities that they wouldn't have done otherwise, to hire someone that they wouldn't have hired in the absence of the credit. And also, we want to avoid having the dollars go towards activities that the Legislature may not have intended to be encouraging.

And the new employment credit attempts to kind of balance this trade off by being very narrowly focused, as we've heard. If you think about, again, considering that we're talking about kind of hard to hire populations and that there is a relatively high wage threshold, it's reasonable to think that a lot of businesses would be making these kinds of hires without some sort of financial incentive. So by having this narrow targeting, you are kind of pushing the balance one way on that trade off of trying to be very safe about only providing incentives where they might actually kind of move the needle for an employer.

And also thinking about the historical context of enterprise zones, it's not entirely surprising that the new employment credit was crafted in this narrow fashion, given that some of the concerns that arose with enterprise zones when they were eliminated in 2013 were that there was kind of a general academic consensus that it was not an effective program, in part because it was too broadly targeted. And then there also were kind of a number of stories and anecdotes about maybe misuse of the enterprise owned credits and used for purposes that the Legislature might not have intended it to be used for.

And so, the narrower targeting of the new employment credit was in part reflecting some of the attempt at lessons learned from the enterprise zone program. And I think we would agree that the narrow focus of the new employment credit generally does make some sense. California does have a broadly scoped kind of jobs program, which is the California Competes Program, that does have a number of additional kind of oversight mechanisms with the competitive allocation and oversight that this credit doesn't.

And so it does make sense for that to kind of stay the state's kind of main focus for a broadly focused jobs program. That being said, we do think there are some things that the Legislature could consider to kind of broaden the margins of this program to try to make it more useful for employers and maybe help further some of the goals of the program. One would be to right now, for an employer to be eligible for the credit, the employee has to perform at least half of their work within the designated areas. Another option could be to expand that not to just where the workers perform, but where the workers are living.

So either a work or a residence requirement for receiving the credit. Another option could be to allow additional industries to be eligible, in particular considering including retail and restaurants. And a third option could be lowering the wage threshold, perhaps bringing it down to minimum wage, and thinking of the credit more as a way of encouraging workers to boost wages more than the law would require them to pay. So with that, I'd be happy to take any questions.

Very good. Thank you very much. Senator Seyarto.

Thank you. First, a definition timely filed. Is that April 15, June 16, August 16, or October 16, which is the timely file?

Good question. To me, it's all of the above.

Right. And to businesses, it's sometime after April 15.

It does include the extension.

So the extensions all the way to October 16 is timely filed?

For a calendar year filer. Yes, sir.

Okay, so that helps a little bit. So what I'm kind of hearing is that we created a tax credit for underemployed people to be employed, and we want the employers to do them the favor of hiring them. Taking a chance maybe on people that sometimes people see, hey, I don't know if that person is going to be the best employee that signs up for this job. And then we make them go through a process that's almost impossible.

And it's kind of like when you get the rebate, you get something, you have a rebate, and then you go through all the rules of the rebate and you throw it in the trash because the $20 is just not worth it. And that's what I'm seeing here. And that's not to say that it's not helping some people. I think we just underestimated how many people, how many employers, after looking at the gauntlet of stuff, would say, oh yeah, we're in on this.

Because it's not worth it to their business and their mental health to try to go through a process that essentially at the end they might fail because they might not even be eligible for it. So you want the goodwill of the employers, but we're putting them through a process that makes that goodwill not worth it to them. And so I think I'm seeing that problem, but it's still helping people. And so the people that it helps, that's great. That just means there's more money being allocated than we probably need to until the need rises.

And I think that's more of what we should be looking at, is how do we make it easier for the employers to access this and participate? Because that's what we're asking them to do, participate. And when you ask somebody to participate something in something, you don't beat them over the head. You kind of welcome them and then try to make the process easy enough where they feel incentivized to use it.

And this doesn't look like that, although some people have gotten through it and gotten some help. You don't scrap the program, but you may lower the expectations of who's going to use it. And then the budget is adjusted accordingly. And if more people start using it because we've made a better program, then you can adjust the budget up a little bit. So those are my comments or questions. Thank you.

Appreciate it very much. And this is really the reason for the oversight hearing, is for us to figure out if there's some changes, because some of these are, well, the details are what the Legislature imposed on it, on the program. And the question, know, it didn't work exactly like we thought it would work. So, Senator Blakespear?

Yes. Hello. Good morning. Thank you for the information you provided. It's very interesting. This is my first hearing on this Committee, so I'm eager to dive in here. So, one of the things that stood out to me was that if we are trying to hire these hard to hire populations, I'd love to know the data on how many individual employers and employees were hired because the information about it being the skilled trades that are largely using this, we could have like one employer who gets 3 to 5 million dollars in these tax credits.

And that's the one that's figured out how to run the gauntlet here and figure this out. So that was a data point that I didn't know if you had provided. But I was curious about.

Sure, I have some information. So what happens is that they have to, each year, in order to get the credit, they have to make a reservation, and it's a reservation per employee. So two things happen. They have reservations for new employees each year. So those are new hires, but the credit can also be used over a five year period. So each year, if the employee is still with them, they have to do what's called a recertification.

So then annually, they would come in and make a reservation and recertify that they are in fact, an employer who still qualifies and that the employee is still, like, for example, working 50% of the time in the geographical area. So they recertify each year. So let's see. In 19, 20 and 21, we had an average of about 1,100 new employee reservations and an average of about 2,200 annual recertifications.

Okay, so when you said 1,100, that's employees, but how many employers?

Employers, it was about 67 and 68 for the 2020 and the 2021 tax year. So those are the employers that are coming in and doing the reservations. That's one employer. But they could be making, as you mentioned, several reservations for employees. And that's also different than who's claiming the credit, because the credit is claimed by not only if you have, let's say, an S corporation.

The S corporation can take the credit, they get a third to offset the percent and a half that they pay on their tax return, but then that credit also flows through to all the shareholders. So then you can see a lot of personal income taxpayers also reporting credit on their returns. So it is a little bit of a complex thing, but I'm just trying to kind of explain why the numbers are a bit different. But I think to answer your question, in 20 and 21, we had around 67 to 68 employers make reservations for the credit.

So I guess I would ask the panel if we think that that is a good number, because to me that seems for the complexity of this program and the amount of administrative cost, and I don't know if that's really meeting the goals, to only have 68 employers in the entire state being able to access this. I would suggest that when we have 83% of claims were invalid. Of the 1829 claims, 83 were invalid.

To me, it does seem like we have a process problem, because these are employers who are trying. There are a large number, as my colleague, I think, pointed out, who decide not to try because it's too complicated, but these are ones that actually are trying. So it does seem like we need some reform in that area. And then one of the other points that I think was really important, or things that stood out to me, is that I would like this to apply so that there are underemployed women who get hired.

And when it's trades, electrical, and the list that you described, I perceive that to be a very male dominated profession and professions. And so it is very important to continue, of course, to serve the trades, but also trying to provide a tax credit, in the more general sense, to have hard to hire populations be hired. Some of the earlier, in this background document that was provided, it did seem like some of these have maybe changed in terms of who we are targeting. So it does say that it used to include low income families with children.

I don't know if that's still one of the categories, but there might be more women head of households in that category, but ways to make sure that we're incentivizing the hiring of women, too, not just the hiring of men. So I think that a gender look would be something that's important here. And then let's see, the last thing was, I think it's a really great point about the average salary having to be $23 per hour or average hourly wage means that what types of employers is this really appealing to.

Especially in higher poverty, lower income communities that we might be kind of missing here. So lowering that amount, to me, seems like that might make sense as well. And I assume we're going to get to the future in the next person who speaks, but this question of expanding it into semiconductor chip research and development. So I do have a lot of questions about if these same populations would need to be hired into that, but I assume you're not covering that part.

That's correct. I think that the next panelist from Department of Finance will be presenting on that one.

Okay. Okay. Thanks very much.

Senator Dahle.

Thank you, Chairman. So I just want to. I'm an employer and I want to give a little background about how we operate so you can maybe understand the challenges that we face as trying to get a workforce. And when we talk about hard to employ people, there's a reason they're hard to employ. There's a lot of challenges when it comes to making sure they're able to get the job done. And actually we have to make a profit.

I know there's a lot of people in this building that think that that's a bad thing, but we have to make a profit at the end of the day to stay in business. And so my wife and I have, over the years, tried to employ hard to employ people, people out of prison, people who have addiction issues.

And when the minimum wage was at $9 an hour, you can take a risk on a person and try to teach them that they need to show up on time, that they need to not be on their phone, that they need to actually provide a service for the company, and that's fine. We moved the minimum wage up to $15 an hour, and, at that point, it's like, okay, am I going to pay $15 an hour for an individual who has no experience at actually even showing up or working and getting the job done?

And on top of that, you have payroll taxes. So the $15 an hour is the starting spot, and then your workers comp is based off of every dollar per hour that you pay. Your unemployment tax, which has now gone up because of all the fraud we had with the EDD, so that's another cost that's added onto that payroll cost. So when you get to $15 an hour, you're typically paying all in cost of $23 to $24 an hour for that employee. That's a fact. That's the truth.

That's what real people deal with every day in California. So why would you then hire somebody who really doesn't have the skills that you need and try to go through the gauntlet of things that you have to have to get to meet that criteria, to actually employ that person? And this is across the board. People I work with in our business who are all trying to hire people. There's a shortage of non-skilled. I'm talking about you can drive through In-N-Out, and there's a sign at In-N-Out.

There's a sign at Carl's Jr. There's a sign everywhere you go to get a hamburger, paying 20 something dollars an hour to get a person to fill the spot. And many restaurants say, hey, be kind to the people that showed up today because they're here at least, and we thank them for their service. So the workforce pool is very limited when it comes to skilled. And when I say skilled, I mean just people that will show up and actually be there every day.

If you hire somebody and you have them operating a machine on the farm and they're not there to operate that machine, that means five other people can't work because the operator of the machine isn't there that day. These are the challenges that we are faced with as employers in the state of California. And on top of that, we continue to drive the cost of employment up and when you start talking about hard to employ, there's a reason they're hard to employ.

They have a lot of other things that you have to deal with to get them to actually do the job and get the job done no matter where they live, it's across the state. So in my mind, I'm going to give you an example of a Bill I voted for last year, that it was a Kamlager-Dove Bill that allowed people who had lost their driver's license for whatever reason to be able to get to work and get their license back so they can actually get to the job.

Especially in rural areas where you have to travel to get to your job, you have to have a driver's license to get to that job. That's an incentive that works for an employer who has somebody who has fallen on hard times. So I just want to say that as an employer, I'm not going to take the risk on that and have to go through a program that is so cumbersome when I can just go ahead and pay the $25 an hour and you actually get an employee who is going to show up to work and actually do the job.

So if we want to incentivize companies to do hard to employ people, we have to come up with ways that give them the ability not to have to pay. If you go to 300% of the minimum wage, remember that your payroll taxes goes up 300% too, because all those other costs are in there. So why would you do that for a tax break that's not going to help you? You can just pay 150% more and you actually get a qualified person.

So that's why people don't use the program. And that's why I wouldn't use the program because I would just rather go pay that smaller amount as a higher wage and get a skilled worker. So those are the challenges that you're going to be faced with until you come up with a way that truly helps that employer have the ability to be able to recoup those costs. Because if you're going to put a number on it of 300%, I'm going to have to pay that tax credit isn't really there because the payroll taxes are so high.

So we need to look at holistically and we need to talk to the people who are trying to do it. Because if you look at the skilled and work trained force, those are high paying jobs and they already have a pipeline of training those people to get there. That's why you have such a small amount. I mean, it's absurd to think that we only have 67 people accessing a program when we have millions of businesses in California that would love to take advantage of this and help those disadvantaged people get a job.

Thank you. Those are just comments. I know you probably don't have a silver bullet to fix it, but that's the challenge that an employer faces every day in the state of California. Employees are the highest cost. The highest cost of doing business is not the capital that you put into the business. It's the everyday cost of an employee, and it's the highest risk.

You're acceptable to lawsuits, you're acceptable to OSHA rules. All these things that come through are risk and is basically based off of the employees that you have. So those are the challenges that we face in California. And California by far is the hardest state, that I'm aware of, to employ people and try to reduce that risk. Thank you.

Thank you, Senator Dahle. I appreciate your practical framework for talking about hiring and some of the challenges. This is a tax credit that the Legislature passed and supported and got signed. So the question becomes, for this particular panel, because I think we're going to hear what the Governor proposed in the next section and then from the employers at the end, right?

Which is there are a number of, and I think it was Senator Blakespear that talked about how many people applied for it and then were disqualified. If, in fact, those people had qualified, what would have been the difference to help them to qualify? Can you quantify 30% did this or 20% did this that made them ineligible?

I don't know that I'm familiar with the statistic, but I did wanted to share a little bit more about the statistic that I gave about the number of corporations that we saw with reservations that claim the credit. We are talking about COVID years in 20 and 21. And one of the requirements of the credit is that they have a net increase in employees. So, for example, if a company who had hired qualified employees had a net decrease in overall employees, they would not be entitled to the credit.

So in the COVID years, I think we have to be considerate of the fact that a lot of people were laid off. And so, in order to claim those credit in those years, they did have to have a net increase, so that could be one of the reasons why. Because, as I mentioned in my remarks, we did see the number of taxpayers who claim the credit go down.

But the dollar amount went up to your comment, probably about wages having being so high because businesses are trying to find labor and having to pay more. So we did see the credit amount claims go up, but the numbers went down. And so I just wanted to add that little bit about it, because I did only give the 20 and 21 statistics for businesses that got a reservation and claimed the credit. So I'm not really sure about the 86%.

I know in the beginning we did see folks who were claiming the credit, but we did notice that some people had thought that they were claiming the easy credit, because the easy credit also has carryover provisions. And even though it is sunset, we still have people claiming the easy credit. So I'm not exactly sure why we had 86% that were ineligible, but a lot of things, it's because they weren't paying high enough wages.

But also that piece about the recertification if the employee is no longer working 50% in the geographical area, or if the wages exceed 350 or below 150, that percentage. Denis talked about how complicated the calculation can be, and also if they don't have a net increase in employees, it doesn't matter. Any of those other pieces, the net credit is zero.

So, the formula for determining whether you're eligible for the credit or not, is that something that's in the statute?

Yes.

Was that based on other? A lot of times what we do is we pick up the language that are used in other tax credits and use that because then it's easier, in terms of the Legislature, to understand. Is that this is based on what we did in this other tax credit, so it's going to work kind of thing? Is it language that was used or has been used in other tax credits, hiring tax credits. What is it related to? I guess is what I'm struggling with is, why make it so complicated?

I believe this was a unique equation for this specific Bill. So the complexity of it is there was a lot of things that went into this credit and the reason why it was designed the way that it was similar to what Mr. Uhler was speaking on. And so, the complexity of the calculation was just something specific to this particular credit, not brought in from a different hiring credit.

A lot of times, the purpose of making things complicated is so that it's not oversubscribed or you're trying to reach a goal that is hard to reach, and so you figure out a way to set it up. Can you think of any reason why it needs to be that complicated? I'm trying to figure out if there's ways we can simplify this so that people can look at this, businesses, and say, it works for me or it doesn't work for me, without having to go through a complicated CPA calculation.

Sure. I'll let Mr. Uhler speak to that.

Yeah. As I mentioned, we would suggest that it does make sense to, in general, keep the kind of narrow focus of this program. But I did mention that I outlined a few options for kind of making incremental changes. You're hitting on another one here with the kind of the net employment requirement, and you're going to have a panel of kind of folks from the employer community up later.

Another important consideration would be places where it seems like we have process that isn't really contributing to that kind of important narrow focus of the program. Deciding whether or not all of that process is necessary would also be a good idea. I think one thing.

By that you mean. Excuse me for interrupting you, but for example, the reservation requirement?

Sure.

Assuming that, just so it doesn't get oversubscribed at the beginning, but if we're not even using 10% of the credit, maybe that reservation may not be necessary.

I think that there are a lot of people also that are denied the credit because they didn't get a reservation. And that reservation process, it's pretty quick. They have to do it within 30 days of hiring the new employee. So if they're just hiring the employee and not thinking about the new employment credit, and maybe the tax professional suggests later on that they could have qualified, they may try to claim that credit, not realizing that they didn't get the reservation, and so therefore it would be denied.

Well, I'm just wondering whether the reason for the reservation is so that it's not oversubscribed and you know from the get go that you're either going to be eligible. Well, you may be eligible for it or not, but I'm just trying to figure out why the reservation?

Typically, the reservation systems are created to allocate the credit, like you're saying, Madam Chair, to make sure that it's not oversubscribed.

Got it.

We have, in developing the credit reservation, although it is one of many steps to take the credit, we have made it as simplified as possible so that taxpayers aren't overwhelmed when they go onto our web page to reserve the credit.

Yeah. Just one final thought, Madam Chair. I think one thing to be careful about is I think there's been a number of good potential ideas to explore in terms of maybe changes to the credit. One thing to consider would be that there could be a disadvantage to making a whole, you know, wholesale change to the credit, changing the reservation, changing the net, you know, changing the limit, all these things all at once.

In terms of one being able to see what benefit did we get from each of those changes. But the other is that, again, maybe a little bit going back and learning some of the lessons from kind of the enterprise zone experience and being cautious about not going too far back towards the old paradigm that this credit was, I think, in some sense, intentionally written very tightly to avoid that. I think we've now have enough experience to see maybe a little bit too tight.

We can look at some ways of trying to make this more effective. But thinking about, okay, what are a few things we can do now look at it in a couple of years? Do we still need to expand it more? An incremental approach may be one way of ensuring that we kind of don't go back to the paradigm that we were trying to avoid before.

Got it. I appreciate that very much. Thank you. Yes, Senator.

Yes, thank you. I mean, it just really seems to me, though, that one of the biggest problems, the initial reason this was so oversubscribed was because state law allowed cities and counties to draw these census tracts to include these huge sections that were not predominantly low income or have high levels of poverty. And of course, that alone just seems like it's such a big factor. So it seems like the pendulum is really swinging here. So we had it really oversubscribed.

Then we created a program that was so constrained, and you have to really run the gauntlet. And to me it seems like eliminating the reservations entirely and to say, to expect someone to have the sophistication, which means hiring the consultants and the attorneys and the accountants who have the sophistication to know if you're going to hire this person within 30 days, you have to tell the government about it. That just seems to me ridiculously onerous.

Eliminating some of these things entirely and recognizing that because we don't have the same system of cities and counties managing these enterprise zones and drawing these census tracts, that created the abuse in many ways, we're in a different environment, basically.

So you're urging caution, but it just seems like we're so far over here with this program and the amount of things you described that was the government trying to get more involvement, going out and talking about it and trying to explain it and having educational seminars and all this. It just seems like a complete waste of time. Like, let's create a system that's actually straightforward and not hire all these people to try to get people involved in a program that is so constrained. So to me, that seems like it's really clear from what this data shows.

I would like to make a comment in regards to the entirety of the program. It is important to note, as we've been mentioning, that there are a lot of different aspects of the credit that lead to the complexity. As Ms. Maples mentioned earlier, the credit reservations that were actually made, there's quite a few of them. It's just about the eligibility of them just weren't there once they've actually tried to claim the credit or we evaluated the employers that are claiming the reservation.

So it's important to note that that just removing the credit reservation, I'm not sure that that would solve necessarily the issue that you guys are mentioning today. It would require multiple facets of the credit being reevaluated.

Very good. No, I understand that it's a question of, I do think it makes sense to take an incremental approaches. The question is what's the first increment that should be done? And hopefully we get that from the employer panel when we have an opportunity to follow this panel. So are there any more questions of this panel? Thank you very much. I appreciate your information today was very helpful. Very helpful.

Thank you.

Thank you.

Right. Next we're going to hear from Nick Thomas, who's the budget analyst with the Department of Finance on the Governor's proposal.

Welcome, Mr. Thomas.

Let's see someone great. Good morning, Madam Chair and Members of the Committee. This is Nick Thomas with the Department of Finance. I just wanted to make a quick comment on the discussion around the reservation system, but before we jump into the administration's proposal. So one reason for having a reservation system is to ensure that we're not necessarily subsidizing behavior that already would have happened. That's always kind of a consideration with tax expenditures.

So in this case, we want to ensure that employers are also looking specifically at this incentive and making decisions based on that. So that's one reason to have a reservation system. So jumping into our proposal, so as part of the Governor's Budget, the Administration is proposing an expansion of the NEC for tax years 2023 through 2025 by exempting certain semiconductor companies from the credits geographic requirements. And this is part of the state's overall strategy to compete for federal dollars under the Federal Chips act.

So in order to qualify for this exemption, the company would need to fall under NAICS code 3344 which encompasses semiconductor and electronic components. And they would also have to also apply for, or plan to apply for federal funding available through the CHiPS act. In the first year, a company claims the credit for a qualified employee. The proposal allows for self certification that they plan to apply for funding.

Due to the uncertain timing of the Chips act application process and also the possibility for companies to use the NEC in their Chip Sac applications, companies who apply for the NEC would still be subject to all other NEC requirements with the exception of the geographic requirements, and they would also have the additional NAICS code requirement.

I would also note that an employee can qualify for up to five years, and the company would need to be able to provide documentation upon request to FTB after the first year that they did apply for federal funding under the ChipS act, along with other proposals, including the extension of the California competes grant program and existing programs such as the R D credit and the sales and use tax manufacturers exemption.

This proposal is part of the state's overall chipsack strategy, which aims to incentivize semiconductor companies to invest in California based operations and leverage federal dollars. Furthermore, the proposal supports the state's equity goals, and it aligns with the Department of Commerce's guiding principle of generating benefits for a broad range of communities, and it encourages linkages to underserved populations. The fiscal impact of the proposal is estimated at $1.1 million annually from 2324 through 2526 and with that, I'm happy to answer any questions about the proposal.

Questions why would you exempt the geographic areas. Those are the determination of how we know where they're disadvantaged folks who really need the companies to locate so we can empower them to rise up to a level of employability.

Yeah.

So specifically, looking at the geographic areas, there's only certain areas of the state that employees can currently work in to be eligible for this credit. By exempting these companies from that requirement, it would make it more likely that hard to hire populations would be hired under the new employment credit. So it basically just removes one requirement for the businesses I understand there is. Right.

So they're all going to be located in the Bay Area, where it's already a competitive market. Mean, the reason we do tax credits is to help the disadvantaged populations be able to get into the workforce. And that's the goal of the legislation that we passed in the past. But this is basically what I heard you say was we want to draw down the federal dollars so we can attract those businesses here and we're going to put them wherever the skilled force is.

The company will be there so they can actually get the people to build the chips. That's what I heard. I mean, in a roundabout way, that's what I heard.

I do acknowledge that. But again, so it is focused on still hard to hire populations regardless of where they might live or work. So even though it's not looking at specific regions of the state now, it would still encourage folks who would otherwise have difficulty being hired. So it would make it more likely that the credit would be used by these employers.

Yes, Senator.

So basically what you're saying is that these companies are already based likely in the Bay Area, and we want to incentivize hiring certain workers.

But it sounds like the subtext of what you're saying is that we're actually less interested in having a company start in a disadvantaged area and be based in a disadvantaged area, so that that's where the work would take place and more interested in just making sure that these companies are as successful as possible so that we can compete and have a supply chain of semiconductors that we need in this country, in this state. Do you think that's an accurate statement, that that's the subtext?

This is really looking at the nexus of the chips act in the current moment. So given the fact that there are billions of dollars in federal funding on the table, the Administration is looking at ways to incentivize that to take place in California. And so it's really looking at just trying to leverage the current NEC in a way that would make it more attractive to help companies that are looking at funding through the chips act. So that's the basis for the proposal.

Very good. So do you have a map of the geographical areas that you believe are targeted by this credit?

Under the current. Yes, under current law, I believe the Franchise Tax Board has a map on their website that we can probably share with the Committee.

Okay. Just to be sure, we're talking about the same.

So it's the former enterprise zones and then the designated census tracks that are currently qualified under the NEC.

Yeah.

Okay. And so my questions are very similar to Senator Dolly's. And the question that I have is this is probably a little beyond your pay grade in terms of a question, but I want to put it out there. One of the issues that is driving communities in my district is vehicle miles traveled.

And the use of vehicle miles traveled is part of a land use, which is if you're going to be building something in your community that causes people to commute, then it's going to cost you more. And, zero, by the way, we're not going to fix your roads because that would induce growth. So many people have moved into rural California to live but work in an area where they can earn a bigger salary.

And what that's done is it's raised the cost of housing in rural California because we don't have the wages to support it. And we continue through our tax policies to incentivize the growth in the urban areas that haven't built the housing. And so more and more people are forced out.

And I'm trying to figure out, theoretically, the people in my district might be able to get a job working at a semiconductor facility, but they're going to have to travel, and they'll have to travel at least 2 hours to get anywhere that would be near that kind of.

So to me, having the facility geographically located in rural California, which is where you have the lowest wages and the most potential for employment that are consistent with this particular tax credit, we would reduce the vehicle miles traveled if we put it in rural areas.

And I know there's a number of Senators that have been talking about this vehicle miles traveled issue because we're incentivizing businesses in the activities that we do in communities that don't have the housing and are going to have to bring in people from other areas.

So I'm a little concerned about the geographical elimination because I think what we really want to do is emphasize hiring people where they're at instead of having to have them travel a long distance, because then our greenhouse gas goals are not being met because of that.

But the other thing, this is a question really for follow up, is that the Federal Government has incentivized a number of industrial activities, and I'm wondering why we don't extend the tax credit to the kinds of companies that are doing new technology to meet some of the goals that we've set in the State of California, such as carbon capture. In my district, there's the potential to do significant amount of carbon sequestration and carbon capture, and it's new.

It would fit within the geography of the Central Valley, but also the geology as well. And so I put that out there. That's not the governor's proposal. I understand that, but it just seems to me that there are significant federal dollars if we're going to try to get the chips dollars, and I have no quarrel with that. I think that's really important.

I think we should also look at other manufacturing opportunities that help us meet the goals of the state, if not the country, as well as we look at this.

Yeah, I appreciate that comment. I would just say, too, with this proposal, the Administration tried to make it very narrowly targeted, and part of that was a recognition of the current revenue situation that is much gloomier since budget act. So that's one reason why we didn't necessarily, given the nexus of the Chips act and kind of the moment we're in, we made it very narrowly focused on that population of companies.

Senator? Yes. Thank you.

Thank you, chair. So presumably this was done in consultation with this industry in terms of the proposal that made it into the Governor's Budget. So the research, manufacturing or research and development of semiconductor chips. I read in the briefing paper that you're proposing a modified reservation requirement. So this reservation requirement is for the qualified employee to be reserved before the last day of the month following the close of the taxable year.

Basically, these modifications that would apply to this business, it seems like we should consider applying these things to all of the businesses that are involved in this, not just this one particular industry. But my question is that, and you can respond to both parts of that, but is that this seems to be the only thing, at least that made it into the summary. That's a proposed change.

So of all of the different programs, the different reasons that the NEC has been underutilized, it seems like this reservation system is the thing that is the biggest deal to the Governor. And I just wonder if there are any other things that you think are relevant in terms of modifications and amendments that could apply to the whole program.

Okay, so I'll take both of those. So, on the reservation system, it does make a change to the reservation system, but only for tax year 2023. Currently, a company has to make a reservation within 30 days of hire for 2023. We made it within 30 days of the end of their taxable year. And that's just given the timeline of when this would be enacted. So it would be enacted partway through the year in June, July of 2023.

And so that's to give companies potentially more time and to allow FTB time to make changes to their reservation system. So the reservation system for 2024 and 2025 would still be exactly the same as what it is currently for companies that aren't subject to this exemption. And then in terms of changes. So, yes, there's the change to the reservation system in 2023. The primary change is removing the geographic requirements that are currently.

So a worker has to perform the majority of their work in either a former enterprise zone or a designated census tract. And so if a company is applying or plans to apply for federal Chips Act Dollars, they would be exempt from that geographic requirement, but they would still be subject to other requirements that are currently under the NEC.

Okay. It seems like this has to be targeted to create a certain number of jobs in the governor's mind. So do we know what those numbers are?

So it's a pretty uncertain estimate just because there are a lot of decision points that would be made before that. We estimate somewhere in the range of potentially 50 to the low hundreds in the number of jobs that would be added based on this or that would at least be claimed under this credit.

Okay. And the idea is those are jobs that would probably not go to disadvantaged people.

It would still be subject to the employee requirements. So they would either be current recipients of the EITC, currently unemployed. There's a whole list of requirements, and those would still be subject to this. We're not changing that.

Right.

But I'm saying, in terms of reaching our policy goals, that those employees would not be hired otherwise. That's the premise.

Yeah.

Okay. Thank you.

Very good. Any other questions, comments on this speaker? Thank you very much for being here today. We appreciate it.

Thank you.

We're going to move on to our third panel, and we have four witnesses. Steve Abbott, who's the head of public policy and government affairs. From Gusto, Adam Kane, managing Director, Allegis Maxim companies, Terry Brennan, SCIU, California, and Chris McKaylee. Prayan McKaylee, welcome. Why don't we start with Mr. Abbott?

Hello.

You guys will hear me.

We can. Welcome.

All right, well, thank you for having thank you for having me. Thank you, Madam Chairwoman and Members of the Committee for allowing me to testify today. My name is Steve Abbott and I am the head of public policy and government affairs at Gusto, a people platform that empowers small to medium sized businesses. We provide information through our platform to educate business owners about tax credit and other resources available to them.

This is an important hearing and I applaud the Committee for undertaking the essential work of trying to determine the efficacy of tax credits designed to incentivize businesses to hire people from underserved populations. While the focus of today's hearing is on the new employment credit, I want to share Gusta's perspective on behalf of our customers on the barriers businesses face when trying to decipher the requirements of different government programs available to them.

At Gusta, we enable small and medium sized businesses to pay and take care of their teams by helping them stay compliant with applicable laws and regulations, offering a full suite of benefits such as healthcare, retirement, and all the tools they need to operate a business. We have tens of thousands of customers in California with fewer than 25 employees, which gives us a unique insight into the challenges they face and the resources they need.

In preparation for this hearing, I consulted with our internal teams to see if we had any sense of the utilization of the NEC by our customer base, and without a more comprehensive survey of our customers, we were unable to make a determination. This is primarily due to the NEC being claimed outside of payroll tax withholdings and data limitations. For example, we do not collect data on whether or not a new employee is from a special population.

Although we do not currently support the NEC within our product lineup, we do expand resources on an internal knowledge base expand resources on an internal knowledge base that details how employers can qualify for a myriad of resources available to them, as well as an externally facing blog that helps business owners make sense of policies such as paid leave credits, minimum wage laws, and the state small business credit initiative.

We provide this information based on customer questions about specific issues and also proactively publish materials on new federal and state policy implementation. To that point, we have heard very little about the NEC. Although we expend resources trying to educate our customers on programs that can benefit them, we have to prioritize compliance with existing laws and regulations so our customers can avoid punitive actions.

To the point, small businesses that typically don't have a dedicated HR and General compliance employee are deluged with information and there's an opportunity cost to the owner, expending time and effort on a tax credit that is cumbersome to file with a marginal monetary benefit. So how can we desire a better credit that will make a meaningful difference in achieving the goal of getting more people from special populations employed? In short, think about the end user of the credit, which is the small business owner.

I will point to one example that isn't perfect but works very well, and that is the research and development tax credit. At Gusta. We do have product support for the R D federal tax credit, and this is due to the fact that the majority of the qualified expenses come in the form of employee salaries and contractor payments data we have being a payroll provider.

California's R and D state credit is substantially similar to the federal credit, making it easier for us to make a determination on whether a business qualifies. Last session we were proud to lend our support for SB 1349, a Bill that would create a work opportunity tax credit for California, which mirrors the federal work opportunity tax credit. This effectively makes it easier for an employer to determine eligibility and increase the incentive for them to file.

The upshot of this standardization is a higher probability of achieving the stated goal of the NEC employing more disadvantaged people. Despite the precariousness of the macroeconomy, Gus's data show that small businesses are still facing a tight labor market with upward pressure on wages. We have historically Low unemployment and I would encourage the Committee to consider the positive impacts that a few $1000 in tax credits would have on a business owner's ability to hire new employees, increase wages, or expand benefits.

Calibrating the size, scope and complexity of tax credits is essential, especially during times of fiscal strain on state budgets, so that they are targeted and achieving the purported goal of incentivizing certain behaviors, such as increasing employment among special populations. We thank you for inviting us to testify today and for your commitment to helping small businesses and their employees within the State of California. Thank you, and I'm happy to answer any questions.

Very good. Thank you, Mr. Abbott. We're going to go through the panel and then we'll take questions, but I appreciate your comments. Very important. Next, we're going to move on to Adam Kane, managing Director of Allegiance Maxim Companies.

Thank you, Madam Chair and Members of the Committee. Appreciate the opportunity. My name is Adam Kane. I'm with the allegiance Redwood Maxim companies. We are a large business. We have about 60,000 employees in California and a variety of different types of companies, including staffing support, technology support, manufacturing, distribution support, home care, senior living, dealerships and grain milling and other agricultural products.

So a very broad based employee base and proud to have that level of investment in California, even for a large business like us, NEC is incredibly complicated and something that we don't participate in, despite targeting a lot of the types of employees that we believe were intended to be included. Because of the complexity, it's really not feasible to participate. And I really think it comes down to what is the purpose of the NEC.

Is the NEC supposed to be helping underemployed or potential employees who face barriers to entering the workforce are difficult to employ people? Or is it really supposed to be helping subsidize specific industries? And I think the way it's structured, as well as the governor's specific proposal, although I understand the strategy behind it, is really sort of focused on helping specific industries as opposed to really focusing on are we looking to help underserved potential employees.

Examples of where this credit sort of diverges from helping underserved employees is some of the requirements, like the geographic requirement. We can be very precise in understanding what type of underserved person or potential employee this could help, as opposed to limiting the geography. I think the excluded industries is a big problem. A lot of people entering the workforce at Low skill levels enter the workforce in those specific industries.

So by excluding those industries, you are by definition excluding this opportunity for many of the lower skilled workforce. And then even this case of where the excluded industries are permitted if they're smaller businesses, which I understand the desire to help small businesses. But if we're focused on the employee and the potential employee, perhaps it's best for that particular employee to enter a larger business that has lots of different opportunities, career ladders, training and support.

So I really think from an identity perspective and a policy perspective, we have to think through, are we focused on the employee and the potential employee, or are we focused on the actual industry? We know that workforce participation rates is very high under some of these targeted communities. So, for example, if you're a snap recipient, we know that you're 38% less likely to be in the workforce. If you're a returning citizen, you know that you're 41% less likely to be in the workforce.

And that's really what those populations are, what we really see as the target of an NEC. And to the extent that there's such Low participation, we're really missing the opportunity to help those groups. Programs in a variety of our different companies that we have that are working with this type of population in very successful ways are excluded. From a policy perspective, I'm not sure that that would have been the intent.

We have technology programs to the Senator's earlier point that focus on tech jobs for underserved communities like women and minorities that identify nontraditional employees who have no particular resume or background, recruit, skill, train and place and create career paths for those type of employees that would be excluded in some of these categories. We have efforts that work with unemployment agencies to target long term unemployed and get them skilled in workforce environment.

We have even temporary employees that are in working with companies on a temporary basis with the goal of and the process to become permanent employees as they get trained and get acclimated to the workforce. And we have healthcare workers that a big issue for a barrier to employment, especially for women, is childcare and who can't necessarily work full time but need to be entering the workforce in a part time basis and getting skilled up to get the skills to have full time employment.

Those would also be excluded, again, probably unintentionally, but for some of this very complex criteria, as Steve mentioned, we do thank the chair for her ideas on the workforce Opportunity credit, which is a federal credit that is tailored narrowly to the type of employees that we were discussing. In California, there were over 200,000 workforce opportunity credit certifications done by the California Department that is foraged IRS. So we know that there are California businesses and underserved employees participating in these type of programs.

It's just they're not really participating in the NEC due to the complexities. Thank you very much and happy to answer any questions.

Thank you very much. That was a good recital of a number of issues that, for whatever reason, in the original Bill, exclusions and created a hard time or excluded industries that traditionally hire new employees at the entry level. And that's, I think what we want to do is, as Senator Dahle said, it's very difficult to bring in employees that have no training or no background in the industry and put them to work part time. And sometimes entry level positions are really important to do that.

So thank you for that. We're going to move on now to Terry Brennan from SEIU California. Welcome.

Good afternoon, Madam Chair Members. Terry Brennan with SCIU California, representing over 700,000 hardworking men and women in California. I guess I want to start with just acknowledging that one of the first questions in your analysis piece here is, are tax credits an efficient way of providing incentives to do business? And our experience in California is a definite no in that it's sloppy, it's complicated, it requires a lot of oversight and bureaucracy to administer.

We far prefer the Gobiz approach where we're looking at how do we incentivize businesses to stay in California, to come to California on a competitive process rather than trying to shotgun a tax credit across a wide swath of businesses in California. Having said that, I don't know if this pendulum has swung from the sloppiness of the enterprise zone too tightly to the restrictions under this proposal. There are things you could consider to tighten it up.

But the one thing to remember about people, I should say businesses getting involved in this credit, is this is the hardest to serve population of employees in the state. The list of disadvantages here could likely point to some of the hardest to employ people in the entire state. So if I would expect that the takeup numbers are lower than any other tax credit we've talked about in this Committee and others, it's a difficult place to start.

Having said that, are the incentives structured in here correct the right balance to Senator Dolly's point about taking risk, perhaps we should increase the percentage on the lower end of the spectrum rather than lowering the base amount to something close to minimum wage where you're already required to do that. Why would we incentivize people doing what is existing law, but incentivizing someone to pay $23 an hour and reducing the cost of that to the employer closer to minimum wage may make some sense.

It's going to increase the cost of the program, but may increase the ability for employers to participate. The bureaucracy involved in this, it's about as complicated as I could imagine, but I think that's all a reaction to prior attempts to deal with this on a broad basis. There are some tinkering here suggested by the Lao that I think you guys should scrutinize and look at.

But just remember, this is a tough population, and in order to incentivize the risk, you may have to change the way this incentive is structured. And I would ask that you not consider lowering the starting point, but perhaps raising the percentage so it's less of a risk and more of an incentive for people to participate. But it is clearly from the comments here rife with problems that we need to address going forward. And with that, I'll just leave it for any questions you may have.

Thank you.

Very good. Thank you very much. I appreciate your comments. And you're right, it's a cumbersome process to say the least. And finally, Chris McKayley. Welcome.

Thank you, Madam Chair Members. I was going to say privilege, but I guess really opportunity, since it wasn't a privilege to work on Assembly Bill 93, a budget trailer Bill, in 2013. I had long represented both local jurisdictions and businesses claiming the enterprise zone program benefits. For years, Governor Brown had targeted it and rdas for elimination, and he was successful in the first year of eliminating the RDA program.

In the second year, not unsuccessful with the easy program, but in the second year decided let's make it revenue neutral. This was pre Prop 26, when a revenue neutral tax package would be subject to only a majority vote. That obviously changed with Prop 20 Six's adoption. So the idea was let's eliminate the enterprise zone program that had five different incentives. The main one that's been referenced is the hiring credit, undoubtedly the most lucrative of those five.

And the whole program was worth between 800 million and $1.0 billion a year, give or take. So what they did was to eliminate that program in total. Of course, it had some carryover provisions for some of the credits, but replace it with a partial sales tax exemption for manufacturing and r and D equipment worth between five and $600 million.

And the Cal competes program, which originally had been capped at 100 $1.0 million appropriation each year, and the remaining was for the new employment credit, the NEC. And I give you that background because if you look, for example, at the original analysis of AB 93, you can see what the benefits were of the proposed NEC starting $34 million, 7100 and 10.

According to the Franchise Tax Board report of two years ago, in 2019 tax year, it should have been worth 269,000,000 in credits and 290,000,000 in the 2020 tax year. Today it would be worth over $300 million, is what the estimate was. And as you've all heard today, the claims are roughly three to $5 million a year, 67 businesses, give or take claiming it, 1000 employees, maybe.

I hate to use the phrase I told you so, and especially since two thirds of the Legislature today was not here in 2013. So there aren't many people to say that too. But nonetheless, I think the business community and local jurisdictions who had fought for the protection of the enterprise zone program said, this is never going to work.

What happened was you took all of these different provisions that prior speakers have spoken to you about, geographic limitation, 150% of minimum wage eligibility criteria, the reservation system, one on top of the other, to pretty soon you get a very small group of people who can actually qualify. And that was the claim that we made in 2013. This is not revenue neutral, this is not worth $300 million.

And we got one thing in AB 93, I would say, and that was an annual requirement for FTB to report to the Legislature on actual utilization and recommendations for going forward. Up until this past year. They usually had eight to 10 different proposals attached. And unfortunately, I know the chair, I think a colleague of yours in the Assembly had some bills in the last two or three years to make some modifications to the program. Unfortunately, those haven't been pursued. So I give you this context.

At this point, this program should have created roughly $1.0 billion worth of tax credits for businesses in the State of California. And what is it, about three to 5 million a year? So maybe $50 million at best. Don't forget that the elimination of the prior program is permanent. The NEC is only available through the end of 2025, and then it goes away without the Legislature extending it. So what do we do about it? zero, by the way, that 67 businesses.

According to EDD, there's roughly 1.8 million businesses in the State of California, give or take. Respectfully, the NEC is nothing worth what it was ever put out to be. A couple of points. Most recently, of course, for all businesses, regardless of size, due to the CPI issue that was addressed by DOF last summer. All employers, 1550 an hour, 150%. That's 2250 an hour. Here's an important point. You only get the amount above that wage. So if you pay 2250 your credit is zero.

If you pay $25 an hour, your credit is on $2.50 per hour. So it's not the full wage that you pay to an individual. It is only the amount above the 150 threshold. I'm not suggesting we tinker with the minimum wage itself, but keep that in mind. So if you want to incentivize paying 23 or $25 an hour, you've got to do more than only the incremental amount above the 2250. A very high wage.

And candidly, I think, as Senator Dahle pointed out early, is maybe not likely to be paid to all the individuals who meet some of those qualifications. You've heard the eligibility criteria is too narrow. I might throw out some other things. For example, those lacking a college degree businesses. It was intended that retailers and restaurants and others not qualify for the NEC. Unfortunately, they claimed a lot of enterprise zone credits. Many of them are located in economically distressed areas of the state.

Many of them hire hard to hire individuals. They were specifically excluded. They should be put back. And in light of the pandemic, where they've been absolutely decimated, particularly the restaurant industry as well, they should clearly be eligible for the credit. I think we argued it was short sighted a decade ago. It seems pretty ludicrous today. The net job increase, especially during the pandemic, we ought to relook at that I understand.

We want folks to add jobs, but even if you lost 10 and hired new, right, new employment credit, if you hired 10, you're still even, you get zero because you didn't have a net increase in employment, at least waive it during the bad economic times. And this Legislature has often talked about affordable housing, homelessness and other issues. Why don't we target those folks, for example, construction jobs in particular, maybe folks who are working on affordable housing projects, the full time employment requirement.

I think somebody mentioned earlier about part time individuals coming back into the workforce or parents who need childcare and can't do 40 hours a week. What about the ACA definition of 30 hours per week, for example? So even though the employer community has lost, I would argue, more than $900 million that was promised to them a decade ago, no one's asking to make all that back up.

But even if you, the Legislature, make some additional changes for the next two and a half years that the NEC currently is in statute, so what if it costs another 50 or $100 million? On paper, it should be costing the state 300 million and it's only costing three to $5 million. Thank you.

Thank you very much. I appreciate those suggestions. Comment questions. Senator Blakespear, thank you.

Thank you to the panel. Those were excellent suggestions at the end. And I'll just voice my support for many of the things that you said. I mean, having to have a rising number of employees, the idea of waiving it during Low economic times, people working on affordable housing projects or who have been homeless, part time work, I mean, all these are great suggestions and hopefully we have really good staff who's taking notes on this because that's what we need.

Yes. So I just wanted to support that. I mean, it's clearly not working. And you really highlighted some of these things that 68 employees, that difference between 22, $52. I mean, these are obviously huge structural problems if we want this to be successful and we need to support our business community and to employ more people who are hard to employ. So having both of those be big policy goals, I mean, these are great suggestions. So just wanted to voice support for that.

You do?

Senator Dahle well, I want to thank you for confirming some of the challenges we face in the people who actually operate businesses. But I want to add something to maybe for the Legislature. The Chairman talked about policies and what happened. I was here in 2013. We lost enterprise zones, we lost RDA. We lost a lot of things that actually produced better communities, blighted areas got changed. And that's the past.

Right.

But we are here today, and we do have the ability as legislators to author legislation and actually make a difference for California. California is bleeding jobs to other states. And that's exactly why the Governor put this proposal together, to attract not only the federal dollars, but attract the jobs, but to the fact that we aren't looking at those hard to employ people. These are difficult to employ people. I will grant you that as somebody who is trying to do that.

So we need to narrow it down back to the point of the governors being able to not have it in geographic areas where we have disadvantaged people is, to me, absurd. I think we need to place this in a place where we actually are trying to get those jobs and employ those people. So that's number one.

Number two, we need to take into account that for every job that we produce for one of those hard and employed peoples is somebody who then has the ability to get off of some of the subsistence. So there's a huge amount of cost that we pay as taxpayers in California to allow to keep them existing and where they're at.

So if you can get them a job, a part time job, if you can help them with childcare, those are all things that alleviate the tax burden that we pay for those who are disadvantaged. So there is a trade off that we never talk about here. When the LAO comes in, or I call them the bean counters, they only count one side of the beans. The beans that come in, they never talk about the diverted beans that are going out the back door.

And so we need to have a holistic talk about that. And we need to get the employers at the table and say, what will work for you to employ those hard to employ peoples, people who have been, we've had hundreds of thousands of people in our prison system, and they're out there and they're hard to employ. They haven't been in the workforce. They haven't been totally trained for the workforce. They don't know how it works.

But employers will take those risks because it's the risk that is really what we need to talk about. They will take that risk if we give them the ability to offset that risk some. And when we do that.

We will.

Actually save money on the social services side of the equation. And that's where I think the Legislature needs to really dig in. And whether this program obviously doesn't matter if it goes forward or not, nobody's using it. It's not working well. We need to look at a program that people will use and we will help those disadvantaged folks get into the workforce and change their lives.

I agree. Any other comments from Committee Members? If not, I appreciate the testimony and the specificity of the testimony. The reason for the hearing is to try to figure out what do we want to do with this tax credit moving forward. And I like some of the suggestions. As Senator Blakespear said, the ability to actually make it work in distressed communities, if you have a lot of people that are unemployed, then your community is distressed. That's just the way it is.

And to be able to have it work would be tremendously important to me, which is why we had this hearing here today. I don't have any questions for you. I just appreciate and took notes on what you had to say. And I think we're going to be looking at this in the future as we move through the budget. The governor's got a proposal. We may have something to add to that as well. But we need to move on to public comment right now.

So I want to thank you very much for your testimony here today, and I want to invite Members of the public that would like to make a comment on this to please come forward here in the room.

And if there are any individuals on the teleconference lane that would like to be able to make a public comment, the toll free number is 877-226-8163 and when you're prompted, please use the access code 439-8318 so we'll check and see if there's anybody in room 1200 that would like to make a public comment here. Seeing no movement, we'll move on to the teleconference line. And moderator, if you could check the line to see if we have anyone who would like to make a public comment.

Thank you.

If you would like to testify on.

Today'S conference, please press one followed by zero.

One followed by zero for public comment. And Madam Chair, nobody is queuing up at this time.

Thank you, Mr. Moderator. Appreciate it very much. If there are no more comments of the Committee Members. We have concluded our hearing for today, and I want to thank everybody that participated. Thank you very much for being here in person. We really appreciate it. For those who testified via the teleconference line, thank you very much for your testimony. Very instructive. And we have a lot of work to do now. So thank you very much. That concludes our agenda today for the Senate Governance and finance Committee.

We stand adjourn. Thank you.