In the spirit of not being too negative or bitter, I have sat on my fingers for the last several weeks and purposely decided NOT to blog about the recent passage of AB93 – the California state law that eliminates enterprise zone benefits in our state. There are plenty of places that you go to find spin, one way or another around the “benefits” of the new law, but you won’t find that here. That’s because our business and our clients will be negatively impacted by passage of this law. Sure – that’s a little selfish of me, to think about me and my clients. But I also don’t buy that this new law is a benefit to very many businesses. In fact, I believe that, aside from the sales tax manufacturing exemption, very few companies will benefit at all. And I think that’s bad for business, bad for the California economy, and another check in the column that our state is not business-friendly.
Part of my frustration in the process is that this bill (a trailer bill that was blank in the hours after the passage of the budget earlier in June) was drafted, presented, and passed within the span of about 72 hours during the last week of June. The legislation (which still begs several administrative questions) was over 100 pages long. The ink on it was barely dry when the Democrat-controlled Senate voted on it. By the time the bill was voted on in the Assembly, the demise of the EZ program was already a “given” because supporters of the bill had strong-armed opponents and were weighing down heavily on those who would vote against it. A program that was alive, vibrant, and creating jobs in California was eliminated under a clever new bill promising “wonderful” new benefits to California businesses. It’s important to note that AB93 was a tax increase, needing a 2/3 majority in both chambers. It was a tax increase because deductions and tax credits were eliminated. In the press since then, there is little discussion of that fact. But, make no mistake, AB 93 takes away tax benefits = it’s another tax increase in California.
Quickly – the summary of the bill:
The only “good” part of AB93 – The bill implements a sales tax exemption for manufacturers for property purchased and used in the manufacturing process, beginning in 2014. As originally drafted and passed by the Senate, this exemption was to be only a five-year benefit, but in the final Assembly negotiations, it was extended to nine years. Such an exemption should have been in place years ago to put California on parity with most other states that already offer an exemption for manufacturing equipment. While many companies will benefit from this exemption, this law change was not related to hiring individuals and should not have been the catalyst for repealing the EZ program. Also, it sunsets. Shall we take bets whether it will be renewed after that time?
The bill repeals the existing EZ Hiring Credit, EZ Sales/Use Tax Credit and EZ Net Interest Deduction for Lenders as of 12/31/13. EZ credits generated will carry forward for ten years (rather than indefinitely) and EZ Hiring Credit benefits will continue to accrue until the qualified employee is no longer employed or reaches the full five years. But there will be no future benefits.
AB 93 “replaces” the EZ program with a statewide hiring credit with many limitations that will make qualification all but impossible for most employers. The new rules require all of the following:
- Companies must fall into qualified SIC codes (mostly manufacturing), and do NOT include retail and eating establishments;
- A net increase in new employees calculated by using a base;
- Qualified wages must be between $12.00 and $28.00 per hour, based on 150 and 350% of California’s minimum wage; and
- Only full-time employees will be considered for the hiring credit and must qualify under one of four criteria (versus the 13 qualified criteria used now):
- Unemployed/displaced worker;
- A U.S. military veteran:
- An ex-offender; or
- Recipient of the Earned Income Credit.
To further add to the complexity, businesses seeking to claim these credits must request a “tentative credit reservation” with the Franchise Tax Board “FTB” within 30 days of the employee’s date of hire, and must submit an annual “certification of employment” for each full-time employee to remain eligible for the credit during the 60-month credit period (With the many limitations and bureaucratic hurdles, we believe that very few companies will qualify for the credit. A perfect storm will need to be created for the credit to have any meaningful value to a company. We believe that the new program will not serve to increase or incentivize businesses to keep employees. It’s simply a “program” so that the Governor can say that he has a hiring credit).
Finally, AB 93 creates a “slush fund” – currently a $30 million set-aside for negotiated incentives for which companies will compete if they expand business within the state. Company applications will be evaluated by a 5 member board established by the Governor. This fund is expected to grow to $200 million in future years. (One of the Governor’s big objections to the EZ program was that it had some perceived abuses. He has now replaced it with a slush fund that will be overseen by only 5 individuals in a plan that is very short on details. If this is not a program that is rife for potential abuses, we’re not sure what is. The projected cost of the EZ program, which benefited thousands of companies in every industry across the state, was estimated at $750 Million annually. With this legislation, the Governor has diverted a third of that amount into a very limited program, with limited oversight, potentially benefitting very few companies.)
We thank all of our clients and friends that reached out to legislators in the final hours of negotiations on AB93 and made their voices heard. Unfortunately, there weren’t quite enough of us to convince the political machine in Sacramento to stop and reconsider this bill. But we applaud everyone’s efforts!
