California Senate Bill 1349 – An Attempt to Make a “State WOTC”

California State Senator Anna Caballero introduced SB 1349 in February to establish a simple state income tax credit to match up to $1,000 of the federal WOTC for each qualified employee. The bill was recently amended in the Senate Appropriations Committee to combine the state WOTC concept with California’s New Employment Credit (NEC). According to sources however, there are proponents of the NEC in the Senate and in the administration who do not want a competing hiring credit. On Thursday, May 26, SB 1349 passed the California Senate and now heads to the Assembly for another round of committee hearings.

The NEC was enacted in 2013 as a partial replacement for the California Enterprise Zone program, along with the California Competes Tax Credit. The NEC has clearly failed in its mission. According to a Franchise Tax Board report in March 2022: “At the time AB 93 was chaptered, the FTB released estimates that $269 million in credits would be claimed for the 2019 tax year, and $290 million for the 2020 tax year. As of the date of this report, taxpayers have reported $3.6 million claimed on 2019 tax year returns, and $3.9 million claimed on 2020 tax year returns.” In other words, taxpayers are claiming barely 1% of the anticipated credit amounts.

The FTB proceeds to explain that the requirements for claiming the NEC are virtually impossible to satisfy. Those requirements and limitations include:

  • Many sectors are excluded, such as retail, foodservice, and temporary staffing.
  • For non-excluded businesses, credit is further limited to businesses located in Designated Geographic Areas.
  • Qualified wages are limited to wages that exceed 150% of the California minimum wage. In other words, there is no credit for the first $22.50 per hour paid to qualified employees.
  • Qualified employees must work at least 35 hours per week.
  • Employers must request a Tentative Credit Reservation in advance for each potentially qualified employee. The reservation must also be renewed annually.
  • Credit is reduced based on the percentage of net new hires compared to a base year. For example, an employer who hired two NEC qualified employees, but has only one net new full-time equivalent employee compared to their base year, will have their tentative credit reduced by ½.

 

The recent amendments to SB 1349 abandon the previous WOTC match formula, and instead attempt to improve the NEC by removing the geographic limitation and adding WOTC certified individuals to the list of qualified new hires. Unfortunately, the bill does not address the many other systemic failings of the NEC that render it virtually unutilized.

The bill would add a new category of qualified employee where “The qualified taxpayer claimed a federal work opportunity credit during the taxable year for the employee on the qualified taxpayer’s federal income tax return.” However, the bill as amended doesn’t account for the timing of the federal WOTC.

Linking the NEC eligibility to the time when a credit is claimed on a federal tax return makes it impractical to comply with the NEC’s Tentative Credit Reservation requirement and seems to frustrate the NEC’s goal of avoiding retroactivity for hiring incentives.

For example, an employee applies for employment with Employer A on November 1, 2023 and indicates that they are a member of a WOTC target group. On 12/1/2023 Employer A offers that individual employment and hires them. On or before 12/29/2023, the employer files an application for WOTC certification with the California EDD. The EDD responds with a WOTC certification on or around 3/31/2024. While the employee works 35 hours per week, they do not meet the minimum retention required for WOTC before the end of 2023 and therefore have no qualified wages until after they meet the retention requirement in 2024. Employer A files their 2024 federal income tax return on extension on 9/15/2025 including a WOTC credit for this employee. Only at this time is the employee (hired on 12/1/2023) a qualified employee for the NEC. However, unless Employer A had speculatively submitted an NEC Tentative Credit Reservation shortly after hiring the individual and renewed that reservation by 3/15/2024 and again by 3/15/2025, they would not meet the initial requirements of the NEC.

If there is a genuine desire to have a beneficial hiring tax credit in California, instead of trying to mitigate the NEC’s shortcomings by adding WOTC as a qualification, the Legislature should instead actually rewrite the NEC to be more like WOTC.

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