California’s New Employment Credit has remained underutilized due to the complexity of claiming the credit, according to testimony at a March 8 hearing of the Senate Governance and Finance Committee.
The credit was established in 2014 through the state budget process and authorizes a 35 percent credit for all qualified wages provided to eligible employees. An eligible employee is defined as one who was unemployed for the previous six months, is located and performing services in a designated geographical area, and receives wages exceeding 150 percent of the California minimum wage, among other things.
When the credit was authorized, tax agencies projected that businesses would utilize hundreds of millions of dollars’ worth of credits annually. Nearly a decade later, however, utilization rates remain low.
“When the credit was put in place in 2014, the Department of Finance estimated it would cost the state $69 million in 2015, and we’ve heard from FTB that that number is more like $3 to $5 million a year,” Brian Uhler, deputy legislative analyst at the Legislative Analyst’s Office, testified. “The first question that comes to mind is why are so few businesses using this credit. One reason is that the wage threshold is relatively high, especially when considering the target population.”
Dennis Armstrong, legislative director at the Franchise Tax Board, agreed that the largest barrier for employers to utilize the credit is the high wage threshold.
“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,” Armstrong said. “Some employers may see this wage amount as high for a newly hired employee.”
In his January budget, Governor Gavin Newsom proposed extending the credit to manufacturers creating semiconductors. The proposal would utilize funding from the federal Creating Helpful Incentives to Produce Semiconductors (CHIPS) Act.
“Along with other proposals, including an extension of the California Competes Grant Program and existing programs such as the research-and-development credit and the sales and use tax manufacturing exemption, this proposal is part of the state’s overall CHIPS strategy,” Department of Finance Budget Analyst Nick Thomas stated.
After government officials testified, stakeholders recommended that the committee pursue several changes to the New Employment Credit to increase utilization, including expanding industry eligibility, lowering wage thresholds, and changing residency requirements. The hearing was informational only, and no votes were taken.