GSBE Weekly Update 11/08/2017
Legislative Analyst’s report calls for ending California Competes program
The state’s Legislative Analyst’s Office recommended ending the California Competes program, which awards income tax credits to attract or retain businesses considering a major investment in the state.
The LAO opined that broad-based tax relief for all businesses would be preferable to targeted tax credits.
The recommendation, in a report released Tuesday, drew mixed reactions from local and state business leaders, some of whom call for improving the program, while others agree with the report’s recommendation.
The report found that while the tax credits provide “windfall” benefits to the 35 percent of businesses that receive the award and sell goods and services “very near” them in California, the credits inadvertently harm other “equally deserving” California businesses, including “tens of thousands” of small businesses that are put at a disadvantage by competitors who receive them.
While the tax credits may have contributed to the state’s overall economic growth, the report said it’s difficult to assess the program’s effectiveness in attracting new investment and jobs because it’s unknown what actions businesses would have taken had they not received the benefit.
Over the last five years starting with the state’s 2013-14 fiscal year, the awards have totaled $780 million, according to the report. If the program continues, the LAO recommends narrowing eligibility to businesses that serve markets outside California, refocusing the program on attracting jobs and investments that would otherwise locate outside California and modifying its small business provisions.
Asked about the LAO report, Sid Voorakkara, deputy director of external affairs for the Governor’s Office of Business and Economic Development, called California Competes a “vital tool” to support businesses that want to locate or grow in California. The Governor’s Office of Business and Economic Development, known as “Go-Biz,” is the administrator of the program.
“Through this program, we have been able to award 775 companies tax credits projected to create 77,178 new jobs and $14.5 billion in new investments,” Voorakkara said in an email.
But Tom Scott, state executive director of the National Federation of Independent Business/California, supports the LAO’s recommendation that California get rid of the program in exchange for broad-based tax cuts for business. His organization represents around 325,000 small businesses.
“Business owners have a hard enough time even knowing these programs exist, much less understanding if they qualify, how to apply, etc.,” Scott told the Business Journal. “Back in June, the Go-Biz committee approved $62.8 million in tax credits for 87 companies. We have 3.8 million small businesses in the state of California that are struggling. Any form of relief would be preferred.”
Yet some fear the LAO report may lead legislators to scrap California Competes without creating anything as a replacement.
“My worry is that we’ll end up diluting the amount of funds across the board, instead of having it be targeted and focused,” said Joshua Wood, CEO of the Sacramento Region Business Association.
While Wood said he philosophically agrees that more broad-based tax relief is needed, he doesn’t think the current Legislature will make that happen.
“I am worried they will now look at this report and say ‘OK, we can do away with this program,’ and then nothing will backfill it, which is a dangerous position to be in,” Wood said. “There’s not a lot of tools in this state that we have in the chest that we can use, and this is one of them. If this goes away, what will we have?”
“If it can’t be offered to Amazon, then what’s it for?”
Barry Broome, CEO of the Greater Sacramento Economic Council, said he would prefer for state leaders to make the California Competes program more accessible by accelerating its turnaround time for companies interested in making investments.
Broome said there’s a “multi-month bureaucratic process” before companies can receive the tax credits.
As an example of California Competes’ shortcomings, he said its tax credits couldn’t be committed to Greater Sacramento’s recent proposal for Amazon.com Inc. to locate its second headquarters here because of the lengthy process.
“If it can’t be offered to Amazon, then what’s it for?” Broome said. “You’ve got to make the process quick and flexible. You’ve got to make the credits more aggressive for valuable industries.”
Still, he advocated for keeping the program and credited it as being very “well managed and well run” under Go-Biz.
“Cal Competes has helped us compete on a couple of major announcements. We’re very close to being selected for a major announcement, and Cal Competes was pivotal to it. When it’s accessible, it’s been impactful,” Broome said. “It’s a program that should be maintained and we should look at ways of improving it.”
Company founder Daniel Morash said the credit helped California Safe Soil’s owners recoup some of their risk capital investment and helped scale the company.
Morash told the Business Journal that anyone can apply for the program, and he doesn’t understand how it can be viewed as an impediment to small businesses.
“It’s exactly the opposite. We’re a small business. We’re a startup,” he said. “It’s only an advantage and nothing else.”
Time to Think About Holiday Bonuses Foley & Lardner LLP
Halloween has passed and we are now squarely approaching the holiday season. While this time of year brings many good things, it can also bring unwanted headaches for employers wanting to spread some “holiday cheer,” especially those who forget how bonuses may affect payment of overtime. So, while we recently discussed bonuses in general, now is a good time for a refresher on bonuses and overtime pay in the context of holiday payments.
First, don’t forget the general rule for non-exempt employees is that all compensation is to be included in the calculation of the “regular rate.” Bonuses must be included within the regular rate unless specifically excluded by law or regulation. Bonuses which do not qualify for exclusion from the regular rate must be totaled in with other earnings to determine the regular rate on which overtime is based. However, certain things are excluded from compensation used to calculate the regular rate.
The first of these is the traditional “Christmas bonus,” or more precisely, “sums paid as gifts; payment in the nature of gifts made at Christmas time or other special occasions, as a reward for service, the amounts of which are not measured by or dependent on hours worked, production or efficiency.” To not be included as compensation used for calculating the regular rate, the “bonus must actually be a gift or be in the nature of a gift.” The bonus cannot be measured by the hours worked, production or efficiency. Nor can it be so substantial that it can be assumed that employees consider it as part of wages for which they work. The bonus may, however, vary between employees based on length of service. Finally, it cannot be paid pursuant to some contract. Bottom line – true Christmas gifts or holiday bonuses do not have to be included in the regular rate for purposes of computing the regular rate.
The second, and more challenging, scenario is a bonus that while paid at year-end is not necessarily a true holiday gift. As we recently addressed, the question is whether such bonuses truly are discretionary. Again, the exclusion is narrow. To be excluded from the computation of the regular rate, the “sum paid in recognition of services performed in a given period” (i.e. bonus) must fall in one of two categories. One, the fact that the payment is to be made and the amount to be paid must be in the sole discretion of the employer. Further, the decision must be made at or near the end of the period in which payment is to be made and not be based on any promise, contract or agreement which causes the employee to regularly expect such payments. Or two, the compensation may be excluded from the regular rate if the payments are made pursuant to a bona fide profit-sharing plan or trust or bona fide thrift or savings plan.
Employers looking to spread holiday cheer in the form of end-of-the-year bonuses must therefore address the primary question of whether the bonus truly is discretionary. In making this determination, consider the following facts that may destroy the discretionary aspect of a bonus:
(1) If the employer promises in advance to pay a bonus
(2) If the amount of the bonus is conditioned on allocating a percentage of sales to the “bonus pool”
(3) If the bonus is promised at the time of hire
(4) If the bonus is to induce employees to work more efficiently or to remain with the employer
As examples, attendance bonuses, individual or group production bonuses, bonuses for quantity or quality of work, or retention bonuses are not discretionary and must be included in the regular rate.
So, celebrate the holidays and reward your employees, but be careful to consider whether bonuses must be included in computing the regular rate for non-exempt employees.