California Governor Proposes Revised NEC Tax Credit in Budget

Published: January 13, 2023 by Max Shenker

changes to the NEC are coming for California businesses

California’s New Employment Credit (NEC) was enacted in 2013 as a partial replacement for the California Enterprise Zone program and 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 claim barely 1% of the anticipated credit amounts.

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

  • Many sectors, such as retail, food service, and temporary staffing, are excluded.
  • For non-excluded businesses, credit is further limited to companies located in Designated Geographic Areas.
  • Qualified wages are limited to wages that exceed 150% of the California minimum wage. The state’s minimum wage increased to $15.50 on January 1, 2023. Therefore, there is no credit for the first $23.25 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 half.

The enacting legislation required the California Franchise Tax Board to report annually to the Legislature regarding the program’s efficacy. FTB has been documenting the same findings for nearly ten years that structural failings of the NEC have rendered it virtually unutilized.

In his annual budget proposal, Governor Newsom has included a modification to the NEC:

“The Budget proposes eliminating the geographic restrictions of the state’s existing New Employment Credit for qualifying semiconductor manufacturing and research and development firms. The New Employment Credit was created in 2014 to incent businesses that operate in high-poverty areas to hire and provide full-time employment to the long-term unemployed, veterans discharged from service in the last 12 months, Earned Income Tax Credit recipients, ex-offenders convicted of a felony, and current recipients of CalWORKS or county general assistance. Expanding access to the credit by removing the geographic requirement for qualifying semiconductor manufacturing and research and development firms will provide more flexibility for these firms to use this financial incentive to create full-time jobs, and will also support the state’s equity goals by encouraging the hiring of underserved populations.”

Unfortunately, this modification is limited to a narrow business sector and only removes the smallest barrier to the program’s effectiveness.

Visit Experian Employer Services to learn more about tax credits for your organization.

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