HOUSE BILL REPORT

HB 604

BYRepresentatives Jacobsen, Peery, Vekich, Cooper, Schoon, May, Kremen, Hargrove, Fisch, Doty and Holm

Changing provisions relating to excise tax deferrals and credits for employee buyouts.

House Committe on Trade & Economic Development

Majority Report:     Do pass.  (16)

     Signed by Representatives Vekich, Chair; Wineberry, Vice Chair; Amondson, Beck, Braddock, Cantwell, Doty, Hargrove, Holm, Kremen, McLean, Moyer, Rasmussen, Schoon, B. Williams and J. Williams.

House Staff:Stephen Hodes (786-7092)

AS REPORTED BY COMMITTEE ON TRADE & ECONOMIC DEVELOPMENT

FEBRUARY 16, 1987

BACKGROUND:

The Legislature in its 1986 session extended the provisions of law permitting out-of-state firms locating new facilities in Washington State to defer sales taxes on new construction passed during the 1985 session.  The Legislature also made the sales tax deferral program for firms locating new facilities in distressed areas in the state consistent with the program established for out-of-state firms locating new facilities in the state. The sales tax imposed on the labor involved in the investment project was exempted from the deferral permitted under these provisions.

The Legislature also allowed a $1,000 business and occupation tax credit for manufacturers in distressed areas which create employment 15% above the prior year.  A maximum of $300,000 is allowed per business and no more than $15 million total credits are allowed per biennium.  The tax credits will expire on July 1, 1988.

Employee ownership, through the use of employee stock option plans and employee cooperatives, has been used as a tool in recent years to retain jobs lost in plant closures, especially in economically distressed areas.  The Deficit reduction Act of 1984 provided substantial tax incentives for employee ownership, and these have been retained in the 1986 Tax Reform Act. Employee ownership is not an appropriate response to all plant closures.  The required transactions are difficult and time consuming, and often involve the assumption of substantial risk on the part of prospective employee owners.  Following the transfer of ownership to employee owners, firms have experienced a significant success rate.  Studies of such firms also report substantial productivity gains following the adoption of employee ownership.  Employee ownership strategies create opportunities for employees to share the benefits which the firm's increased productivity often provides.

SUMMARY:

The bill extends the definition of situations in which sales tax deferrals and business and occupation tax credits shall be granted to include employee buyouts.  Employee buyouts are defined as the purchase and ownership of at least 50% of a business's property and assets by the employees of the business in an effort to prevent a shutdown.  In order to qualify for these tax benefits, at least 50% of the total employees of the new business must possess an ownership interest, and the new firm must be organized as an employee stock ownership plan (ESOP) or employee cooperative.

Fiscal Note:    Requested February 4, 1987.

House Committee ‑ Testified For:     Representative Jacobsen.

House Committee - Testified Against: None Presented.

House Committee - Testimony For:     Financing for employee buyouts has been difficult to arrange.  The passage of such legislation would reduce financial barriers.

House Committee - Testimony Against: None Presented.