Report - 2023 01 24 A30526 D248522 Bill Report 5096 Sbr Bfgt Ta 23

Summary

A Senate Bill Report on SB 5096, an act relating to expanding employee ownership, prepared by non-partisan staff of the Senate Committee on Business, Financial Services, Gaming & Trade and dated as of January 12, 2023. The bill would create the Washington Employee Ownership Program at the Department of Commerce and an eleven-member Washington Employee Ownership Commission to oversee it. It would also establish, beginning July 1, 2024, a business and occupation tax credit for converting a business to employee ownership, capped at $2 million per year, with credits of up to $25,000 for a worker-owner cooperative or employee ownership trust and up to $100,000 for an ESOP. The report includes background on ESOPs, employee ownership trusts and cooperatives, and a staff summary of public testimony. The sponsors listed are Senators Padden, Pedersen, Hasegawa and Schoesler.

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                            SENATE BILL REPORT
                                  SB 5096

                                      As of January 12, 2023

Title: An act relating to expanding employee ownership.

Brief Description: Concerning employee ownership.

Sponsors: Senators Padden, Pedersen, Hasegawa and Schoesler.

Brief History:
     Committee Activity: Business, Financial Services, Gaming & Trade: 1/12/23.


                                     Brief Summary of Bill
           • Creates the Washington Employee Ownership Program (program) at the
             Department of Commerce to offer technical support, and other services,
             to certain businesses considering certain employee ownership structures.
           • Forms the Washington Employee Ownership Commission to oversee the
             program.
           • Provides a business and occupation tax credit for costs related to
             converting a qualifying business to an employee ownership structure.


SENATE COMMITTEE ON BUSINESS, FINANCIAL SERVICES, GAMING & TRADE

     Staff: Kellee Gunn (786-7429)

     Background: Employee Ownership Structures. Employee ownership refers to the
     arrangement where no one person has the most shares or control over an organization.
     Some of the most common forms of employee ownership include Employee Stock
     Ownership Plans (ESOPs), Employee Ownership Trusts (EOTs), and Cooperatives (Co-
     ops).

     Employee Stock Ownership Plans. ESOPs are recognized under federal tax law as a




     This analysis was prepared by non-partisan legislative staff for the use of legislative
     members in their deliberations. This analysis is not part of the legislation nor does it
     constitute a statement of legislative intent.

Senate Bill Report                              -1-                                             SB 5096
     qualified defined contribution retirement plan. The ESOP must be designed to invest
     primarily in qualifying employer securities and meet certain other requirements. The IRS
     and United States Department of Labor share jurisdiction over some ESOP features.

     Employee Ownership Trusts. EOTs are not recognized as a retirement plan under federal
     law. An EOT is a perpetual trust, in which employees may receive certain financial benefits
     and governance rights.

     Cooperatives. Co-ops are member-owned business entities in which worker-owners have a
     controlling interest, and who elect the governing body on a one-member-one-vote basis.

     Summary of Bill: Washington Employee Ownership Program. The Washington
     Employee Ownership Program (program) is created to support efforts of businesses
     considering sale to an employee ownership structure. The program is administered within
     the Department of Commerce (Commerce) and overseen by the Washington Employee
     Ownership Commission (Commission).

     The program must offer technical support, and other services, to certain qualified businesses
     considering certain employee ownership structures. To receive program support, a business
     must be headquartered in Washington State.

     Subject to successful federal funding for this specific purpose, the program must establish a
     revolving loan program to assist existing small businesses in financing a transition to
     employee ownership. Certain requirements regarding who can receive the loan and what
     the loan may be used for are established.

     Commerce must report to the Legislature on the program by December 1st each year and
     include recommendations for improvement and barriers for businesses considering
     employee ownership structures. The first report must include the rules and guidelines for
     the administration of the program, developed by the Commission.

     Washington Employee Ownership Commission. The Commission is created to develop and
     supervise the program.

     The Commission shall consist of the following eleven members:
        • one member from each of the two major caucuses of the House of Representatives,
          appointed by the Speaker of the House;
        • one member from each of the two major caucuses of the Senate, appointed by the
          President of the Senate; and
        • seven of the following members appointed by the Governor:
             1. one representative of a small business using an employee ownership structure,
                with an initial four-year term;
             2. one representative of a large business using an employee ownership structure,
                with an initial four-year term;


Senate Bill Report                             -2-                                        SB 5096
                3. one representative of a statewide business association, with an initial two-year
                   term;
                4. one economic development expert from the private sector, with an initial four-
                   year term;
                5. one representative from a financial institution with expertise in transitions to
                   employee ownership, with an initial two-year term;
                6. one economic development expert from the public sector, with an initial four-
                   year term; and
                7. one representative from Commerce, with an initial four-year term.

     The Commerce representative shall chair the first meeting, until a chair is elected. All
     gubernatorial appointments must first be nominated from recognized organizations that
     represent the entities or interests identified. After initial appointments, all members shall
     serve four-year terms and hold office until successors are appointed.

     The Commission shall develop, in consultation with Commerce, the rules and guidelines for
     the administration of the program.

     Business and Occupations Tax Credit. Beginning July 1, 2024, a business and occupation
     tax credit for costs related to converting a qualifying business to an employee ownership
     structure is established. The total amount of credits may not exceed $2 million per year and
     are available on a first-in-time basis. Unused credit may be carried over up to 12 months
     from the end of the tax reporting period in which the credit was earned.

     Qualified businesses may receive up to:
        • 50 percent of the conversion costs, not to exceed $25,000, to a worker-owner
           cooperative or an employee ownership trust; or
        • 50 percent of the conversion costs, not to exceed $100,000, to an ESOP.

     This bill includes a tax preference performance statement. The Legislature’s specific public
     policy objective is to encourage business owners to create an employee ownership plan or
     employee ownership trust or convert to a worker-owner cooperative. If the review finds
     that the number of employee ownership structures has increased, then the Legislature
     intends for the Joint Legislative Audit and Review Committee to recommend extending the
     expiration date of the tax preference.

     Appropriation: None.

     Fiscal Note: Available.

     Creates Committee/Commission/Task Force that includes Legislative members: Yes.

     Effective Date: The bill contains several effective dates. Please refer to the bill.



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     Staff Summary of Public Testimony: PRO: Schweitzer Engineering is an employee-
     owned business and is one of the premier businesses in Washington State. There are many
     benefits to employee ownership. Many current business owners do not have a plan for when
     they transition out of the business, and employee ownership provides a valuable option.
     Employee ownership also helps retain good employees. Massachusetts, California, and
     Colorado have all passed legislation that create programs to support businesses as they
     transition to employee ownership. If a fraction of retiring business owners pursued
     employee ownership, the results would be extraordinary. ESOPs allow wealth creation for
     employees and an exit strategy for business owners.

     There are three issues in transitioning to employee ownership—lack of information, lack of
     capital, and lack of state level incentives and resources. This bill deals with all three of these
     issues. The commission and program are key first steps to help businesses become
     employee-owned. With the recent implementation of federal legislation supporting
     employee ownership, and the number of employees working for businesses who may retire,
     this bill will make a difference. This bill improves the LGBTQ plus community's ability to
     support each other and the greater community. Employee ownership helps distribute wealth
     and transforms lives by providing economic stability.

     OTHER: The silver tsunami is undoubtedly affecting the businesses in Washington, and it
     threatens about 70,000 businesses and their 700,000 employees. The state can strengthen,
     rather than duplicate, current efforts already underway in the state. To improve the bill there
     should be data collection, as these businesses are hard to track, and a dedicated full-time
     position to support businesses transitioning to employee ownership. A Washington State
     Center for Employee Ownership should be created, and the full time position should be
     allocated there. WCF is well suited to help create this Center. Please consider whether the
     following proposed activities would be best performed by non-governmental entities

     This last biennium Commerce was provided State Small Business Credit Initiative (SSBCI)
     funding from the United States Department of the Treasury, and those funds are currently
     allocated to specific programs. Though equity programs are an allowable use of those funds,
     per the Treasury's rules, Commerce has not been approved use of Washington's SSBCI
     funds for that purpose.

     Persons Testifying: PRO: Senator Mike Padden, Prime Sponsor; Jack Moriarty,
     Ownership America; Steve Storkan, Employee Ownership Expansion Network; Mitchell
     Miller, GreatBanc Trust Company; Gabriel Neuman, GSBA.

     OTHER: Keith Swenson, Washington State Department of Commerce; Mauri Ingram,
     Whatcom Community Foundation.

     Persons Signed In To Testify But Not Testifying: No one.




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