California’s Enterprise Zones on the Block

State weighs in, keeps hold of the purse strings

By John Howard, Special Report from Capitol Weekly

UPDATED July 7, 4:30 pm

It could be the calm before the storm.

On Gov. Brown’s desk is a hard-fought plan to dismantle California’s enterprise zones, shift key authority over $700 million in business tax and other incentives to the state and boost the pay of new workers. The governor, joined by most Democrats and a handful of Republicans, pushed through a top-to-bottom overhaul of California’s decades-old enterprise zone system, which was created 27 years ago to spur jobs and growth in low-income zones by giving tax breaks to businesses. Brown, who believes the tax breaks have been systematically abused by businesses, is expected to sign the bill within the next few days, but it won’t go into effect until Jan. 1 – which means six months to gear up for a transfer of power.  “Basically,” one local official said, “everyone is trying to figure this out.”

Because the bill involved taxation, it required – and got – two-thirds votes in both the Senate and Assembly.

The crux of the new landscape – Brown’s third major policy change upending local governance since taking office -- is the shift of authority from some 40 local enterprise zones across California to the administration’s business agency and to the Franchise Tax Board, as well as the Board of Equalization. Decisions over tax incentives and other benefits, hitherto held locally, effectively will be made by the state instead under the bill, AB 93 by the Assembly Budget Committee. Brown described the new arrangement, which was put together following the 2013-14 budget agreement, as “a big, bipartisan win for California businesses and working people. AB 93 will help grow our economy and create good manufacturing jobs.”

Under the new program, hiring will target veterans, the disabled, low-income and minority applicants, pay will be upped from the minimum wage to $12 an hour, companies that qualify will get hefty sales tax credits to spur growth totaling hundreds of millions of dollars, $100 million to encourage companies locate in California, and other benefits. Eric Johnson of the state Department Housing and Community Development said the change reflected the governor “wanting to make sure that the enterprise zones help those who need it the most in California.”  

The dollars remain the same, but they will be redistributed.

“We are fully supportive of this approach because it does weed out the worst abuses and replaces them with incentives to not only create jobs in California, but good jobs, jobs paying at least $12 an hour,” said Steve Smith of the California Labor Federation. In the existing zones, the “hiring credits were going to minimum-wage corporations like Wal-Mart, which were taking big portion of the credits. Even the financial district in San Francisco was able to claim credits. This (AB 93) is a much better way to spend taxpayer money,” he said.

But not everyone is so enthusiastic, especially those who see Brown’s push as another example of the locals losing authority to Sacramento over local programs. 

The existing zones are "a very effective program to assist low-income and minority residents. This new program is entirely different. It is no longer focused (on them) but on the types of businesses that the governor thinks it will produce," said Craig Johnson, the executive director of the California Association of Enterprise Zones. "With the current enterprise zone program you have local officials working with local businesses to determine what will work. Here, we have all that authority shifted to Sacramento, where they have no knowledge of these businesses. They don't know who these people are. It will be a big learning curve for the people in Sacramento."

Supporters of the existing enterprise zones said last year alone they created 25,000 jobs and prevented the loss of 100,000 more, and that the combination of tax and hiring incentives enticed businesses to locate in low-income areas. While there may have been some abuses, they say, the program was useful in building job creation, although that contention was refuted by a study by the Public Policy Institute of California.

The action by the governor and lawmakers “will absolutely end enterprise zones,” said Kirstin Kolpitcke, a lobbyist with the California League of Cities. “I think it creates a larger set of losers than it does winners in the legislation.” 

Danny Fitzgerald, an enterprise zone director in Imperial County, said the governor’s plan is deeply flawed.

"It (the new program) is unusable in my opinion. The No. 1 problem is that the enterprise zone program was designed to incentivize employers to take a risk on the hard-to-hire individuals, those with low skills, the chronically unemployed, those re-entering the workforce. The employer takes a risk on that person and you give them a tax credit. Maxine Waters was one of the originators of the (enterprise zone) bill, and she saw it as an anti-crime bill, that people would be less-inclined to commit crimes if they have a job when they return to the community."

"The new program completely throws that out the window. This is a tax on the have-nots and you're giving it to the haves. It will target businesses in Silicon Valley or Sorrento Valley in San Diego, and that may be beneficial but not at the expense zones, he added. “Our hope is that he (the governor) will let the enterprise zones go out with dignity and not create the fiasco of the former redevelopment agencies."

Several major business groups, although opposing the loss of the enterprise zones, were hesitant to discuss the issue publicly. One noted that “it wasn’t our fight, we stayed out of it,” another referred a reporter to the governor’s office for details and two others declined to talk at all. 

Critics of the enterprise zones have long urged their abolishment, citing overly lavish tax breaks and too-easy qualifying for businesses, the use of money for such things as card rooms and strip clubs, dubious regulation, lax rules over hiring, and more.  An earlier attempt to eliminate them fizzled, driven by Republicans who were able to block the two-thirds votes and saw the businesses in the zones as part of their political base.

But the Legislature now has Democratic supermajorities in both houses and Democrats pushed through the change, which they said was long overdue.

“Going forward, the businesses that have been claiming tax credits can’t claim them anymore if there is game playing like hiring somebody, then laying somebody off, but keeping the credit,” said Lenny Goldberg, a lobbyist with the California Tax Reform Association. “It’s a tax loophole or a tax break or a tax incentive, whatever you want to call it, but they are not going to get it anymore.”

Goldberg said the “implementation should be pretty straight forward. We’ve got these credits. It limits their ability to go back and do anything retroactive. It’s not that difficult. People in the zones can’t do what they used to do, which was hire anybody. So now, anybody hired is going to be in addition to those already hired, so they can’t lay someone off and then claim the credit.”

Republican Curt Hagman, R-Chino Hills, while supportive of the existing enterprise zones, helped negotiate the new package.

“They were going to be eliminated at a certain point,” he said. “It was the best we could do to protect the business community. Probably, it was better than most people could get … but anytime you change goals, you are going to have winners and losers.”

A critical piece is a sales tax credit over several years, Kolpitchke said.

“The only thing that might potentially provide benefit is the sales tax exemption, which allows businesses that produce manufacturing and biotech equipment to get their state sales tax back and allows purchases up to $200 million,” she said.

“That's our only form of economic development now that redevelopment doesn't exist,” she added.

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