Phasing Out Enterprise Zones as We Know Them

July 9, 2013

The CBP has been following and informing the debate over California’s controversial Enterprise Zone (EZ) Program for several years, and has published a number of reports and blog posts that highlight the escalating costs and serious shortcomings of the EZ Program as well as opportunities for reform. This past Wednesday, AB 93 and SB 90 — budget trailer bills that phase out the EZ Program and replace it with a new package of economic development incentives — were transmitted to Governor Brown and await his signature. [Update: On Thursday, July 11, the Governor signed AB 93 and SB 90.] As a result, our analysis of the 2013-14 budget agreement has been updated with a detailed review of the changes to EZs and the state’s tax system.

Specifically, the budget agreement:

  • Retains current EZ designations but modifies them to more effectively target the most economically distressed areas of the state. Current EZ designations will remain intact for the 40 existing EZs, plus two recently expired zones — Antelope Valley and Watsonville — but incentives will also be available for use in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty rate. Further, census tracts with low unemployment and low poverty rates will be removed from the existing EZs, ensuring that the hiring tax credit truly is targeted to businesses located in the state’s most economically distressed areas. Lastly, the seven existing Local Area Military Base Recovery Areas (LAMBRAs) will be preserved and eligible for incentives as well.
  • Alters key elements of the EZ hiring credit to create and retain jobs for disadvantaged individuals. The budget agreement makes major changes to the hiring tax credit to improve performance. These changes include:
    • Requiring businesses to create new jobs — not just make new hires — as a condition of claiming hiring credits.
    • Discontinuing retroactive vouchering, whereby credits are awarded for hires made in past years.
    • Maintaining the credit for a particular employee at a constant level over a five-year period, instead of having the credit decrease over time. This change removes the incentive and reward for employers that “churn” their workforces.
    • Ensuring that companies that take the hiring credit pay employees a living wage. Specifically, the budget agreement increases the amount of qualified wages from up to 150 percent of minimum wage — currently $12 per hour — to between 150 percent and 350 percent of minimum wage. This currently is between $12 and $28 per hour. The credit is only available for qualified wages paid to employees who work an average of at least 35 hours per week. In five pilot areas that would be designated by the Governor’s Office of Business and Economic Development (GO-Biz), qualified wages will be set between $10 an hour and 350 percent of minimum wage to reflect working conditions in areas with average wages less than the statewide average.
    • Targeting the hiring tax credit to five categories of individuals, which is much narrower than the 10 groups included in current eligibility requirements. The targeted groups will include individuals who have been previously unemployed for six months, recipients of the Earned Income Tax Credit, recipients of CalWORKs or General Assistance, unemployed veterans, and ex-offenders.
  • Creates a manufacturing equipment sales and use tax (SUT) exemption. The SUT exemption will eliminate the California portion of sales and use tax for basic manufacturing and research and development (R&D) purchases for use within manufacturing and biotech industries. This exemption will be available statewide — rather than just within certain geographic areas. The maximum amount of purchases eligible for the SUT exemption statewide is not to exceed $200 million annually.
  • Establishes a business incentive fund to retain and attract businesses to California. The budget agreement establishes a new fund that will be administered by GO-Biz for the purpose of negotiating business tax credits in exchange for investments and employment expansion in California. The budget agreement also creates the California Competes Tax Credit Committee — consisting of representatives from the Treasurer’s Office, Department of Finance, and GO-Biz, and an appointee from both the Senate and Assembly — which will provide final approval for GO-Biz’s allocation of tax incentives. The fund will be limited to $30 million in 2013-14, increasing to $200 million annually in 2015-16 through 2018-19.

The budget agreement includes a number of provisions intended to ensure that the new economic development package is effective, transparent, and available to small businesses. First, the hiring tax credit, the SUT exemption, and the GO-Biz fund require annual evaluations to ensure that program administrators, policymakers, and the public are able to track program usage, and they each contain provisions that require businesses to return money to the state if certain terms are not met. Second, the budget agreement creates clear benchmarks to ensure that small businesses — defined as having less than $2 million in gross receipts in the previous year — benefit from the economic development package. Specifically, 25 percent of the hiring tax credit will be reserved for small businesses, and industry restrictions on the hiring tax credit will be lifted for small businesses as well. In addition, 25 percent of the funds allocated to GO-Biz will also be reserved for small businesses. Lastly, the budget agreement includes sunset dates for the programs, a provision that does not exist within the current EZ Program.

— Kristin Schumacher

Dollar for Dollar: California’s Enterprise Zone Program Falls Short

June 7, 2013

As deliberations over the 2013-14 state budget continue, one key issue under discussion is the future of California’s Enterprise Zone (EZ) Program. This program was created nearly 30 years ago to promote business development and job creation in economically distressed areas, but independent studies have questioned the effectiveness of EZ tax breaks in achieving their goals — even as program costs have skyrocketed.

A new CBP report on the EZ Program examines the growing cost to the state of the EZ tax breaks, looks at who receives these breaks, and discusses current proposals to reform the EZ Program, including those contained in Governor Brown’s May Revision of his proposed 2013-14 budget. Dollar for Dollar: California’s Enterprise Zone Program Falls Short shows that:

  • The annual cost of EZ tax credits and deductions has grown to more than $700 million and — without program changes — is expected to reach $1 billion by 2016. Between 1986 and 2010, the average cost per zone grew from approximately $48,000 to $17.2 million.
  • The EZ Program’s tax breaks primarily benefit very large corporations. Corporations with assets of at least $1 billion claimed more than two-thirds of the total dollar value of EZ tax credits in 2010, the most recent year for which data are available.
  • The high cost of the EZ Program is primarily due to its hiring tax credit, which cost the state $414 million in 2010 — nearly 60 percent of the total cost of the EZ tax breaks. Yet because companies can claim these credits without actually creating new jobs, the hiring tax credit has generally been ineffective in promoting job growth.

This new report includes a set of policy recommendations for improving the EZ Program and making it more cost-effective, with a focus on two areas that are especially important targets for reform: the hiring tax credit and the designation of enterprise zones. Look for updates and commentary here on California Budget Bites as the debate over EZs and other key budget issues moves forward in the coming weeks.

— Chris Hoene