Enterprise Zone Reform — At Last

July 29, 2013

Earlier this month, Governor Brown signed into law several bills included in the 2013-14 budget agreement that, at long last, reform the state’s controversial Enterprise Zone (EZ) Program. The program was created nearly 30 years ago with admirable intentions — to provide tax breaks to promote job creation in economically distressed areas. However, independent studies, including our own, have questioned the effectiveness of EZ tax breaks in achieving their goals — even as program costs skyrocketed. Among the problems highlighted in our most recent report:

  • The annual cost of the EZ tax credits and deductions had grown to $700 million and — without program changes — were expected to reach $1 billion in 2016;
  • The EZ program’s tax breaks primarily benefited very large corporations, with two-thirds of the credits being claimed by corporations with assets of at least $1 billion; and,
  • The hiring tax credits, which comprised nearly 60 percent of the total cost of the EZ program, were poorly structured, allowing companies to claim the credits without actually creating new jobs.

Since its inception, the California Budget Project has critiqued the structure, usage, and rising costs of the EZ program. We’ve consistently called for significant reforms to the program, including narrowing the hiring tax credits and zone designations to better ensure that the credits result in new job creation in economically distressed areas. Reform was a long time in coming, despite a body of evidence showing that the program failed to produce its intended outcomes at an increasingly high cost to the state.

The 2013-14 budget agreement puts in place a series of reforms that effectively phase out the EZ program and replace it with a new and revised package of incentives (see our prior blog for more on the specifics of the budget agreement). In brief, the budget agreement:

  • Modifies the current EZ designations to include the use of the credits in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty;
  • Alters key elements of the hiring tax credit, including requiring businesses to create new jobs (as opposed to hiring new workers for existing positions) and narrowing the hiring tax credit to fewer categories of disadvantaged workers; and,
  • Creates a manufacturing equipment sales and use tax exemption for use within manufacturing and biotech industries. The exemption is available statewide, rather than just within certain geographic areas, helping reduce incentives for jurisdictions in California to compete against each other for businesses.

The budget agreement also includes a number of provisions designed to enhance our ability to evaluate the performance of the credits. The new policy requires businesses to return money to the state if certain terms are not met, sets benchmarks to ensure small businesses benefit from the new incentives, and includes sunset dates for the credits.

In short, the package of reforms more effectively targets job creation in the state’s most distressed areas and allows us to evaluate and revisit the programs over time based on performance. That’s a win, at long last, for Californians and California.

Beyond EZ Reform

Beyond EZ reform, we will be monitoring two issues in particular. First, while there is much to celebrate in the budget agreement, the package of reforms also includes the establishment of a business incentive fund, to be administered by the Governor’s “GO-Biz” office to retain and attract business in California. The Governor used the signing of the new package to comment on Texas Governor Rick Perry’s travels to California earlier in the year in an effort to attract businesses to Texas, saying, “Those fellas in Texas, watch out…California has some new tools.” The Governor’s remarks point to an underlying problem with the new business incentive fund, in that it could be used to engage in a zero-sum, state-to-state competition for business, rather than investing in new jobs overall. A critique of the prior EZ system was that it encouraged local jurisdictions in the state to compete for businesses and jobs, rather than creating new opportunities. The same critique can just as easily be applied to the new business incentive fund if it merely results in state-vs.-state gaming of the system. Further, it perpetuates myths that lower state taxes inevitably result in state economic growth and that business location decisions are influenced by tax credits — claims that are clearly not supported by research. Fortunately, the new fund is limited in size ($30 million in 2013-14) and is subject to the same evaluation and performance requirements noted above, but how the fund is used in the coming years is worth watching closely.

Second, in the deliberations about EZ reform, local leaders opposing the reforms often noted that the elimination of Redevelopment Agencies (RDAs) in 2011 and restructuring of the EZ program would leave local governments with few available tools to promote local economic development and redevelopment. From our vantage point, RDAs and EZs were poorly structured to achieve these goals. But their elimination (RDAs) and reform (EZs) expose a significant gap in state and local economic development and redevelopment, particularly in terms of affordable housing. With EZ reform at long last a reality, it is time for state and local leaders to identify effective strategies and tools that position the state for growth and broadly shared prosperity.

— Chris Hoene and Kristin Schumacher


Enterprise Zone Reform at a Critical Juncture

June 25, 2013

Deliberations over the future of the Enterprise Zone (EZ) Program — California’s controversial economic development program — are entering a pivotal stage. Assembly Bill 93, which would substantially reform the program, passed out of the Senate Committee on Budget and Fiscal Review yesterday and is scheduled to be heard on the Senate floor this afternoon.

Earlier this month, we released a report detailing the escalating costs and serious shortcomings of the EZ Program. This report included a set of policy recommendations for improving the EZ Program and making it more cost-effective, with a focus on how EZ hiring tax credits are awarded. AB 93 would move California in the right direction on enterprise zones and economic development by improving the tax credit in ways that could eliminate the most severe program inefficiencies.

Specifically, AB 93 would restructure the hiring tax credit in five crucial ways:

  • Discontinuing retroactive hiring credits, whereby credits are awarded for hires made in past years.
  • Requiring businesses to create new jobs — not just make new hires — as a condition of claiming hiring credits.
  • Eliminating residency in a Targeted Employment Area as a qualifying criterion for the tax credit and specifically targeting the tax credit for three categories of individuals: those that have been previously unemployed for six months, recipients of the Earned Income Tax Credit, and veterans.
  • Changing the credit formula to remain the same over a five-year period, instead of decreasing over time — thereby removing the incentive and reward for employers that “churn” their workforces.
  • Ensuring that companies that take the credit pay employees a living wage by increasing the amount of qualified wages from up to $12 per hour to between $12 and $28 per hour for employees.

AB 93 also would address the EZ Program’s current inability to target areas of the state that are most in need of job growth, new businesses, and assistance with economic development. While the current EZ designations would remain intact, the new hiring tax credit would also be available 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 would be removed from the eligible areas, ensuring that the hiring tax credit truly is targeted to businesses located in the state’s most economically distressed areas.

In addition to making major improvements in how the EZ hiring credits are targeted and awarded, AB 93 would create a manufacturing equipment sales tax exemption. This sales and use tax exemption would eliminate the California portion of sales tax for basic manufacturing and biotech equipment purchases, and will be offered statewide — rather than within certain geographic areas. Currently, California is among only a very few states that do not offer this type of exemption. AB 93 also would establish the California Competes Tax Credit Committee, administered by the Governor’s Office, with the purpose of negotiating business tax credits in exchange for investments and employment expansion in California. While we have voiced skepticism in the past concerning the efficacy of state tax credits in creating jobs and growing the economy, AB 93’s strong provisions in two key areas of the program — transparency and performance evaluation — would enable program administrators, policymakers, and the public to track these credits’ impact and their return on investment.

The reforms contained in AB 93 represent major improvements to California’s EZ Program and are designed to address the worst abuses and inefficiencies within the program. These reforms are a significant step forward for the state in fostering positive economic development and long-term fiscal health. Stay tuned as AB 93 is taken up today in the Senate.

—  Kristin Schumacher


Governor’s New Restructuring Proposal Stirs Up Debate Over Future of Enterprise Zone Program

May 22, 2013

One of the issues we’ve been tracking closely in this year’s budget debate is potential reform of the state’s Enterprise Zone (EZ) Program. Established in 1984, the EZ Program provides a variety of tax credits intended to encourage businesses to locate in economically distressed areas as well as to promote job creation. However, research shows that, as currently structured, the program fails to achieve its goals. At the same time, the EZ Program places an increasing strain on the state budget: The program cost the state $720 million in 2010 and is projected to cost $1 billion by 2015-16.

Governor Brown’s revised 2013-14 budget, released a week ago, includes a new, revenue-neutral set of proposals that would significantly restructure the EZ Program. These proposals include narrowing the EZ hiring tax credit, expanding statewide the sales and use tax credit for the purchase of manufacturing and biotech equipment, and creating a California Competes Recruitment and Retention Fund, which would provide tax credits for business investment and job creation throughout California.

The May Revision’s proposed changes to the EZ Program are controversial and have generated media attention across the state, with, for example, articles in the Los Angeles Times and the Sacramento Business Journal pointing to the mixed reactions to the Governor’s new proposal.

As we noted in our discussion of the Governor’s January budget proposal and our analysis of the May Revision, policymakers have real choices in crafting a budget, even when facing revenue constraints. As policymakers choose the future direction for EZs in California, the upcoming debate will likely focus on three issues.

First, the Governor’s proposals to narrow the hiring tax credit and expand the sales and use tax credits statewide essentially end EZs as they are currently structured. But, as noted earlier, the program doesn’t produce significant outcomes given the costs to the state in foregone revenue. In light of its serious shortcomings, elimination or restructuring of the EZ Program would not be expected to have an adverse effect on employment or job growth.

Second, local leaders argue that the loss of EZs is an egregious hit coming on top of the elimination of redevelopment agencies (RDA) just last year. They have a point. Much like in prior years’ battle over RDAs, the issue isn’t the intent of the program — most of us support efforts to redevelop and create jobs in economically distressed areas. Rather, the issue is that these programs are poorly structured to produce the desired outcomes, and they come at a high cost to state and local governments and constrain their ability to invest in other priorities. However, the debate over EZs shouldn’t be a fight to the death, as with RDAs. The Governor and local leaders should come together to craft legitimate strategies for economic development. If not RDAs, or EZs, then alternatives need to be developed that put state and local investments on the same page.

This brings us to the third issue: the Governor’s proposed California Competes Recruitment and Retention Fund, which would operate out of the Governor’s Office of Business and Economic Development (GO-Biz). The details are lacking at this point, but on early review, the proposal raises concerns that it apparently gives discretion to the Governor’s Office to provide tax credits throughout the state. Not only does research show that EZs fail to produce the intended outcomes, but considerable research also suggests that state tax credits are equally if not more ineffective than area-based credits. While the narrowing of the credits as noted above has the potential for considerable state savings, we suspect the new Fund is what results in the Governor’s proposals being revenue-neutral, rather than providing an increase in revenue. Bottom line, we think the state’s money could be better spent elsewhere.

A more critical look at state and local economic development incentives along with a more ambitious restructuring of the EZ Program could reduce the strain on the state budget and provide funds for needed investments elsewhere, such as increasing the number of subsidized child care and preschool slots, repealing the 10 percent cut to Medi-Cal provider payments, and strengthening the CalWORKs Program.

The CBP will soon release a report analyzing California’s EZ Program. Stay tuned.

— Kristin Schumacher and Chris Hoene


What We Were Watching for in the May Revision — and How It Looks Thus Far

May 20, 2013

Last week, in the run-up to Governor Brown’s May Revision, we blogged about the five things we were looking for in his revised 2013-14 budget and the ensuing budget debate. Here we reflect back on what were looking for — and provide a brief take on what we’ve seen. Our initial analysis of the May Revision — published the day after the Governor released his revised budget — provides a fuller discussion of the major changes and important new proposals. In the coming days and weeks, we’ll provide continued analysis and commentary here at California Budget Bites.

1. Education Finance Reform

We were watching for: potential changes to the mix of Local Control Funding Formula (LCFF) grants as well as any new accountability provisions. Under the Governor’s proposal to restructure school finance in California – a topic the CBP recently examined in its chartbook on the LCFF — each school district would receive a base grant per student and, in addition, a supplemental grant based on the unduplicated number of English learners or students from low-income families and a concentration grant for the share of these students above 50 percent of district enrollment. We were watching for preservation of the additional dollars allocated for disadvantaged students and stronger accountability provisions that would ensure that districts are using the LCFF dollars to directly benefit the students for whom they are intended.

The May Revision: preserves the LCFF formula proposed in January, including the concentration grants. The May Revision also strengthens LCFF accountability provisions by clarifying that supplemental and concentration grants are provided “primarily for the benefit” of students for whom they are intended. Further, the May Revision requires school districts, upon full implementation of the LCFF, to report how they plan to spend supplemental grant dollars in proportion to the number of disadvantaged students at each school site.

2. Medi-Cal Expansion

We were watching for: a call for a state-led expansion that leaves existing funding with counties, for now. As part of federal health care reform, the Governor has called for expanding Medi-Cal  to cover low-income adults who currently are not eligible — a topic addressed in our recent Medi-Cal chartbook. In January, the Governor presented two approaches to expansion — a county-based approach and a state-led approach — while also linking the expansion to his proposal to “realign” some human services programs to counties. Under the Governor’s plan, counties’ new costs would be funded with dollars that counties now use to provide health care to low-income, uninsured (“medically indigent”) Californians — many of whom would enroll in Medi-Cal under the expansion. We were watching for a commitment to a state-led expansion of Medi-Cal that allows counties to retain any savings they realize and put it toward providing local health services for the remaining uninsured, at least until the impact of health care reform on both the state and the counties is better understood.

The May Revision: endorses a state-led expansion of Medi-Cal where newly eligible Californians would enroll in Medi-Cal and receive the same benefits available to other Medi-Cal enrollees. However, the May Revision also maintains — and provides new details about — the Governor’s proposal to shift costs for certain human services programs to counties. The Governor now proposes that counties “assume greater financial responsibility” for CalWORKs, CalWORKs child care, and CalFresh administration. Counties would cover these costs with dollars shifted from their health care safety nets, thereby generating state savings that the Administration estimates would exceed $1 billion per year by 2015-16.

3. State Revenue Projections

We were watching for: revised economic and revenue forecasts and the implications for state spending. Through April 2013, state revenue for the current (2012-13) fiscal year was running ahead of the Governor’s January projections by $4.6 billion, prompting speculation that the May Revision would feature revenue forecasts for 2013-14 much higher than had been expected in January. We were watching for revised economic and revenue forecasts and the implications of those revisions for the Proposition 98 minimum school funding guarantee.

The May Revision: presents somewhat weakened economic and revenue forecasts. The Administration reported that higher-than-anticipated revenues for the current year (2012-13) are spread over several fiscal years and that “the influx is expected to be short-lived.” The May Revision projects additional revenue collections in the current fiscal year ($2.8 billion higher than assumed in January), derived from taxpayers shifting revenue from 2013 to 2012 in response to federal tax changes, followed by a slight decrease in revenue in 2013-14 ($1.3 billion lower than assumed in January). The assumed Proposition 98 minimum funding level follows a similar pattern, increasing in 2012-13 and decreasing slightly in 2013-14. The May Revision also adjusts the state’s short-term economic outlook downward due to federal actions, including federal tax changes and sequester cuts, and weaker global economic growth. However, the Legislative Analyst’s Office argues that the Administration’s economic and revenue forecast “seems too pessimistic” and projects that revenues will come in more than $3 billion higher – over the three-year period from 2011-12 to 2013-14 – than the Governor assumes.

4. Pay-Down of California’s Budgetary Debt

We were watching for: any changes to the Governor’s proposed pay-down of budgetary debt. The Governor’s January proposal called for paying down $4.2 billion in budgetary debt as part of a plan to reduce this debt from $35 billion in 2010-11 to less than $5 billion by 2016-17. We were watching for any increases to the proposed pay-down as a result of higher-than-anticipated revenues or possibly a more gradual repayment schedule in order to free up dollars for other spending priorities.

The May Revision: maintains the Governor’s general plan for paying down budgetary debt to less than $5 billion by 2016-17. The adjustments to the state’s revenue forecast noted earlier alter the repayment schedule, but do not change the multiyear objective. The May Revision also maintains the Administration’s planned $1 billion contribution to the state’s Special Fund for Economic Uncertainties.

5. Enterprise Zone Reform

We were watching for: any changes to proposals to restructure the Enterprise Zone (EZ) Program. The Governor’s January proposal included a set of regulatory changes to the state’s EZ Program, which provides tax credits intended to encourage businesses to locate in economically distressed areas. While the intent of the program is to promote business development and job creation in targeted areas, research shows that the program fails to achieve its goals while placing an increasing strain on the state budget — with the cost projected to rise to $1 billion by 2015-16. We were watching for proposals to more aggressively restructure the program to better target job creation and business development, boost accountability and evaluation of program effectiveness, and reduce the costs to the state.

The May Revision: significantly alters the Governor’s proposal to restructure the EZ Program. The new proposal narrows the EZ hiring tax credit to specific areas with high unemployment and poverty rates, and limits availability to hiring of three targeted groups of individuals (as opposed to 10 groups currently). The May Revision also expands the EZ sales tax credit for manufacturing and biotech equipment purchases to be a statewide — rather than a zone-specific — incentive, in an effort to discourage within-state competition for jobs. The May Revision also creates a new business recruitment and retention fund, administered by the Governor’s Office, for use in negotiating business tax credits in exchange for investments and employment expansion in California. Early reviews of these newly proposed reforms – which as a whole the Administration projects to be revenue-neutral — suggest that the tax-credit changes would largely eliminate the EZ Program in its current form.

*  *  *

Beyond the five budget issues detailed in our May Revision preview and discussed above, there were other notable components of the Governor’s revised budget proposal. The Governor essentially put on hold for two years his complete restructuring of adult education, during which time the Governor proposes to transition to a new regional partnership system. The May Revision also leaves many previous cuts to health and human services unchanged, though it does include a new funding allocation ($48 million) for CalWORKs “early engagement” strategies to better address client needs during the shortened 24-month time window imposed in 2012-13. All of these proposals are discussed in the initial May Revision analysis we issued last week.

The initial analysis we released last week also highlights some of the key choices that policymakers could face during the coming weeks as they move toward enacting a 2013-14 budget, which would take effect on July 1. California Budget Bites will provide continued analysis and commentary on the issues shaping the budget debate and what the latest policy proposals mean for low- and middle-income Californians and for the future of our state.

— Chris Hoene


What We’re Watching For in the May Revision and Beyond

May 13, 2013

Governor Brown is set to release the May Revision of his proposed 2013-14 budget tomorrow, kicking off the sprint to a final budget agreement in June. The CBP will provide a series of analyses of the revision, including a same-day statement, a brief analysis of major changes and important new proposals — and the issues they raise — and a more in-depth scan in the days that follow. You can find all the latest updates and analyses here at California Budget Bites.

The following are five issues that we’ll be watching for in the Governor’s May Revision and the budget deliberations that follow in the coming weeks:

1.   Education Finance Reform

The issue: The Governor’s proposed Local Control Funding Formula (LCFF) seeks to make the state’s system of school finance more equitable by providing additional revenue to school districts with disadvantaged students, a topic the CBP recently examined in its chartbook on the LCFF. Under the Governor’s proposal, each school district would receive a base grant per student and — in addition — a supplemental grant based on the unduplicated number of English learners or students from low-income families as well as a concentration grant for the share of these students above 50 percent of district enrollment.

We’re watching for: potential changes to the mix of LCFF grants as well as any new accountability provisions. Will the May Revision preserve the additional dollars allocated for disadvantaged students? If the LCFF concentration grants are reduced or eliminated, will the freed-up dollars be used to provide larger supplemental grants? The May Revision may also include stronger accountability provisions in terms of addressing district spending of LCFF dollars. Our view is that policymakers should preserve additional dollars the LCFF would allocate for disadvantaged students, including concentration grants, and that school districts should be required to use these dollars to directly benefit the students for whom they are intended.

2.    Medi-Cal Expansion

The issue: As part of federal health care reform, the Governor’s proposed 2013-14 budget calls for expanding Medi-Cal — the state’s Medicaid program — to cover low-income adults who currently are not eligible. Our recent Medi-Cal chartbook provides an in-depth look at the program and the issues raised by the expansion. In January, the Governor presented two approaches to expansion — a county-based approach and a state-based approach — while also linking the expansion to his proposal to “capture” some funding that counties now use to provide health care to low-income, uninsured Californians. The Governor’s proposal also assumes a 10 percent cut in payments for Medi-Cal providers that was approved by state policymakers in 2011 and is currently pending in the U.S. 9th Circuit Court of Appeals.

We’re watching for: a call for a state-led expansion that leaves existing funding with counties, for now, and that reconsiders the cuts to provider payments. Counties and health care advocates are nearly unanimous in their push for a state-led expansion. Also, any savings that counties do realize, at least in the near term, should be prioritized for local health services given that millions of Californians will remain uninsured even after health care reform is fully implemented and will turn to the counties for care. Lastly, amid concerns that payment cuts on the eve of the Medi-Cal expansion could drive providers from the program at the very time when provider participation needs to increase, we’ll be watching for a call to repeal those cuts.

3.    State Revenue Projections

The issue: Ten months through the current fiscal year, the State Controller’s Office reports that total revenue is running ahead of the Governor’s January projections by $4.6 billion. The state’s revenue collections are prompting speculation about increased revenue forecasts for the upcoming 2013-14 fiscal year.

We’re watching for: updated economic and revenue forecasts. If there is a projected increase in General Fund revenues compared to January projections, what will the revised level of the Proposition 98 minimum school funding guarantee be, and how will the May Revision propose to use additional Proposition 98 funding? Options would include using the dollars to pay back money borrowed from K-12 schools, providing additional funding to implement the Local Control Funding Formula, and/or providing resources for other one-time or ongoing education priorities. How much of this higher-than-anticipated revenue is left over beyond the Proposition 98 minimum funding level? And how is that revenue allocated? Calls for paying down budgetary debt and/or building up the state’s reserves are likely to be among the options considered. But, with many Californians still hurting in the wake of the Great Recession, a balanced approach would prioritize providing additional resources for critical programs such as child care and state preschool, CalWORKs, and adult dental coverage.

4.    Pay-Down of California’s Budgetary Debt

The issue: The Governor’s proposed 2013-14 budget calls for paying down $4.2 billion in budgetary debt as part of a plan to reduce this debt from $27.8 billion in 2012-13 to $4.3 billion by 2016-17. “Budgetary debt” includes money borrowed from K-12 schools, unpaid costs to local governments, and loans from state special funds.

We’re watching for: any changes to the Governor’s proposed pay-down. If the May Revision does project higher revenue collections, increasing the pay-down in 2013-14 could be part of proposals for allocating these additional revenues. The Governor and the Legislature may also choose to adopt a more gradual repayment schedule in order to free up funds to support other budget priorities.

5.    Enterprise Zone Reform

The issue: The Governor’s proposed 2013-14 budget includes a set of regulatory changes to the state’s Enterprise Zone (EZ) Program, which provides a variety of tax credits intended to encourage businesses to locate in economically distressed geographic areas. While the intent of the program is to promote business development and job creation in targeted areas, research shows that the program fails to achieve its goals and places an increasing strain on the state budget — $720 million in 2010, projected to rise to $1 billion by 2015-16.

We’re watching for: any changes to proposals to restructure the EZ Program. Proposals that are currently under consideration include the Governor’s proposed regulatory reforms as well as a number of legislative proposals that seek to restructure the program. Given that lawmakers are very unlikely to eliminate the program, we think that it should be restructured to better target the jobs and business development intended, boost accountability and evaluation of program effectiveness, and reduce the strain on the state budget.

— Chris Hoene