It’s Round 3 in Jerry Brown vs. the locals.
The governor’s efforts to reform California’s 29-year-old enterprise zone system, an ongoing tax-break program that encourages business investment and promotes new jobs in economically distressed areas of the state, is his latest attempt in a series of major moves targeting local businesses and governance.
Critics claim that the governor’s reforms could further drive businesses out of California, but Brown and his allies believe the $700 million EZ program is deeply flawed, with little oversight and accountability. In effect, they are asking: Is the money the state loses by providing the tax breaks good policy?
The EZ hiring credit is “by far the most expensive for the state in terms of forgone revenues. In 2007, this accounted for $237 million of the corporation tax revenue reduction attributable to Enterprise Zones,” reported the Legislative Analyst’s Office, the Legislature’s nonpartisan fiscal adviser.
Businesses in Enterprise Zones can earn a $37,440 state credit for each qualified employee hired who is from a Targeted Tax Area. In addition, unused tax credits can be applied to future tax years.
The governor initially called for the elimination of the Enterprise Zone program in 2011, but the proposal was met with resistance from state legislature and his administration has since called for reforms so that the program may still offer tax incentives to businesses, but on a leaner scale.
“The enterprise zone is the only state incentive program left,” noted Craig Johnson, president of the California Association of Enterprise Zones, and makes little sense “to target it when Texas Governor Rick Perry is in California…meeting with CEO’s up and down the state.”
Perry, who turned a miniscule $24,000 radio advertising buy into widespread media coverage about his efforts to poach California jobs, “has made no bones about the fact that he is desperately trying to lure successful California companies out of California to come to Texas,” Johnson said. “Just a couple of years ago, he went to great lengths to crow about the fact that 147 California businesses relocated to Texas and he will continue to do that and say that Texas is a better place to do business.
Brown’s 2013-14 budget proposal calls for limiting retro-vouchering, requiring all voucher claims to be made within a year of hire. It requires third-party verification of employee residence within a Targeted Employment Area. streamlining the voucher process for hiring veterans and recipients of public assistance, and creating stricter zone audit procedures and audit failure procedures.
The proposed changes and new regulations would increase the general fund by $60 million in 2013-14, and the Brown administration is expected to make stricter reforms.
“We’ll pursue legislation to address the ineffective programs in the enterprise zone and invest in efforts to encourage job creation and manufacturing,” said Elizabeth Ashford, spokeswoman for Gov. Brown. “It’s too premature to discuss the details of legislation. There are some changes that can be made administratively, without legislation but…we need to pursue legislation to make them more effective.”
Previously, the governor has been successful in abolishing redevelopment agencies, a program that allowed developers to use property tax funds to spur development in underserved communities. Eliminating redevelopment agencies helped close the state’s fiscal debt and brought funds to schools and public safety.
The governor also pushed to implement public safety realignment, which gave new responsibility to county jails by releasing low-level state prison inmates into its custody.
The nonprofit Public Policy Institute of California found that “in the first few months of realignment, California’s jail population increased noticeably—but many [county] jails were already facing capacity concerns.” In reaction, California voters amended proposition 30, backed by Gov. Brown, which will protect funding to counties for realignment. The law prevents the Legislature from reducing funds to these counties.
Johnson said that a critical area that raises concern with the EZ program is the reform to the targeted employment areas. Typically that’s been done using both state median income and county median income. New rules mean that the state median income will be used to determine eligibility, which is a higher number.
“The problem with that is you have counties, especially poorer counties that their median incomes are significantly lower [than state median levels], which means by using those lower income levels, you have to have very low income census tract in order to take advantage of the program and be designated as a targeted employment area. It’s very arbitrary, the analytics used to create this,” Johnson said.
“The other important thing to understand about Targeted employment is that these are moderate to low income areas and communities. These are high minority populations and it makes it very difficult for these folks who already have significant barriers to employment,” he added. “I believe this is unintentional and I don’t think that anyone at the state is intentionally trying to focus on minority communities, Minority communities already face significant barriers to employment and now these regulations will raise additional barriers for those residents of those areas to gain gainful employment. That’s concerning.”
There are 42 Enterprise Zones in California that touch about 90 legislative districts out of 120 in the state. The vast majority of the members of legislature represent at least a portion of a zone. Some members represent multiple Enterprise Zones.
According to the Franchise Tax board 93% tax returns filed take advantage of the tax credits available in this program are filed by businesses and individuals with net assets of $5 million or lower.