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Enterprise zones — which were created to offer tax breaks for companies creating jobs in economically depressed areas of the state — are on the way out in California, to be replaced by a range of more targeted incentives. The current program came under scrutiny for soaring costs and the proliferation of businesses that legislators said did not need the generous tax credits they were collecting.
The cost in lost tax revenue “skyrocketed” since its inception in 1984, according to an economic analysis by the California Budget Project, an independent think tank in Sacramento. From a start of just $675,000, it grew steadily, and shot past the $700 million mark three years ago.
That is one reason the Legislature voted last week to eliminate the program, and replace it with new statewide business incentives. These include a $400 million annual tax credit to manufacturing and biotechnology firms, up to $100 million in rewards for businesses that relocate to California and $200 million in tax breaks for hiring the long-term unemployed, earned-income tax credit recipients and veterans.
Enterprise zones started as a targeted way to bolster economically underdeveloped areas by offering hiring incentives to businesses.
But in the nearly three decades of the program’s life, the 13 original enterprise zones have become 40 and include some of the wealthiest areas in the state. The hiring tax credits are now nearly $38,000 per employee, spread over five years.
The program grew rapidly in the middle of the last decade, when tax consulting firms discovered that they could help companies get tax breaks for hiring workers under a wide range of circumstances, said Steve Smith of the California Labor Federation, a union advocacy organization.
With existing privacy provisions in state tax laws, little is known about which businesses qualify and benefit from the tax credits. This troubled Smith, whose organization filed a public records act request from 12 enterprise zones but only heard back from one.
“There is no mechanism for whoever is interested in looking to see where the $750 million in tax credits is going and to who and why,” he added.
The labor federation identified some of the big corporations that benefit: Wal-Mart, McDonalds, Yum! Brands, Fed-Ex, Starbucks and Wells Fargo.
“With the existing enterprise zone program, about two-thirds of the tax credits go to corporations that make billions of dollars and are getting tax credit for existing jobs instead of making new jobs,” Smith said.
The California Budget Project found in a study released last month that businesses with assets of $1 million or more claimed 70 percent of all enterprise zone dollars. The group estimated that the program has cost the state $4.8 billion in lost revenue since it started.
Political opposition to the program may have reached the tipping point when state senators learned that among the companies benefiting from the credits were two Sacramento strip clubs and a casino.
For more than two years, Gov. Jerry Brown described the tax breaks as “inefficient” and “wasteful.”
On Thursday, the Assembly passed Brown’s proposal, AB 93, on a 54-16 vote. The same measure was approved earlier in the state Senate. Jim Evans, a Brown spokesman, said the governor plans to sign it. The new law would take effect on Jan 1, 2014.
The end of the state program would not affect San Francisco’s 1992 local version that gives companies that hire city residents in economically depressed neighborhoods exemptions from payroll expense taxes.
“My understanding is San Francisco will continue with its local enterprise zones,” said Gloria Chan, a spokeswoman for the city’s Office of Economic and Workforce Development, which manages initiatives to spur job growth locally. She declined to comment on the state bill.
Supporters say that the new state tax break program will create jobs, not just recycle new employees through the same positions. They also say that by keeping the tax credits for each job constant over a five-year period, employers will have an incentive to keep their workforce stable. The current system lets them take advantage of credits decline every year for each employee — so firing employees and replacing them with new ones earns them fresh tax benefits but hurts workers.
“Studies have shown that enterprise zones are wasteful and don’t perform the way that they were intended to, which is to promote job creation,” said Smith. “We believe that the governor’s new proposal taps into the strengths of California as an innovative economy and what it economically has to offer.”
He said his organization fully supports the bill because it focuses on creating “good jobs that are not easily displaceable and temporary, and provide workers pathways to enter the middle class.” Under the new plan, companies that take advantage of the credits would have to pay employees between $12 and $28 per hour.
Smith said the new policy may be the first of several state efforts to encourage a California economy based on manufacturing, technology, biotech and health care.
Bob Linscheid, president of the San Francisco Chamber of Commerce, worries that the elimination of enterprise zones will have unintended consequences. “Our belief is that enterprise zones have been very beneficial to San Francisco’s economy,” he said.
In 2009, a Public Policy Institute of California study found that enterprise zones had little impact on either business creation or employment growth. Brown’s bill cites these study results as evidence that enterprise zones need “comprehensive reform.”
Linscheid said the study was flawed because it did not adequately reflect the number of jobs created within enterprise zones. He said the study misrepresented the self-reported employment data by letting companies give ranges of jobs created, such as from one to five jobs, or from six to 10.
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