BILL ANALYSIS
AB 2476
Page A
Date of Hearing: April 20, 2010
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
V. Manuel Perez, Chair
AB 2476 (V Manuel Perez and Caballero) - As Amended: April 13,
2010
SUBJECT : Enterprise Zones and targeted employment areas
SUMMARY : Tightens the criteria for designating a targeted
employment area (TEA) for the purposes of establishing one of
thirteen worker eligibility criteria under the Enterprise Zone
(EZ) hiring tax credit requirements. Specifically, this bill :
1)Modifies the definition of a TEA for areas designated after
December 31, 2010, by increasing the percentage of low and
moderate income residents from 51% to 61% and by refining the
unit of measurement from census tract to census block.
2)Requires local governments with a TEA designated prior to
December 31, 2010, to use the new definition when they review
and update the boundaries of their TEA to conform to the 2010
census data becoming available.
3)Makes other related technical changes.
EXISTING LAW
1)Purpose of EZ program : Establishes the EZ Program,
administered by California Department of Housing and Community
Development (HCD) to stimulate business and industrial growth
and create jobs in depressed areas of the state. A maximum of
42 EZs are authorized at any one time. Designations are for a
period of 15 years, as specified.
2)Hiring Credit : Authorizes an income tax credit for businesses
in an EZ that hiries certain "qualified employees." Among
other qualifying criteria, which are described in (6) and (7)
below, the qualified employee must be certified that he or she
meets meet one of nearly a dozen categories of individuals,
including living within a TEA.
3)Purpose of the TEA : Specifies that the purpose of a "targeted
employment area" is to encourage businesses in an EZ to hire
eligible local residents. A targeted employment area may
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include, but is not required to include, all or part of the
boundaries of the enterprise zone. Further, the targeted
employment area does not need to encompass all eligible areas,
but may include only those areas that the local government
determines have residents who are in the most need of this
employment targeting.
4)Definition of a TEA : Defines a targeted employment area to
mean an area within a city, county, or city and county that is
composed solely of those census tracts designated by the US
Department of Housing and Urban Development as having at least
51% of its residents of low- or moderate-income levels, using
either the most recent US Department of Census data available
at the time of the original EZ application or the most recent
census data available at the time the targeted employment area
is designated to determine that eligibility.
5)Update of TEA : Requires local governments to update the
boundaries of their TEA to reflect new census data within 180
days of the data becoming available.
6)Definition of a qualified employee : Limits the hiring credit
to be awarded to only those employees that meet the following
requirements:
a) The employee provides service to an employer where at
least 90% of those services within a taxable year are
directly related to the conduct of a taxpayers business or
trade located in an enterprise zone;
b) The employee performs at least 50% of his/her service
for the taxpayer during the taxable year in an enterprise
zone;
c) The employee is hired after the date of the enterprise
zone designation;
d) The employer has received a voucher for the employee
that certifies that the employee, immediately preceding
employment with this employer, met one of 12 eligibility
categories. The employee was or is:
i) A resident of a TEA, as specified;
ii) Eligible for services under the federal JTPA, or its
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successor;
iii) Eligible to be a voluntary or mandatory registrant
under GAIN, or its successor;
iv) An economically disadvantaged individual 14 years or
older;
v) A dislocated worker, as specified;
vi) A disabled individual who is eligible for, enrolled
in, or has completed a state rehabilitation plan;
vii) A service-connected disabled veteran, veteran of
Vietnam, or veteran who has been recently separated from
military service;
viii) An ex-offender, as specified;
ix) Eligible to receive specified social services
benefits, including Federal Supplemental Security Income
benefits, Aid to Families with Dependent Children, food
stamps, or state and local general assistance;
x) A member of a federally recognized Indian tribe,
band, or other group of Native American descent; or
xi) A member of a targeted group, as defined by the
Internal Revenue Service for the purposes of the Work
Opportunity Tax Credit, which includes a qualified IV-A
recipient, a qualified veteran, a qualified ex-felon, a
high-risk youth, a vocational rehabilitation referral, a
qualified summer youth employee, a qualified food stamp
recipient, a qualified Supplemental Security Income
recipient, or a long-term family assistance recipient.
7)Further Hiring Credit Requirements : Requires "qualified
employees" to be retained in employment for a minimum of 270
days (approximately 9 months) in order to qualify for hiring
credit vouchering. The value of the hiring credit incentive
totals 50% of the employees's wages in the first year, 40% in
the second, 30% in the third, 20% in the fourth, and 10% in
the fifth year. Although employees can be paid more, the
maximum wage rate used to calculate the credit is 150% of
minimum wage. Aircraft manufacturers in Long Beach may
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calculate the credit based on 202% of minimum wage. The hiring
credit may only be applied to offset tax liability
attributable to revenues received from activities located
within the EZ where the employee is primarily working. While
not every employer is able to fully utilize the maximum value
of the credit, it could be as high as $37,700 over five years.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's purpose : The Assembly Committee on Jobs, Economic
Development and the Economy (JEDE) initiated a comprehensive
review of the enterprise zone and other geographically
targeted economic development area (G-TEDA) programs in August
2009.
With the support of the Speaker of the Assembly, the committee
is currently engaging in an extended discussion on how best to
reform the G-TEDA programs. Program improvements will be
amended into AB 2476.
2)Enterprise Zones : Existing law authorizes the creation of up
to 42 enterprise zones based on a statutory list of criteria
related to poverty and economic dislocation. The EZ program
is based on the economic principle that targeting significant
incentives to lower income communities allows these
communities to more effectively compete for new businesses and
retain existing businesses, which results in increased tax
revenues, less reliance on social services, and lower public
safety costs. Residents and businesses also directly benefit
from these more sustainable economic conditions through
improved neighborhoods, business expansion, and job creation.
Enterprise zones are located in portions of 54 Assembly
Districts and 35 Senate Districts. Enterprise zones range in
size from one square mile to 70 square miles and in geographic
locations ranging from Eureka and Shasta Valley near the
Oregon border to San Diego and Calexico along the Mexican
border.
Under the EZ Program, businesses and other entities located
within the area are eligible for a variety of local and state
incentives. In its application, a prospective EZ is required
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to identify specific local government incentives that will be
made available to businesses located in the proposed G-TEDA.
The local incentives can, among other things, include writing
down the costs of development, funding related infrastructure
improvements, providing job training to prospective employees,
or establishing streamlined processes for obtaining permits.
The state also offers a number of incentives, including tax
credits, special tax provisions, priority notification in the
sale of state surplus lands, access to certain Brownfield
clean-up programs, and preferential treatment for state
contracts. Below is a chart comparing the state tax
incentives offered to businesses located in a G-TEDA.
------------------------------------------------------------
| Comparison of State Tax Benefits by Targeted Area |
------------------------------------------------------------
|-----------+------+---------+---------+----------+----------|
| |Hiring|Longer |Sales |Accelerate|Lender |
| | |NOL<1> |and Use |d |Interest |
| |Credit|Carry- |Tax |Depreciati|Deduction |
| | |Forward |Credit |on | |
| | |Period | | | |
|-----------+------+---------+---------+----------+----------|
|Enterprise | X | X | X | X | X |
|Zone | | | | | |
|-----------+------+---------+---------+----------+----------|
|Manufacturi| X | | | | |
|ng | | | | | |
|Enhancement| | | | | |
| Zone | | | | | |
|-----------+------+---------+---------+----------+----------|
|Targeted | X | X | X | X | |
|Tax Area | | | | | |
|-----------+------+---------+---------+----------+----------|
|Local | X | X | X | X | |
|Agency | | | | | |
|Military | | | | | |
|Base | | | | | |
|Recovery | | | | | |
|Area | | | | | |
------------------------------------------------------------
------------------------------------------------------------
---------------------------
<1> NOL= Net Operating Loss
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|Source: Legislative Analyst's Office |
------------------------------------------------------------
The Franchise Tax Board (FTB) reported that in 2007 - the most
current data available - $481 million in credits and
deductions were claimed through corporate and personal income
tax (PIT) returns. Additionally, FTB reports hundreds of
millions in carryover credits have been earned by businesses
located in G-TEDAs, but have not been claimed. Below is a
chart that displays the dollar amount of G-TEDA incentives
claimed through each of the tax incentives.
--------------------------------------------------------------
| | 2004 | 2005 | 2006 | 2007 |
| | | | | |
|----------------------+---------+---------+---------+---------|
|Hiring and Sales Tax |$349,127 |$362,620 |$385,677 |$430,934 |
|Credit | | | | |
|----------------------+---------+---------+---------+---------|
|NOL Deductions |$72,326 |$74,024 |$126,106 |$207,993 |
|----------------------+---------+---------+---------+---------|
|Tax Impact |$5,171 |$5,966 |$11,351 |$15,807 |
|----------------------+---------+---------+---------+---------|
|Net Interest |$432,867 |$490,129 |$517,310 |$520,372 |
|Deductions | | | | |
|----------------------+---------+---------+---------+---------|
|Tax Impact |$29,103 |$32,395 |$34,156 |$34,438 |
|----------------------+---------+---------+---------+---------|
|Business Expense |$4,387 |$4,770 |$4,463 |$5,136 |
|Deductions | | | | |
|----------------------+---------+---------+---------+---------|
|Tax Impact |$222 |$200 |$188 |$197 |
|----------------------+---------+---------+---------+---------|
|Total Tax Impact |$383,624 |$401,181 |$431,371 |$481,376 |
--------------------------------------------------------------
------------------------------------------------------------
| |
|------------------------------------------------------------|
|Data Provided by the Franchise Tax Board |
|11/9/09 |
| |
------------------------------------------------------------
Across the U.S., 37 other states have a G-TEDA type program.
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Economic developers have testified that the G-TEDA programs
are among the state's last remaining marketing tools for
attracting new businesses and investment to California.
Others, however, remain unconvinced and have suggested that
this level of tax expenditure could be better spent elsewhere.
Complicating the matter is that much of the discussion around
the relative successes or failures of the G-TEDA programs and
individual areas is anecdotal. Of the academic attempts to
assess the state's G-TEDA programs, they have produced mixed
results. Some of the variance among study findings can be
attributed to the limited access to good data sets. Research
generally requires the development of a set of assumptions in
order to undertake the study. The assumptions made in the
case of the G-TEDAs have, however, left most, if not all, of
the methodological approaches open to debate. Moreover, the
problems in assessing the G-TEDA programs have been further
complicated by a lack of consensus on why the programs have
been established and what objectives are trying to be
achieved.
Responding to the differing reports, HCD commissioned its own
report in 2006, which looked at the impact of the program on
neighborhood poverty, income, rents, and vacancy rates. The
report showed that, on average, within enterprise zones
between 1990 and 2000:
a) Poverty rates declined 7.35 percent more than the rest
of the state.
b) Unemployment rates declined 1.2 percent more than the
rest of the state.
c) Household incomes increased 7.1 percent more than the
rest of the state.
d) Wage and salary income increased 3.5 percent more than
the rest of the state.
Since HCD's 2006 report, two additional reports have been
released. It is important to note, however, that while the
reports were released in 2008 and 2009, the business
development data used to form the statistical analysis are
from 2004 and earlier.
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In November 2008 and later revised and re-released in March
2009, economists from the University of Southern California
(USC) released a report with consistent findings of the HCD
report. The USC study found that federal empowerment zone,
federal enterprise communities, and state enterprise zones
have "positive, statistically significant impacts on local
labor markets in terms of the unemployment rate, the poverty
rate, the fraction with wage and salary income, and
employment."
The Public Policy Institute of California released its study
of the EZ program in June 2009, looking at whether the EZ
program had been successful in creating more jobs than would
have otherwise been established without the zone. The main
finding of the report was that, "enterprise zones have no
statistically significant effect on either business creation
or employment growth rates." The report also noted that the
effects of the program differed between zones, perhaps due to
the effectiveness of the local administration. In addition,
the report found that the program had a positive effect on
employment under each of the following conditions:
a) When manufacturing constitutes a small share of overall
zone employment
b) When the zone administrator reported doing more local
zone marketing activities
c) When the zone administrator reported doing less
facilitation of the hiring tax credit
3)Findings from the 2009 oversight hearings : During the course
of the review, JEDE held three public hearings, met with a
variety of stakeholder groups, and produced an extensive white
paper that details the structure and activities of the G-TEDA
program in California, as well as those in other states.
Speakers included representatives from a wide variety of
perspectives including practioners, researchers, nonprofits,
local governments, labor, and business leaders.
At the first hearing, witnesses provided a general overview of
the G-TEDA programs including presentations on the most recent
program evaluation studies. The second hearing focused on how
the G-TEDA programs help the state's innovation-based
industries - especially those in the manufacturing area. At
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the third hearing, presentations were arranged around three
topics: workforce training, small business development, and
models for measuring success. Based on this work, JEDE made
five key findings that are leading its further review of the
recommendations:
a) There is clear lack of consistency between the G-TEDA's
programs' mission, their programmatic elements, and
evaluation methods. Realigning these three elements is
central to improving program outcomes.
b) While a number of oversight and accountability
improvements were made in 2006 (discussed below), it is too
soon to tell whether the new metrics will provide the data
necessary to holistically review the programs. This has
resulted in having the issue of accountability has remained
a topic in the current reform discussions.
c) G-TEDA programs in other states are more targeted toward
specific economic development outcomes. The white paper
includes two charts which display information on how other
states have chosen to implement their G-TEDA programs.
Reform discussions have also included how changes in
California's programs can impact the state's
competitiveness, as well as making the programs more
focused on specific outcomes.
d) The current business development elements of the G-TEDA
programs are insufficiently linked to current state and
local programs assisting unemployed workers. While
discussions are still in the preliminary stages, improving
linkages between the use of federal workforce dollars,
local One-Stop Career Centers, and CalWORKS is on the
reform recommendation agenda.
e) In order for the G-TEDA programs to better support small
businesses, the programs will need to be refined and better
adapted to the actual needs of small size businesses.
A summary of each of the three hearings, including
identification of areas that could be improved and the list of
recommendations, can be found in Committee's white paper,
available through the JEDE office or online at
www.assembly.ca.gov .
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4)G-TEDA Reforms in 2005/2006 : While the G-TEDA programs have
been around for decades, it was not until the winter of 2005
that the first oversight hearings were held.
During the course of these hearings, hosted jointly by JEDE
and the Assembly Committee on Revenue and Taxation, the
Committees reviewed current and best practices related to
designation, management and monitoring, and use of business
incentives available through the G-TEDA programs. As a result
of these hearings, JEDE developed a list of 47 recommendations
on how to improve the overall G-TEDA programs and drafted AB
1550 (Arambula and Karnette), Chapter 718, Statutes of 2006.
Key reforms in AB 1550 include:
a) Requiring EZ applications to be ranked based on their
economic development strategy and implementation plan,
including to the extent the strategy does the following:
sets reasonable and measurable benchmarks, goals, and
objectives; identifies local resources, incentives, and
programs; provides for the attraction of private
investment; includes regional and community-based
partnerships; and addresses hiring and retention of
unemployed or underemployed residents or low-income
individuals.
b) Requiring G-TEDAs to biennially report to HCD on their
progress in meeting the goals and objectives identified in
their implementing MOU. G-TEDAs designated prior to
January 1, 2007, are required to update their goals and
objectives by April 15, 2008, and meet the annual reporting
requirements by October 1, 2009.
c) Adding a new audit element that requires the review of
an EZ's administrative support and whether financial
commitments made in the G-TEDA application and MOU have
been kept. The bill also made similar conforming changes
in the MEA, TTA, and LAMBRA audit requirements.
A summary of these hearings, including background materials,
is available on the JEDE Committee website.
5)Establishing employee eligibility : Existing law authorizes
the establishment of a TEA as a means for encouraging
businesses within an EZ to hire new workers that live in and
around the zone. TEAs are designated by the EZ based on the
most current U.S. Census data and can include areas both
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within and adjacent to the zone. None of the other 12
categories of eligible employee provide a nexus to the
community where the actual zone is located. Well over half of
the hiring credit vouchers use the TEA designation for
qualifying employees.
The high usage of the TEA designation is related to a number
of factors. One of the most significant advantages of the TEA
over qualifying an employee under the other criteria is the
employer's ability to easily access the appropriate
documentation for submitting the voucher application. As an
example, to demonstrate that an employee qualifies as a
resident of a TEA, an employer has the option of submitting a
copy of the employee's driver's license or state
identification card.
In order to demonstrate that an employee qualifies for the
other eligibility categories, employers have to ask employees
to provide them with copies of sometimes very personal
documents, including, but not limited to, bankruptcy
documents, physician's statements, letters from parole, and
public assistance records. Some employers have voiced
concerns about asking employees questions about their
eligibility other than being a resident of a TEA.
Further clouding an accurate understanding of which employees
are being advantaged by the program is the fact that employers
voucher employees based on a single category of eligibility.
This means that to the extent that an employee is living in a
TEA, is a Vietnam Veteran and a member of a federally
recognized tribe, was unemployed and receiving assistance at
the local One Stop Career Centers at the time of employment in
a company located in an enterprise zone, the current data
system can only register one category of eligibility - most
likely that being that the employee lives in a TEA.
6)Related legislation : The following is a list of related
legislation.
a) AB 121 (Maze) and AB 2709 (Maze) - Hiring Credit
Eligibility for Former Foster Youth : These bills would
have established a separate category of employee
eligibility under the California Enterprise Zone Program's
hiring income tax credit program to include a person who
was a former foster care recipient. Status: Held in
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Assembly Committee on Revenue and Taxation during the
2007-08 Session.
b) AB 579 (Swanson) - LAMBRA Code Update : This bill would
have extended the official term of the designation of a
LAMBRA from eight to 15 years, except that the term may be
for 20 years if the Department of Housing and Community
Development determines that certain conditions exist in
year five. Status: Held in Assembly Committee on
Appropriations during the 2007-08 legislative session.
c) AB 1550 (Arambula) - Final Enterprise Zone Reform Act
from 2005-06 Session : This bill made a number of
significant changes to the management and oversight of the
G-TEDA programs. This bill is the result of extensive
oversight hearings by JEDE and Revenue and Taxation, as
well as extended discussions with stakeholder groups.
Status: Signed by the Governor, Chapter 718, Statutes of
2006.
d) AB 1766 (Dymally) - Initial Enterprise Reform Act from
2005-06 Session : This bill would have made a number of
significant changes to the G-TEDA Program's including
streamlining the selection criteria, authorizing
noncontiguous zones, extending certain zone designations,
and tightening up of the TEA. Status: Held on the Senate
Floor in the 2005-06 Session.
e) AB 2044 (Caballero) - Cap on Enterprise Zone Credits :
This bill places annual caps on certain EZ related tax
credits and increases the basis for calculating the hiring
credit from 150% of minimum wage to 250%. Status: Pending
in JEDE.
f) AB 2589 (Runner) - Aggregate Credits to Offset Tax
Liability within Zones : This bill would have authorized a
business to use credits generated in an EZ to offset taxes
attributable to the business from any EZ. Status: Held in
the Assembly Committee of Revenue and Taxation during the
2005-06 Session.
g) SB 1008 (Duchney) - Initial Enterprise Reform Act from
2005-06 Session: This bill would have made a number of
significant changes in G-TEDA Program including
streamlining the selection criteria, authorizing
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noncontiguous zones, extending certain zone designations,
and tightening up of the TEA. Status: Held in the
Assembly Committee on Jobs, Economic Development, and the
Economy during the 2005-06 Session.
h) SB 341 (Lowenthal) - EZ CEQA Reform : This bill would
have expanded the ways in which a local government applying
for an EZ designation after October 1, 2007, may meet the
requirements of California Environmental Quality Act and
eliminates the ability of these jurisdictions to limit
subsequent environmental reviews based on the contents of
the initial CEQA documents. Status: Signed by the
Governor, Chapter 643, Statutes of 2007.
i) SB 763 (Lowenthal) - Voucher Fees : This bill expanded
HCD's fee authority for the purpose of offsetting the cost
of administering the geographically-targeted economic
development area programs. Status: Signed by the
Governor, Chapter 634, Statutes of 2006.
j) SB 974 (Steinberg) - Career Training Credit : This bill
would authorize a tax credit for employers who provide
specified career technical education and modify the
definition of "ex-offender" for the purposes of the EZ
hiring credit. The bill provides legislative intent that
the EZ programs have been ineffectual and should be phased
out for incentives that enhance workforce development and
high school graduation rates. Status: Pending in Senate
Education Committee.
REGISTERED SUPPORT / OPPOSITION :
Note
The JEDE Committee has received 76 letters relating to the
pending reform discussions on Enterprise Zones. The letters
came from a variety of small business owners, local governments
and individuals. 75 letters expressed their support for
enterprise zones and 1 expressed opposition.
Support
Assembly Committee on Jobs, Economic Development and the
Economy, (sponsor)
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Opposition
None known
Analysis Prepared by : Toni Symonds / J., E.D. & E. / (916)
319-2090