BILL ANALYSIS                                                                                                                                                                                                    

                                                                  AB 2476
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          Date of Hearing:   April 20, 2010

                               V. Manuel Perez, Chair
           AB 2476 (V Manuel Perez and Caballero) - As Amended:  April 13,  
          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  

             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  

             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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               iii)   Eligible to be a voluntary or mandatory registrant  
                 under GAIN, or its successor;

               iv)    An economically disadvantaged individual 14 years or  

               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  

            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  

            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  

            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  

            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  

             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  


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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  

             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  

              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  
              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. 



           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.  

          Assembly Committee on Jobs, Economic Development and the  
          Economy, (sponsor)


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          None known

          Analysis Prepared by  :    Toni Symonds / J., E.D. & E. / (916)