BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 484 HEARING: 7/3/12
AUTHOR: Alejo FISCAL: Yes
VERSION: 6/21/12 TAX LEVY: No
CONSULTANT: Grinnell
ENTERPRISE ZONES
Allows taxpayers to claim enterprise zone tax benefits after the
zone expires.
Background and Existing Law
California's 40 enterprise zones are located in areas as diverse
as the state itself. From Siskiyou County to Compton, and from
San Francisco to Calexico, this program provides generous tax
incentives for firms that do business in these zones. Cities
and Counties apply to the Department of Housing and Community
Development (HCD) to designate geographic areas in their
jurisdictions as enterprise zones. HCD reviews applications,
and may designate up to 42 zones statewide for 15 year periods.
Geographic areas are eligible based on its unemployment rates,
free lunch program participation, median income, plant closures,
or history of gang-related activity.
Taxpayers located in enterprise zones may claim income and
corporation tax credits for hiring qualified individuals, sales
tax paid on equipment purchases, and can qualify banks for a net
interest deduction for loans made to a zone business. Firms may
also accelerate depreciation of equipment, and carry over 100%
of losses; however, these incentives are largely irrelevant
today because the Legislature has since enacted similar or
superior benefits for nearly all taxpayers regardless of
location.
The most significant incentive is the hiring credit. Employers
inside an enterprise zone may claim a tax credit of 50% of the
wages paid to a qualified employee in the first year, 40% in the
second year, 30% in the third year, 20% in the fourth year, and
10% in the fifth year, up to 150% of the minimum wage.
Businesses or consultants submit applications to qualify
employees to zone managers, who grant the firm or consultant a
voucher certifying eligibility if the employee qualifies. The
firm then claims the credit on its tax return. Qualified
employees include individuals:
Eligible for job training programs
Eligible for most social welfare programs
Economically disadvantaged
A "dislocated worker," as defined.
A disabled individual who is eligible or enrolled in a
state rehabilitation plan
Service connected veteran
Ex-offender
Member of a federally recognized Indian tribe
Employers may also claim the hiring credit for residents of
Targeted Employment Areas (TEAs), in addition to the criteria
listed above. Cities and counties managing enterprise zones may
draw TEAs to contain census tracts where 51% or more of the
individuals are low or moderate income, meaning 80% of the area
wide, or countywide, median. In other words, local agencies
draw TEAs to include communities where only half of the
residents are actually or somewhat low-income, but anyone living
in one qualifies his or her employers for the hiring credit
regardless of their own economic status or employability. TEAs
need not be contiguous to, or drawn within the borders of the
Enterprise Zone.
Taxpayers can also receive a certification qualifying an
employee for an enterprise zone hiring credit at any time.
Taxpayers may certify employees who worked for them in past
years, then submit claims for refunds for previous taxes paid to
FTB based on those certifications under California's general
four year statute of limitations for amending past returns, a
practice known as "retro-vouchering." SB 974 (Steinberg, 2010)
and AB 1139 (Perez, 2009) proposed to repeal the TEA criterion
and "retrovouchering," although neither bill advanced to the
Governor's Desk.
In his 2011-12 Budget, Governor Brown proposes to repeal all EZ
tax credits, citing the Legislative Analyst's Office
long-standing recommendation to reform or repeal the program,
and the PPIC Study noted below, among others. The proposal
would have increased revenue $343 million (2010-11), $583
million (2011-12), according to the Department of Finance. The
Governor states that zones would continue to provide local
incentives, but zone taxpayers could no longer receive state tax
benefits. The Legislature did not act on the Governor's
proposal.
Currently, HCD has designated 40 zones. Two zones, the City of
Watsonville and the Antelope Valley Zone, expired in 2012,
having reached the end of their 15 year designation period. HCD
has stated that it "will use its authorized discretion to not
open up applications for new zones until the program is
sufficiently reformed to strengthen its effectiveness to
incentivize job creation."
Proposed Law
Assembly Bill 484 deems a zone that expired in 2012 is
temporarily redesignated, and taxpayers within the geographic
boundaries of the previous zone shall be eligible for all tax
benefits as of the date the previous zone expired, if:
The zone sent a letter to HCD expressing their intent to
reapply for a new designation,
HCD has not issued a request for proposal, and
HCD has not conditionally designated 42 zones.
The temporary redesignation shall continue until the earlier of
January 1, 2014, or the date HCD issues conditional designation
letters to the maximum number of zones in the state. Any zone
temporarily extended under the bill shall report to HCD on
October 1, 2013, and again on December 31, 2014 on the
following:
Progress made on its goals, plans, objectives, and
commitments,
Identification of the previous two years' funding,
The number of certified new qualified employees, and a
break out by eligibility category,
Total range and average, median, and mean qualified
employee wage rates,
Number of businesses obtaining certification for
qualified employees,
Industry classification and the distribution of employee
certifications by industry sector of businesses obtaining
certifications, according to the North American Industrial
Classification System,
Distribution of employee certifications by annual gross
receipts and asset values of business obtaining
certification, and
Number of state-certified small businesses and disabled
veteran owned-business enterprises submitting
certifications.
The measure limits a temporarily redesignated zone's cap on
expansion from 15% of its current size to 10%. The bill
additionally directs the Employment Development Department (EDD)
and the State Department of Education to give high priority to
the training of unemployed individuals who reside in targeted
employment areas and enterprise zones temporarily extended by
the bill. AB 484 additionally directs EDD to assist unemployed
workers who are registered in the one-stop career centers,
provide letters to unemployed prospective employees that could
be used to certify eligibility under the Workforce Investment
Act.
AB 2183 also directs local agencies to update their targeted
employment areas whenever data from the United States Census
Bureau becomes available.
HCD must notify the Franchise Tax Board (FTB) within 60 days of
an enterprise zone extension pursuant to the bill. HCD shall
notify FTB within 60 days of the expiration of any zone. The
measure sunsets on January 1, 2015.
State Revenue Impact
According to the Franchise Tax Board (FTB), AB 484 results in
revenue losses of $12 million in 2012-13, $13 million in
2013-14, $10 million in 2014-15, and $8 million in 2015-16.
Comments
1. Purpose of the bill . According to the Author, "AB 484
allows an expiring enterprise zone and the businesses located in
the zone to continue to be eligible to receive all enterprise
zone benefits until the California Department of Housing and
Community Development (HCD) completes any regulatory or
administrative review of the program. The intent is to allow
businesses within an expired enterprise zone to continue to
receive uninterrupted benefits until such time that regulation
changes and policy reforms be determined later this year. This
bill is a one-time solution to HCD's closure of the RFP
process."
2. Everyone's a winner . Almost every zone that sought
redesignation after first expiring has been redesignated by
previous administrations for another 15 years, for an overall
life of 30 or 35 years, due to a separate legislative five year
extension. However, the law vests HCD with the discretion to
designate zones, and the department has indicated that no new
designations will happen any time soon, so taxpayers should be
aware that tax benefits expire when the zone does. AB 484
enacts a legal fiction to benefit those taxpayers: the zone
itself has legally expired, but the tax benefits don't for
another two years. As such, the bill begs the question of
whether the law intends for zones to ever expire; a condition
under the bill for temporary redesignation of a zone that's
already been in place for 15 years is a letter stating its
intent to apply for another 15 year designation. The Committee
may wish to consider whether the intent of the program is to
provide temporary economic stimulus for economically distressed
areas, or whether the program is a permanent, ongoing subsidy.
3. Assessing performance . California's enterprise zone
program, the result of collaboration between former
Assemblymembers Pat Nolan and Maxine Waters (AB 40 and 514,
1984, respectively), has evolved from a well-intentioned
legislative effort to use tax credits to draw investment into
economically depressed rural and urban areas into an almost
half-billion tax credit program referred to as California's best
economic development program. HCD administers the program,
taking over from the now-defunct Trade and Commerce Agency in
2003.
Program defenders say the program is the state's best tool for
economic development, citing accounts from taxpayers who state
that they locate in California largely because of enterprise
zone program incentives, which overcome stated disadvantages
posed by California's tax and regulatory system. Supporters
state that the incentives draw investment into economically
distressed communities and provide avenues for hard-to-hire
individuals to find employment. However, detractors argue that
the program offers a poor return on the state's investment, and
criticize individual parts such as TEA criterion, the practice
of "retrovouchering," and the sliding scale structure of the
hiring credit.
At the Senate Revenue and Taxation Committee's Enterprise Zone
Oversight Hearing on March 10, 2010, the Committee took
testimony from experts, including:
Dr. Charles Swenson, whose work shows that enterprise
zones have decreased unemployment and poverty rates in
California census tracts within zones. <1>
David Neumark, whose paper states that California's
enterprise zones have no effect upon employment and
business formation in zones,<2> and zones which have lower
share of manufacturing and where managers perform more
marketing activities have more favorable effects on
employment, and zones that devote more time to helping
firms claim tax credits, eliminate any positive benefit.<3>
Eileen Norcross of the Mercatus Center at George Mason
University, whose written testimony stated that enterprise
zones failed to produce the hoped for benefits of economic
revitalization and robust economic growth because the
--------------------------
<1> Government Programs Can Improve Local Labor Markets:
Evidence from State Enterprise Zones, Federal Empowerment Zones,
and Federal Enterprise Communities," by John Ham, Ayse
Imrohoroglu, and Charles Swenson, February 2009.
<2> "Do Enterprise Zones Create Jobs?" by David Neumark and Jed
Kolko, Journal of Urban Economics, June 2010
<3> "Do Some Enterprise Zones Create Jobs?" by Jed Kolko and
David Neumark. Journal of Policy Analysis and Entrepreneurship,
Vol 29, No. 1, 5-38 (2010).
policy is discriminatory and introduces complexity and
gamesmanship into the tax code and business decisions.
Norcross recommended that the state should instead set
rules that encourage entrepreneurship without regard to
firm size or business activity.
LAO, which recommends that the program be eliminated or
restructured.
4. Show me the money ! At first, the program resulted in
annual revenue losses of less than $10 million. However,
beginning in 1998, the program's costs began to significantly
grow as an industrious cottage industry of accounting firms and
tax credit consultants discovered its profit potential. These
firms found that the program could be marketed to taxpayers,
often under contingency arrangements, who were previously
unaware of the hiring credit's benefits, which are worth up to
$37,444 to an employer over five years if qualified wages reach
or exceed the cap. Annual costs grew to exceed $100 million in
the late 1990s, and continued to rise each year in the 2000s,
now totaling $465 million in 2008, the most recent year for
which data is available. The annual amount of the net interest
deductions claimed ranges between $17 million and $34 million
for the last eight years. Taxpayers mostly claim hiring credit
(80% of the value of the remainder) and the sales and use tax
credit (20%).
5. Time for Reform ? AB 484 calls for the extension of
benefits for taxpayers in Watsonville and the Antelope Valley,
yet contains no changes to an expensive program that has
significantly grown in cost over the years, and should be
reformed or repealed according to LAO. Additionally, benefits
have only been enhanced, never limited, since its inception.
Should the Legislature want to increase the cost-effectiveness
of the enterprise zone program, it could:
Repeal the TEA criterion and retrovouchering.
Limit tax benefits to firms under a certain amount of
annual gross receipts.
Require local agencies to reimburse the state for a
share of the foregone revenue resulting from taxpayers
applying tax credits in their zone.
Reduce the number and size of zones, or place a
statewide cap on the total number of square miles that HCD
can designate as a zone.
Tighten and focus the measurements of economic distress
necessary for HCD to designate an area as a zone.
Limit tax incentives to firms that are mobile, or who
pay higher wages, such as manufacturing, biotechnology, and
energy.
6. Diff'rent strokes . The law directs HCD to administer the
program, and allows, not requires, it to designate 42 zones.
Under the Schwarzenegger Administration, HCD approved as many
zones as the law allowed, and twice used questionable legal
authority to conditionally designate more zones than strictly
allowed by the law. In 2006, with 23 zones available and 24
applicants, HCD consolidated the unsuccessful application of the
Northeast Valley Enterprise Zone near Pacoima with the expanded
boundaries of the Los Angeles Central/Hollywood Enterprise Zone,
allowing all 24 applicants to be designated as zones. HCD
stated that its authority to provide technical review and advice
to applicants allowed the consolidation. In 2009, HCD
consolidated the application for the Northern Sacramento
Enterprise Zone with another Sacramento zone conditionally
designated in 2008. HCD also designated larger areas in zones;
in the case of the Stockton/San Joaquin County zone, the 30
square mile zone in place from 1993-2008 was expanded to 650
square miles for its next 15 years. In contrast, the Brown
administration first proposed to repeal tax benefits, and has
now indicated that it won't designate any new zones until the
program changes significantly.
7. Deluxe and Dicon . HCD is planning to issue new regulations
for the program; however, they will likely again become subject
to litigation from tax credit consultants, who unsuccessfully
brought suit to enjoin HCD's 2007 regulations in Cyntron v. HCD
et al , and also failed to disqualify the Franchise Tax Board
from auditing enterprise zone tax credits at all first through
the BOE, then in the courts. The BOE affirmed FTB's authority
in The Appeal of Deluxe (Case No. 297128). However, tax credit
consultants appealed to the courts, and the California Court of
Appeal weakened FTB's authority in Dicon Fiberoptics v.
Franchise Tax Board (Case B202997, 2009), holding that while
FTB is legally authorized to audit EZ credits, the voucher
constitutes prima facie evidence that the taxpayer is entitled
to the credit. FTB appealed this case to the California Supreme
Court, which unanimously reversed the Court of Appeal's decision
in April, 2012, thereby allowing FTB to continue to audit
documentation of enterprise zone tax credits.
8. What's new ? The author amended AB 484 on June 21, 2012 to
insert additional reporting requirements for temporarily
extended zones, and enact three other reforms that have been
discussed among interested parties in recent years, and build on
the efforts of the Assembly Committee on Jobs, Economic
Development, and the Economy to identify consensus reforms,
including:
Limiting zone expansions to 10% of current size for
zones redesignated under the bill, instead of the current
15% under existing law.
Enacting the so-called "golden-ticket" approach, where
EDD provides certifications to individuals who complete
workforce training programs, in the hopes that the
enterprise zone program and workforce training programs can
complement each other, and giving these individuals a leg
up by providing certainty to the employer that the
individual qualifies them for the hiring credit.
Requires timely updates to TEAs, instead of relying on
older data. Newer TEAs ensure that residing in an area
that was once somewhat poor, but now houses more affluent
individuals, doesn't qualify the employer for a tax credit.
However, the measure applies these reforms solely to the zones
it seeks to temporarily extend, while HCD indicates that its
forthcoming regulatory package will apply the same reforms to
all existing zones. Additionally, the measure does not
specifically preclude firms from obtaining certification for not
supplying the gross receipt and asset value information the
temporarily extended zone must report to HCD under the
amendments. The Committee may wish to consider whether the
recent amendments represent sufficient reform to a program with
substantial doubts regarding cost-effectiveness and its promises
of creating economic growth.
Assembly Actions
Not relevant to this version of the bill.
Support and Opposition (6/14/12)
Support : Steve Tate, Mayor of the City of Morgan Hill, Richard
Constantine, Mayor Pro Tempore of the City of Morgan Hill,
Madison Nguyen Vice Mayor of the City of San Jose, Granite
Construction Company, Los Angeles County Economic Development
Commission, Aaron's, Aerowire Technical Services, American
Council of Engineering Companies, Antelope Valley Black Chamber
of Commerce, Antelope Valley Board of Trade, Antelope Valley
Chamber of Commerce, Antelope Valley Harley-Davidson, Antelope
Valley Mall, Building Industry Association of Southern
California, Burkey Cox Evans & Bradford, Accountancy
Corporation, California Aerospace and Technology Association,
California Asian Pacific Chamber of Commerce, California
Association for Local Economic Development, California
Association of Enterprise Zones, California Bankers Association,
California Business Properties Association, California Chamber
of Commerce, California Employment Opportunity Network,
California Grocers Association, California Independent Bankers
Association, California Manufacturing and Technology
Association, California Retailers Association, Camacho Auto
Sales, City of Colton, City of Hesperia, City of Kingsburg, City
of Lancaster, City of Mendota, City of Palmdale, City of
Salinas, City of Selma, City of Watsonville, Coalition of Small
and Disabled Veterans Businesses, Del Mar Food Products
Corporation, Douglas B. Weber Dentistry, Driscoll's, Elyxir
Distributing, LLC, Goodwill Southern California, Greater
Antelope Valley Association of Realtors, Greater Antelope Valley
Economic Alliance, HL Performance Converters, Lancaster Chamber
of Commerce, Lance Camper, League of California Cities, League
of Cities, Los Angeles Division, Lockheed Martin, Long Beach
Area Chamber of Commerce, Los Angeles Area Chamber of Commerce,
Los Angeles County Economic Development Corporation,
MB-Technology, Museum of Art & History, National City Chamber of
Commerce, Nordic's Naturals, Palmdale Chamber of Commerce, Santa
Cruz Chamber of Commerce, Smith and Vandiver, SSA Marine,
Stanislaus Economic Development & Workforce Alliance, Town of
Apple Valley UAW, Local 887 United Parcel Service, the
Greenlining Institute.
Opposition : California Conference Board of the Amalgamated
Transit Union, California Labor Federation, California
Nurses Association, California Professional Firefighters,
California Tax Reform Association, California Teamsters
Public Affairs Council, Engineers and Scientists of
California, International Longshore and Warehouse Union,
National Nurses Organizing Committee, Professional and
Technical Engineers - Local 21, State Building and
Construction Trades Council, United Food and Commercial
Workers Union, UNITE HERE, Utility Workers Union of America
- Local 132, Western States Council.