BILL ANALYSIS Ó
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 1411
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: V.M. PÉrez
VERSION: 6/28/11
Analysis by: Mark Stivers FISCAL: Yes
Hearing date: July 5, 2011
SUBJECT:
Enterprise zones
DESCRIPTION:
This bill makes various changes to the zone selection and
administrative provisions of the enterprise zone program.
ANALYSIS:
Under existing law, the Department of Housing and Community
Development (HCD) can designate up to 42 enterprise zones. Each
designation lasts for 15 years. Within an enterprise zone,
cities and counties can relax regulatory controls such as
permits and development fees, provide tax incentives, expand
infrastructure, and target federal grants for education, health
and welfare, economic development, vocational education,
transportation, and housing. The state provides a number of tax
credits and deductions for businesses in the zone, including
credits for sales and use tax paid on manufacturing equipment
purchased, hiring credits for qualified employees, 100% net
operating loss carryover for losses associated with operations
within the enterprise zone, deduction of interest earned by
lenders who loan money to enterprise zone businesses, and
election to expense rather than amortize equipment used within
the enterprise zone. In order to claim a hiring credit, a
business must obtain a voucher from the enterprise zone.
To be eligible for designation, a proposed enterprise zone area
must meet either of the following:
1. Fulfill at least one of the following criteria:
Meet the criteria for the now-defunct Urban Development
Action Grant (UDAG) program of the United States Department
of Housing and Urban Development.
Meet criteria of economic distress related to those used
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in determining eligibility under the UDAG program.
Have experienced plant closures within the past two
years affecting more than 100 workers.
Have a history of gang-related activity, whether or not
crimes of violence have been committed.
1.Fulfill at least two of the following criteria:
Have an unemployment rate not less than 3 percentage
points above the statewide average.
Be in a county where more than 70 percent of the
children participate in the federal free lunch program.
Be a low-income area.
HCD selects enterprise zones through a competitive process based
on the appropriateness of the applicant's proposed economic
development strategy and implementation plan. HCD awards bonus
points to proposed zones that meet at least two of the following
criteria:
Have at least 17.5 percent of households below the
poverty level.
Have an average unemployment rate that is not less than
five percentage points above the statewide average.
Have a unique distress factor affecting long-term
economic development, such as resource depletion, plant
closure, industry recession, natural disaster, or military
base closure.
After receiving a designation, an enterprise zone biennially
must report to HCD on the zone's progress relative to its goals,
objectives, and commitments set forth in its memorandum of
understanding with HCD. In addition, HCD may audit a zone at
any time and must audit each zone at least once every five
years. If a zone receives a failing grade, it must enter into a
written agreement to remedy the deficiencies. Ultimately, if a
zone fails to remedy the deficiencies, HCD must de-designate the
zone.
HCD is required to report to the Legislature every five years
evaluating the effect of the program on employment, investment,
incomes, and state and local tax revenues in enterprise zones.
The report must also review the progress and effectiveness of
each zone.
This bill makes various changes to the zone selection and
AB 1411 (V.M. PÉREZ) Page 3
administrative provisions of the enterprise zone program.
Specifically, the bill:
Zone designation
Alters the eligibility criteria for a proposed zone such that
a proposed zone must be located solely in low-income census
tracts and meet one of the following criteria:
Have an unemployment rate not less than 3 percentage
points above the statewide average.
Be served by schools in which at least 70 percent of the
students participate in the federal free lunch program.
Have experienced significant distress factors that HCD
may define but must include significant gang activity, high
crime rates, and a significant number of plant or business
closures.
Deletes the provision prohibiting zone applicants from drawing
boundaries to include larger stable businesses to the
detriment of areas that are truly economically depressed.
Allows an applicant's economic development strategy and
implementation plan to identify local resources that the
jurisdiction will utilize to implement its strategy and plan
and explain how these resources will leverage enterprise zone
benefits.
Adds redevelopment tax increment, federal Workforce Investment
Act, federal Community Development Block Grant, CalWORKS, and
local educational funds to the list of local resources that
applicants may commit to the program.
Deletes from the list of scoring bonus criteria unique
distress factors affecting long-term development.
Agency responsibilities
Requires enterprise zones to include in their biennial report
to HCD the financial value of local incentives and other
resources benefiting zone and various voucher-related data.
Requires enterprise zones to provide information HCD needs to
prepare its report to the Legislature.
Requires HCD to submit a report to the Legislature on the
enterprise zone program every six years, as opposed to every
five years, and requires the report to include an evaluation
of the program's effects on retaining and increasing
employment among specified target populations.
Requires HCD to serve as a liaison between the state and
AB 1411 (V.M. PÉREZ) Page 4
enterprise zone residents, businesses, workers, non-profit
organizations, and local governments.
Requires state agencies, consistent with their statutory
duties, to respond to requests made by and on behalf of an
enterprise zone.
Requires state agencies to consider harmonizing their programs
with the enterprise zone program to maximize the benefits to
workers and businesses.
Requires the Employment Development Department to provide
letters certifying an unemployed jobseeker's eligibility for a
hiring tax credit due to eligibility under the Workforce
Investment Act.
Requires local educational entities that administer student
work permits to consider how hiring credits could be used to
benefit lower-income students who apply for work permits.
Hiring tax credit vouchers
Requires that hiring credit vouchers be approved or denied
based upon the regulations and administrative memoranda in
effect on the date of application.
Provides that administrative memoranda are binding on all
parties unless modified or repealed in writing.
Requires HCD to maintain on its website a catalog of
administrative memoranda in effect and update the website
within 10 business days of the publication, modification, or
repeal of a memorandum.
Requires HCD to post enterprise zone and targeted employment
area boundaries and changes thereto on its website within 10
business days.
Zone audits
Requires HCD to consider progress report findings as a basis
for conducting an audit.
Requires HCD to audit zones that fail to submit a biennial
report.
Deems as superior an enterprise zone that, according to an HCD
audit, meets 90 percent of its goals, objectives, or
commitments, as opposed to 100 percent.
Requires HCD to provide technical assistance and training to
address inadequacies identified in an audit.
COMMENTS:
1.Purpose of the bill . According to the author, one of the most
important things state government can do during difficult
AB 1411 (V.M. PÉREZ) Page 5
economic times is to help keep people employed. When
Californians have jobs, local and state governments have the
necessary resources to fund local priorities such as
education, public safety, and community services. At the same
time, it is essential that scarce state resources are put to
good use for economic recovery. The enterprise zone program
is an economic development program that encourages businesses,
through tax and other incentives, to locate and create jobs in
targeted, economically distressed communities. Beginning in
2009, the Assembly Jobs, Economic Development, and the Economy
Committee initiated a series of oversight hearings on the
enterprise zone program to ensure that it has been meeting its
economic development goals. The reforms in this bill are
based on this examination, which spanned two years of
oversight hearings, working group meetings, stakeholder
engagement, and a comparative review of other states'
programs. While more comprehensive reforms have been proposed
this session in AB 231 (V.M. Pérez), this bill advances only
those recommendations that relate to increased accountability
and program transparency.
2.Voucher rules . In order to claim a hiring credit, a business
must obtain a voucher from the enterprise zone administrator.
An employer may appeal a zone administrator decision to HCD.
This bill requires that hiring credit vouchers be approved or
denied based upon the regulations and administrative memoranda
in effect on the date of application. While this seems to
make sense on its face, the language may be overly broad and
include actions taken by the Franchise Tax Board (FTB).
Recent Board of Equalization (BOE) and court cases have
challenged the ability of the Franchise Tax Board (FTB) to
determine the appropriateness of a voucher issued by a zone
administrator. The BOE affirmed FTB's role in The Appeal of
Deluxe (Dec. 12, 2006, No. 297128) 2006 Cal. Tax Lexis 432,
but the Second Court of Appeal subsequently weakened FTB's
authority in Dicon Fiberoptics v. Franchise Tax Board (Case
B202997, 2009) by stating that while FTB is legally authorized
to audit hiring credits, the voucher constitutes prima facie
evidence that the taxpayer is entitled to the credit. So if
FTB looks behind a voucher, discovers some practice it deems
illegal, and writes a memorandum clarifying its illegality,
would the bill prohibit FTB from rejecting vouchers issued
prior to the memorandum? The committee may wish to consider
deleting this provision from the bill until its ramifications
are more clearly understood.
AB 1411 (V.M. PÉREZ) Page 6
3.Increasing zone sizes . Over the last decade, the average size
of an enterprise zone has increased almost 500%. Most of this
increase is driven by the expansion or combination of zones
when they apply for re-designation at the end of their
original 15 year lifespan. Of the 28 enterprise zones that
HCD has re-designated, 12 grew in area by more than 15
percent. The San Joaquin County zone grew 19 times in size.
Los Angeles, Sacramento, and San Diego aggregated
previously-designated zones. Los Angeles went from five to
two zones, Sacramento from three to one zone, and San Diego
from two to one zone. Expanding and aggregating zones is akin
to increasing the cap on the number of zones without
legislative authorization. The committee may wish to consider
capping the amount that a zone may increase upon
re-designation.
4.Technical amendments .
On page 5, lines 11-13 strike "Sections 7073 and 7073.3
that include an eligible area and a qualifying commercial
or industrial area, or both, as defined by the department"
and insert "Section 7073"
On page 5, line 18 after "zone" insert ", a
Manufacturing Enhancement Area, a targeted tax area,"
On page 7, line 5 strike "Except as provided in (e),
any" and insert "Any"
On page 11, line 37 after "zone" insert "or
manufacturing enhancement area"
On page 17, lines 23-26 strike "The Franchise Tax Board
shall make available to the department and the Legislature
aggregate information on the dollar value of enterprise
zone tax credits that are claimed each year by businesses
pursuant to Section 7085.5."
Assembly votes are not relevant
POSITIONS: (Communicated to the Committee before noon on
Wednesday, June 29,
2011)
SUPPORT: None received.
AB 1411 (V.M. PÉREZ) Page 7
OPPOSED: None received.