BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 1411 (V.M. Perez) - Economic development: enterprise zones.
Amended: August 6, 2012 Policy Vote: T&H 9-0
Urgency: No Mandate: No
Hearing Date: August 6, 2012
Consultant: Mark McKenzie
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 1411 would make numerous changes to the
Enterprise Zone Law, including substantive revisions to zone
selection criteria and administrative provisions.
Fiscal Impact:
Minor costs to the Department of Housing and Community
Development (HCD) to revise and update regulations to
reflect changes to audit provisions and zone eligibility and
selection criteria.
HCD administrative costs of up to $275,000 (Enterprise Zone
Fund) related to expanded auditing activities and providing
additional technical assistance and training. These costs
may not be fully covered by voucher fees paid by G-TEDAs.
Franchise Tax Board (FTB) administrative costs of up to
$133,000 in 2012-13, with ongoing costs of $128,000 (General
Fund) related to expanded reporting requirements, assuming
FTB is expected to provide G-TEDA tax credit and incentive
data on personal income tax returns as it currently provides
on corporate tax filers.
Potential increase in General Fund costs, to the extent
that the requirement that EDD provide voucher eligibility
certification to specified persons results in an increase in
the number of hiring credit vouchers. Each voucher costs
the General Fund an average of $37,000 in General Fund
losses.
Background: Under existing law, HCD can designate up to 42
enterprise zones that meet specified criteria through a
competitive process, and each zone has a duration of 15 years.
AB 1411 (V.M. Perez)
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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.
After receiving a designation, an enterprise zone must submit a
biennial report to HCD on the zone's progress relative to its
goals, objectives, and commitments set forth in its memorandum
of understanding with HCD. Every geographically targeted
economic development area (G-TEDA) must also comply with the
biennial reporting requirement. In addition, HCD is required to
audit each G-TEDA, including enterprise zones, at least once
every five years, and is authorized to audit a zone at any time.
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 submit a report to the Legislature every five
years that evaluates the effect of the enterprise zone 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.
Existing law require FTB to provide annual reports to HCD and
the Legislature on the dollar value of enterprise zone tax
incentives claimed each year by businesses operating within a
zone. In order to collect the necessary data, FTB is required
to distribute forms that allow for the reporting of specified
data on hiring credits and zone tax incentives.
Proposed Law: AB 1411 would make numerous changes to the
enterprise zone program and other requirements for G-TEDAs.
AB 1411 (V.M. Perez)
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Among other things, this bill would:
Revise eligibility criteria for proposed zones to
require the zone to be located solely in low-income census
tracts and meet specified criteria.
Allow an applicant's economic development strategy and
implementation plan to identify specified local resources
that will be used to implement the plan and explain how
these resources will leverage available state resources.
Limit the size of proposed zones that are within the
boundaries of one or more previously designated zones to
nor more than 15% larger than the previous zone, except
those in rural areas may exceed the size of previous zones
by 25%.
Require HCD to post specified information on
administrative memoranda, and enterprise zone and targeted
employment area boundaries, on its website.
Revise the information that G-TEDAs report biennially to
HCD.
Require HCD to review biennial progress reports to
determine whether an audit is warranted and require HCD to
audit a G-TEDA that fails to submit timely reports.
Require HCD to provide technical assistance and training
during the audit process to help G-TEDAs address identified
deficiencies.
Revise the criteria HCD uses to judge whether a G-TEDA
audit determination is superior, passing, or failing.
Require state entities to consider how G-TEDA programs
could be integrated to maximize benefits to workers and
businesses when developing specified workforce development
and training plans and strategies.
Require the Employment Development Department (EDD) to
provide letters to certify an unemployed person's
eligibility for a hiring tax credit as a person
participating in a federal Workforce Development Act
program.
Require local education entities that administer student
work permits to consider how hiring credits could be used
to benefit lower-income applicants for permits.
Revise FTB's annual reporting requirement to include
additional information on G-TEDA tax credits and other
incentives, to the extent available, and require FTB to
review both personal income tax and corporate tax returns
when collecting information.
Revise, add, and delete other criteria, and reconstitute
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some existing provisions.
Staff Comments: This bill is intended to enact numerous reforms
and changes, primarily related to the enterprise zone program,
identified through a series of informational hearings conducted
by the Assembly Jobs, Economic Development, and the Economy
Committee.
One of the more significant reforms in the bill is the
limitations on the size of new zones that are within the
boundaries of a previously designated zone. 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. AB 1411 would limit the size of new zones, if a
portion of the proposed zone includes an area that lies within a
previously designated zone or zones, to no larger than 15%
greater than the size of the previously designated and expanded
zone, as specified. A proposed zone in a rural area may expand
by up to 25%. Limiting the size of new zones would result in
unknown future General Fund savings when compared to potential
expansion of zone size without the proposed limits.
The bill makes numerous changes to enterprise zone law that
would require HCD to revise and update regulations to reflect
those changes. HCD would incur part-time staffing costs in
2012-13 related to this workload, but the costs are absorbable.
HCD would also incur ongoing costs due to increased audit
activity, including travel expenses, as well as increased
monitoring and technical assistance for G-TEDAs. These annual
costs could be in the range of $275,000, and could be funded
from the Enterprise Zone Fund, which includes fee revenue
charged to G-TEDAs for processing vouchers. The current fee is
$15, but this level of funding would likely be insufficient to
fully cover HCD's costs to the program as a result of this bill.
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One provision of this bill would require EDD to provide letters
to unemployed prospective employees that could be used to
certify their eligibility as a person participating in a
Workforce Development Act program. This certification would
presumably be provided to employers in an enterprise zone to
allow for the claim of an EZ hiring credit. There are currently
approximately 112,000 vouchers for which credits are claimed,
and each hiring credit is worth approximately $37,000 in tax
benefits for employers. There are currently only 768 vouchers
that are based upon eligibility requirements associated with
Workforce Investment Act certifications. To the extent this
bill results in an increase in voucher claims by these persons,
there would be a General Fund impact.
The Franchise Tax Board developed form 3805Z to collect
specified information on tax credits and incentives provided to
businesses for G-TEDAs. Currently, FTB utilizes a manual
process to provide necessary data to HCD and the Legislature
from approximately 5,000 corporate tax filers who claim G-TEDA
incentives each year.
Although the bill specifies that FTB would only provide the
additional data "to the extent it is reasonably available,"
staff assumes that additional data would need to be manually
processed from approximately 23,000 personal income tax returns
of taxpayers who claim G-TEDA incentives each year. FTB
estimates first-year costs of approximately $133,000 to develop,
program, and test system changes to implement expanded
reporting, and an additional $128,000 in ongoing annual costs to
provide the expanded reports.
Recommended Amendments: Staff recommends the following
amendments:
Page 8, line 4: strike: "Redevelopment tax increment moneys
and"
Page 20, line 5, strike: "returns from personal and corporate
tax returns" and insert: "tax returns filed by taxpayers
claiming G-TEDA tax credits and tax incentives."