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Assemblyman Smyth: “Cancelling Enterprise Zones … ill-timed bait and switch”

From Assemblyman Cameron Smyth in Fox & Hounds Daily:

An article in Forbes shortly after the November election charted California’s fall from role model to cautionary tale, aptly noting that the decline of our economy was largely self-inflicted. We have over-taxed and over-regulated businesses to the point that it no longer makes financial sense for them to stay here, let alone move or expand here. At a time when we should be doing everything in our power to stimulate economic growth, Governor Brown has proposed extending tax increases and eliminating tax credits. Rather than figuring out how to attract businesses to California, these actions will do everything short of packing the moving vans for them.

While cuts and tax extensions remain the most controversial centerpieces of Governor Brown’s proposed budget, his call to eliminate redevelopment agencies and Enterprise Zones has many local government advocates, including myself, concerned. Enterprise Zones are an important tool for local governments looking to spark job creation and economic development. The impact of the Governor’s proposal on communities in my district and around California would be devastating.

For those unfamiliar with the program, an Enterprise Zone is a designated area in which businesses can receive substantial tax credits and benefits for things like equipment purchases, and hiring qualified employees – veterans, ex-offenders, and other disadvantaged workers, to name a few. These designations last for 15 years, after which the area must reapply for a new designation. Since the program’s inception in 1984, businesses in Enterprise Zones have recognized over $300 million in tax incentives.

Almost four years ago, the City of Santa Clarita received an Enterprise Zone designation that has generated nearly $70 million in economic benefits for the surrounding community. Just last month, Santa Clarita and part of the surrounding unincorporated Los Angeles County were granted another Enterprise Zone designation – the first city/county partnership of its kind. Now, Governor Brown wants to end not only new Enterprise Zone designations, but also tax credits for existing Enterprise Zones.

Cancelling Enterprise Zone tax credits in the middle of the 15-year term is constitutionally questionable, but regardless, it is an ill-timed bait and switch for the local governments and businesses that have made long-term business decisions based on the availability of existing tax incentives. While planning for the future hasn’t been one of our state government’s strong points over the last decade, we shouldn’t penalize businesses that plan ahead.

Governor Brown’s rationale for ending the program is based on a study by the Public Policy Institute of California that found no net effect to the state. He suggests that instead of generating new economic development, they simply shift economic activity from one geographic area in the state to another. Therefore, he concludes, they are not of statewide interest.

I disagree.

In many cases, the tax incentives created by Enterprise Zones are the only things keeping businesses from fleeing to other states and I believe the state has a compelling interest in maintaining the program. A co-author of that same PPIC study admitted that it did not account for the program’s effect on lowering poverty and raising income. In fact, another study conducted by researchers at two universities found that Enterprise Zones led to lower poverty and unemployment rates, and higher wages and household income levels. It’s hard to imagine a greater statewide interest than putting people to work and reducing California’s staggering unemployment.

Enterprise Zones are one of California’s most effective tools in combating the threat from states like Nevada, Oregon, or Texas which have no income tax. Rather than relocate, businesses have the opportunity to stay in California because these tax credits help offset their state income tax liability. In turn, those businesses employ hardworking Californians who put their earnings back into our economy.

Instead of making the penny-wise, pound-foolish decision to eliminate the program altogether, why not seek to improve the program and develop better accountability measures? We should demand tangible proof that programs are working, and use successful areas like Santa Clarita as models for how to properly plan and manage them. It is one thing to cut waste, but quite another to get rid of one of the few programs that actually encourages investment in California.

Numerous publications already rank California at or near the bottom in terms of the cost of doing business, and our general economic climate. A recent study found that between January 2010 and August 2010, California lost 153 businesses to Texas, while another determined that since 1998, California has not produced a single new net job. That’s unacceptable, and proposals to eliminate Enterprise Zones will continue to cripple our economy and drive businesses out of the state.

California should be a place that businesses aspire to move to. Not only do we have a highly-skilled workforce and plentiful natural resources, but we also have some of the finest universities in the world turning out entrepreneurial talent by the thousands. Sadly, like so many jobs, that talent is leaving the state at a staggering pace.

That’s good news for neighboring states, but a disaster for California.

Assemblyman Cameron Smyth is Chair of the Assembly Local Government Committee, and represents the 38th Assembly District, which includes the cities of Los Angeles, Santa Clarita, Simi Valley and Glendale.

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