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BNA’s Laura Mahoney: California State Budget Agreement Does Not Include Enterprise Zone Tax Credit Overhaul

Reproduced with permission from Daily Tax Report, 114 DTR H-2 (June 13, 2013).
Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033)

California State Budget Agreement Does Not Include Enterprise Zone Tax Credit Overhaul

By Laura Mahoney

SACRAMENTO, Calif.—Gov. Jerry Brown (D) and Democratic legislative leaders said June 11 they reached an agreement on a budget plan for the fiscal year that begins July 1, but they are not ready to include the governor’s plan to restructure the $750 million enterprise zone tax incentive program in the overall budget package.

Brown, Senate President Pro Tempore Darrell Steinberg (D), and Assembly Speaker John Perez (D) said they worked out their differences on the key issues of funding for K-12 education, health care, and overall spending on the $96 billion plan, clearing the way for the package to be passed on time. The Assembly and Senate are expected to vote on the package by June 15 and send it to the governor for his signature.

Absent from the plan is the governor’s proposal to eliminate the current enterprise zone program and replace it with three, more targeted tax incentives (109 DTR H-3, 6/6/13). At a news conference, the three lawmakers said they are still working on the proposal, including getting a two-thirds vote majority in both houses that is necessary to enact the changes. Most lawmakers have a zone in their districts, making it difficult to win support for elimination of the current program.

Strip Clubs, Card Rooms

The bill requires a two-thirds vote because it would increase taxes on some taxpayers. However, because the proposal would not increase or decrease overall revenue, it can pass separately from the main budget bill. Lawmakers could act on it any time before the end of the legislative session Sept. 13.

“It’s part of the work that’s before us,” Brown said. “It’s wherever it can be based on the votes.”

Brown has picked up some support for his proposal in recent weeks following news reports that two strip clubs and a card room in Sacramento were claiming up to $37,000 in tax credits for each employee they hired. The hiring tax credit is available to any business inside the boundaries of one of the 40 EZs in the state for employees who fall into one of 18 categories of disadvantaged workers.

Brown and some legislators have been critical of the program, saying it does not create new jobs but gives employers large tax credits for hiring decisions they would have made anyway. The program also allows employers to get the hiring credit for moving jobs from one area of the state to another.

Tighter Rules for Hiring Credit

Under Brown’s proposal, the tax credit would be available only for hiring workers who are unemployed for at least six months, veterans who are unemployed at discharge, and recipients of the earned income tax credit. The zones themselves would be disbanded, and instead the credit would be available to business in U.S. Census tracts in the highest quartile for unemployment and poverty.

Brown also wants to offer a statewide sales tax exemption on equipment purchased for manufacturing, research, and development.

“We do have enterprise zones still out in front of us,” Brown said. “I know they supported strip clubs and other things of questionable providence. I hope that we have the chance to transfer that into a into a manufacturing sales tax exemption.”

A coalition of biotechnology and research organizations sent Brown a letter June 11 offering their support for his proposal. The groups, including the Silicon Valley Leadership Group, BayBio, Pharmaceutical Research and Manufacturers of America, and the California Healthcare Institute, said the governor’s plan “will go a long way in maintaining and creating new jobs in California.” The groups said they are urging lawmakers to support the governor’s proposal.

Enterprise zone proponents are vocal in their opposition to Brown’s plan, arguing that it would impose a $750 million tax increase and eliminate the only economic development tool available to local governments.

EZ Supporters Organize to Oppose Governor

The California Association of Enterprise Zones has formed a coalition with local governments, chambers of commerce, employers, and tax credit consulting firms to form Californians for Improving Enterprise, Employment, and the Economy to oppose the governor. Instead, they are backing more modest proposals from three Democrats in the Assembly to reform the rules for EZs but keep the program in place. Assemblyman V. Manuel Perez (D) is the primary author of the reform proposals.

“Quite a number of legislators want the zones to continue and want to reform them,” Chris Micheli, a lobbyist representing the California Grocers Association and consulting firm California Credits Group, told BNA June 12.

Micheli said the governor’s office has not engaged EZ supporters in negotiations on the details of his proposal, but the supporters are continuing discussions with legislators.

Steinberg told BNA June 11 if the supporters of EZs are not willing to accept major changes to the program, they are likely to see the program eliminated completely as lawmakers did in 2012 with the state’s redevelopment program, which used local property tax revenue for development projects.

“The time is now,” Steinberg said.

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