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BNA’s Laura Mahoney on Public Comments on Enterprise Zone Regulatory Proposal

Reproduced with permission from Daily Tax Report, 49 DTR H-2 (March 13, 2013). Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>

Employers: Legal Challenges Likely If California Enterprise Zone Rules Change
By Laura Mahoney

SACRAMENTO, Calif.—Employers in the state’s 42 enterprise zones have put state regulators on notice that they may file legal challenges if proposed regulations to tighten tax credits and boost accountability in the $700 million program become final in a few months.

In comments submitted Feb. 28 to the California Department of Housing and Community Development, coalitions of EZ employers representing retailers, grocers, bankers, developers, and other businesses said the proposed regulations exceed HCD’s administrative authority and violate the state constitution.

The employers’ objections came on the last day HCD was taking public comments on regulations it proposed in January, and countered support from labor groups and employees who turned up at four public hearings around the state to urge adoption of the changes (31 DTR H-1, 2/14/13).

“In sum, many of HCD’s proposed regulatory changes raise legal questions that cast a cloud of suspicion over the legitimacy of the entire regulatory process HCD is undertaking,” Marty Dakessian, an attorney with Reed Smith, representing a coalition of employers called Communities to Save Enterprise Zones, said in written comments.

New Proposal in April

HCD is weighing the public comments it received and is likely to issue a revised regulatory package in late April, HCD spokesman Eric Johnson told BNA March 11. HCD will hold another public comment period before making the rules final.

Many of the employers’ objections are similar to issues they raised in 2011, when Gov. Jerry Brown (D) called for elimination of the Enterprise Zone Program. Brown dropped the proposal when he gained little support from lawmakers, and has turned to HCD to reform the program as much as possible through the regulations. The governor also said he will seek legislation in 2013 to make additional changes.

Dakessian said in his written comments that the regulations would violate the state Administrative Procedure Act because they would alter the scope of the underlying EZ statutory scheme without express legislative authority, and because HCD has not demonstrated a necessity for the reforms as required by APA.

Further, the regulations would violate the Due Process and Contracts clauses of the state constitution, and would result in a tax increase that requires a two-thirds vote of both houses of the Legislature, he said.

Vouchers Not Tied to Hiring, HCD Says

The regulations take aim at a practice called retroactive vouchering, in which employers can obtain vouchers from local EZ administrators up to four years after hiring a worker, making the employer eligible for as much as $37,000 in tax credits. Under the proposal, employers would have one year to obtain the vouchers, but have a one-year grace period to go back more than one year for employees hired before the regulations take effect.

HCD has said retroactive vouchers give employers a loophole that allows them large tax credits not tied to their decision to hire employees.

The regulations also would tighten rules for verification of an employee’s residence within Targeted Employment Areas, which are subzones within larger EZs, change documentation rules for employees on public assistance, and create stricter zone audit procedures.

The retroactive voucher limits and changes to TEA verification were the subject of most of the employers’ objections.

Employers Want Regulations Withdrawn

Chris Micheli, representing the California Grocers Association and a coalition of business groups, agreed with Dakessian that HCD does not have the authority to adopt the reforms.

“We have to see what the final regulations say, but we prefer that HCD withdraw the regulations and let the Legislature do it,” Micheli told BNA March 5.

Micheli provided testimony to HCD at a Feb. 28 public hearing in addition to submitting a letter from 17 business groups including the California Chamber of Commerce, California Retailers Association, California Business Properties Association, and National Federation of Independent Business.

Micheli said the governor’s estimate that the regulations would cut the amount of credits issued each year by $50 million is understated.

“What they’re trying to do here is all about raising revenue,” he said. “That is not a sufficient justification for the regulations under APA. Increasing taxes by regulation exceeds their authority.”

Dakessian said the proposed changes are inappropriate and illegal.

“We accordingly request that you refrain from making the changes discussed above and consider a lawful way of addressing real and legitimate policy concerns,” Dakessian said in his comments to HCD.

Labor Supports Regulations

Sara Flocks, public policy coordinator for the California Labor Federation, told BNA March 7 that the labor organization supports the regulations in their entirety.

“I don’t think HCD could have done a better job with the regulations,” Flocks said. “We are very committed to reforming the EZ program and see the regulations as a first step.”

Dozens of union members testified at the four public hearings around the state in February, including one worker wearing a shirt with the words “Enterprise Zone Victim” written on the front and back. CLF and labor unions ramped up their support for reforms to the EZ program in recent years after two manufacturing facilities moved from the Bay Area to an enterprise zone in the Central Valley.

The workers at those facilities were represented by the Teamsters, but they were not offered jobs at the new facilities, according to CLF. Without a union representing employees at their new locations, the companies cut wages to $10 an hour and were eligible for EZ hiring credits of up to $37,000 for each new employee, Flocks said.

Beyond the regulations, Flocks said CLF is working on legislation that would require EZs to show they have created a net gain in new jobs, set a wage floor of 250 percent of the state minimum wage for participating employers, cap the amount of credits that can be awarded each year, and increase transparency about who is receiving the credits.

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