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BNA’s Laura Mahoney on the Governor’s May Revise Enterprise Zone Proposal

Reproduced with permission from Daily Tax Report, 94 DTR H-2 (May 15, 2013).
Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033)

California Governor Against Tax Hikes, Seeks To Revamp Enterprise Zones in Budget Plan

By Laura Mahoney

SACRAMENTO, Calif.—Gov. Jerry Brown (D) said May 14 he wants to restructure and cap tax incentives available under the state Enterprise Zone program to target small businesses that hire disadvantaged workers more effectively, but said he does not support other specific tax increase proposals pending in the Legislature.

At a news conference to discuss his revised budget plan for the fiscal year that begins July 1, Brown said Proposition 30, the measure approved by voters in November 2012 to increase personal income and state sales tax rates, was enough for now. Lawmakers are weighing bills that would impose new taxes or increase tax rates on specific items including bullets, sugary soda, oil extraction, and cigarettes.

“We just got a nice tax,” Brown said. “I think we ought to take a deep breath and show how we’re spending it in a wise way before we start looking around for more money.”

EZs ‘Work in Funny Ways.’

The governor’s plans to revamp the EZ program would hold steady on the $750 million in annual spending to promote job creation and economic development under the current program, but its structure would be completely different, Department of Finance officials told BNA.

Brown has been a critic of the EZ program, which he said fails to encourage new job creation and instead rewards companies for moving from one part of the state to another. He proposed to eliminate EZs entirely in 2010, but faced stiff opposition from fellow Democrats, as well as Republicans, and business groups.

“The enterprise zone works in funny ways,” Brown said at his news conference. “This is an effort to use this money to really create jobs.”

Brown would do away with the 42 designated enterprise zones throughout the state, and instead would push three statewide incentives that he said would be more efficient and effective at stimulating economic activity.

Statewide Sales Tax Exemption on Equipment

Under the proposal, the current sales tax credit under the EZ program would be shifted to a statewide, upfront sales tax exemption for manufacturing or biotech research and development equipment purchases. Instead of employers in the currently designated zones receiving a tax credit equivalent to the sales tax they paid on qualified manufacturing equipment after the fact, employers statewide would receive an exemption from the 4.25 percent sales tax on qualified equipment purchases.

The sales tax exemption would apply to a maximum of $200 million in equipment purchases per employer per year, according to DOF.

The governor also would refine the New Jobs Hiring Credit, which was created in 2009 to provide a credit of up to $3,000 for full-time employees hired by businesses with 20 or fewer employees. The credit would be available specifically for hiring long-term unemployed workers, unemployed veterans, and people receiving public assistance.

Statewide Tax Credit Fund for Job Creation

Brown also called for creation of a statewide program called California Competes Recruitment and Retention Fund, which would be administered by the governor’s Office of Business and Economic Development, known as GO-Biz.

Through the new program, employers could apply for hiring credits and other incentives for locating or expanding their business, or retaining workers in California, according to DOF. The amount of credits administered by GO-Biz would not be unlimited as the current EZ program credits are, but would be capped statewide.

The new program also would carve out a certain amount of the total credits and incentives to be allocated only to small businesses.

The current EZ program offers credits of up to $37,000 for hiring workers who fall into one of 16 eligible categories in the 42 designated zones. Employers of any size are eligible for the credit, and can claim the credit for an unlimited number of workers.

Changes Would Be in Budget Package

Brown’s overhaul of the EZ program would be in separate legislation that would be included in the overall spending package for the next fiscal year. At the same time, the governor’s Department of Housing and Community Development has proposed regulations that would change the rules for claiming credits and incentives under the current EZ program. In addition, several bills are pending to make major changes to enterprise zones.

Although the governor’s office released few details about his proposal to change the EZ program, the program’s supporters said May 14 it appears the governor would be effectively eliminating it.

“We understand there are criticisms of Enterprise Zones and we support efforts to make legitimate improvements that strengthen Enterprise Zones,” Craig Johnson, president of the California Association of Enterprise Zones, said in a news release. “But they must be done in a way that preserves the program’s essential economic and community development benefits and does not harm the businesses and individuals the program is intended to benefit.”

Overall Budget Reduces Deficit

Overall, Brown said the new budget plan greatly reduces the state’s chronic budget deficit from about $20 billion when he took office in 2010 to $4.7 billion, thanks in part to voter passage of Proposition 30. So far, the governor said, revenue in the current fiscal year is $2.8 billion higher than expected.

Most of the new revenue would be spent on K-12 education under Brown’s revised plan, which updates his budget proposal unveiled in January with new revenue and spending estimates.

The overall budget includes $96.3 billion in general fund spending, or a 0.7 percent increase over the current year’s spending of $95.6 billion.
Lawmakers will now debate the governor’s proposal and have until June 15 to adopt a spending plan for the next fiscal year.

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