Reproduced with permission from Daily Tax Report, 97 DTR H-2 (May 20, 2013).
Copyright 2013 by The Bureau of National Affairs, Inc. (800-372-1033)
With Spotlight on California Enterprise Zones, Anaheim Arena Denies It Would Claim Credits
By Laura Mahoney
SACRAMENTO, Calif.—With Gov. Jerry Brown (D) putting a spotlight on criticisms of the state’s enterprise zone program in a new proposal to reinvent the tax incentive program, its supporters scrambled May 16 to defuse allegations that a sports arena in Anaheim could claim millions of dollars in EZ tax credits by laying off about 400 concessions workers and hiring replacements.
“We would condemn any effort, by any company, to fire workers and rehire workers for purposes of gaming the Enterprise Zone program,” Craig Johnson, president of the California Association of Enterprise Zones, said in a May 16 statement.
Johnson responded to allegations from a labor union representing Aramark food service company workers who will lose their jobs June 30 that Anaheim Arena Management LLC may claim $37,400 per employee it hires to replace the laid off workers.
The workers employed by Aramark have received notices that their jobs will end because the company has lost its contract with AAM’s Honda Center, Unite Here Local 11 spokesman Hal Weiss told BNA May 16.
Honda Center Says It Will Not Seek Credits
Honda Center management denied May 16 that it will seek EZ tax credits for hiring new food service workers.
“To make the record perfectly clear, our decision to take food service in-house was based solely on our relentless pursuit of giving our customers the very best entertainment experience possible,” AAM Chairman Michael Schulman said in a prepared statement. “It had nothing to do with California Enterprise Zone tax credits, which we never had any intention of utilizing.“
Johnson and Schulman spoke two days after Brown proposed in his state budget plan to eliminate the EZ program and replace it with more targeted tax incentives for hiring disadvantaged workers in high-poverty areas (94 DTR H-2, 5/15/13). The same day, Anaheim officials acknowledged at a city council meeting that AAM could claim the EZ hiring credit for hiring replacement workers.
Johnson said existing law already prohibits companies from claiming credits for employees they fire and rehire. CAEZ advocates have been working with legislators to craft changes in the EZ rules to “ensure that any attempts, by any company, to game the system by circumventing existing laws will not be tolerated,” he said.
Union Members Raise Issue at City Council
Unite Here raised the issue at the Anaheim City Council meeting May 14, when several union members appeared before the council to request a worker retention ordinance that would require the Honda Center to keep the existing workers during its transition from Aramark to its own food service operations. Many of the union members argued the arena would claim the EZ tax credits once it hired new workers.
Responding to a question from council member Gail Eastman, City Planning Director Sheri Vander Dussen said nothing would prevent AAM from claiming the credits.
“The Honda Center is within the enterprise zone, and there is nothing we’ve been able to identify that would make them ineligible for tax credits if they were to hire eligible employees through the termination of the contract with Aramark,” Vander Dussen said.
Unite Here’s criticisms echo other labor unions that have been critical of EZs after companies moved from one part of the state to another in recent years to take advantage of the tax credits and leave union workers behind without jobs.
The California Labor Federation is backing a bill that would overhaul the EZ program with new net job creation requirements and at least $16 minimum hourly wages for employers to qualify for the hiring tax credit (85 DTR H-3, 5/2/13).
Brown’s Second Attempt to Eliminate EZs
For his part, Brown’s proposal announced May 14 to restructure and cap incentives is his second attempt to eliminate the EZ program. Brown has been a critic of EZs, saying they fail to encourage new job creation and instead reward 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.
Although no legislative language is yet available about the governor’s new plan, his Department of Finance provided more details in a two-page fact sheet distributed to stakeholders and lawmakers May 14. Several elements of the governor’s plan are consistent with proposals from the CLF.
Under the governor’s proposal, the number of designated enterprise zones around the state would decline from the current 40 as their authorizations expire, and ongoing regulatory changes and audits are completed, according to the fact sheet obtained by BNA. Overall, the state would continue to spend about $700 million a year on new economic development tools, as it does now on EZs.
Package of Three Incentives
In place of the current EZ program, the governor would push three economic incentives:
• an upfront, statewide sales tax exemption for manufacturing and biotech research and development equipment purchases;
• changes to an existing hiring credit of $3,000 available to small businesses to focus only on hiring long-term unemployed workers, unemployed veterans, and people receiving public assistance; and
• an incentive fund through which businesses would compete for tax credits in exchange for investments in employment and expansion in California.
The sales tax exemption would put California on equal footing with other states, most of which do not impose sales tax on manufacturing equipment purchases, DOF said. Businesses would be able to exclude the first $200 million in equipment purchases from the 4.25 percent state sales tax, after approval by the State Board of Equalization of a qualifying business exemption.
With a price tag of $600 million a year, the sales tax exemption would account for most of the $700 million intended for economic development under the governor’s plan.
Brown would tighten criteria for the existing New Jobs Hiring Credit, which was created in 2009 with a cap of $500 million in total credits that can be awarded. So far, about $160 million has been claimed, or about $30 million to $40 million a year. The new criteria would apply to businesses that claim the $3,000-per-employee credit until the remaining $240 million is tapped.
Competition Criteria for New Incentive Fund
The new incentive fund would allow businesses to compete for funds based on specific criteria, including the number of jobs to be created or retained, wages that are at least two times the minimum wage, and a set job retention period. The Governor’s Office of Business and Economic Development, or GO-Biz, would administer the program.
Go-Biz would negotiate agreements to provide businesses tax credits in exchange for employment and expansion in the state, according to the fact sheet.
An allocation committee would approve proposed incentives, and could recapture the incentives from businesses that fail to fulfill the terms and conditions of their contracts. A portion of the fund would be given only to small businesses.
Lawmakers will begin debating the economic development proposal in budget committee hearings the week of May 20. Three key Democrats in the Assembly already said they do not support Brown’s plan but are working on an alternative.
“We appreciate the governor’s proposal regarding Enterprise Zones,” Assembly Revenue and Taxation Committee Chair Raul Bocanegra said May 14. “However, my colleagues and I believe that his proposal would essentially end the one economic development tool that local governments still have at their disposal.”
In a joint statement with Assembly Members Jose Medina (D) and V.M. Perez (D), current and former chairs of the Jobs, Economic Development, and the Economy Committee, Bocanegra said reform of the EZ program is necessary, but the program must be maintained.
The three Assembly members said they will have a formal proposal on EZ reform soon.
For More Information
Text of the Finance Department fact sheet is at http://op.bna.com/der.nsf/r?Open=emcy-97sv2z.