EZ Policy Blog

H.R. 4213 passed the U.S. Senate yesterday. Included in the bill is a one year extension (through 2010) of the federal Empowerment Zone and Renewal Communities tax credits which expired at the end of 2009.

Yesterday (3/10/10) I spent the day in Sacramento primarily to attend a hearing of the Senate Revenue & Taxation Committee on the Enterprise Zone program. The meeting was conducted by Committee Chair Senator Lois Wolk and was very well attended.

The Committee heard from three panels of speakers covering the program background and overview, academic research on the efficacy of the program, and recommendations for the future of the program. (Click here for the agenda).

I am working on getting the video of the three hour hearing to post; in the mean time, however, I just found out that no video was taken of the hearing, luckily I was able to capture an audio recording. Here is the audio for your iPod:

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Here is a link to the proposed agenda for the Senate Revenue and Taxation Committee hearing on Enterprise Zones scheduled for March 10.

Assembly Member V. Manuel Perez shared some of his thoughts on jobs, the economy and bills he is sponsoring with KXO Radio News in Imperial Valley. It’s particularly interesting to see how he articulates his intention regarding Enterprise Zone legislation AB 2476:

Assemblyman Perez Shares thoughts on the economic recovery.

We’re all familiar with the saying that ‘government doesn’t create jobs, businesses create jobs,’ and it’s quite true. The fact of the matter is that we in the Legislature have a limited set of tools at our disposal to help businesses create and retain jobs. And with limited state resources, we need to be creative. One thing we can do is to help businesses access credit. When last year’s budget froze the state program that provides small businesses with gap financing, I jointly authored a bill to get the program reinstated. I’ve also just introduced AB 2437 for a revolving loan fund that provides a gap financing mechanism for manufacturers that create and retain jobs in California.

Another thing we must do is build infrastructure. These are critical investments in our state’s future that also provide much needed jobs. A bill I authored last fall helps California leverage $3.2 billion in federal recovery bond authority. A third task at hand is workforce development. Making sure businesses have an educated and skilled workforce is critical. There are millions of federal dollars available to our counties to help assess and retrain displaced workers – we need to align those dollars to the fields and industries that are looking for workers so businesses don’t go looking elsewhere when they could be hiring Californians. I have authored AB 2628 to do just that. A fourth area is common sense regulatory reforms so that businesses aren’t burdened by red tape. AB 978 calls for the development of an online, one-stop application for businesses to apply for state licenses.

Finally, we cannot overlook the state’s Enterprise Zone program. I spent a lot of time last year facilitating a hearing process to examine many aspects of this program, and I appreciate the efforts of stakeholders to participate in the dialogue. Last month, I introduced AB 2476 to serve as a vehicle for statutory reforms to the program. As the bill currently reads, it makes changes to the eligibility criteria for Targeted Employment Areas. I see this measure as a starting point and look forward to ongoing and productive discussions as we refine the bill language and make an important program even better.

One of the criticisms of the Enterprise Zone that tends to be repeated with some frequency is that even though the targeted incentives may help attract industries that could locate anywhere, retailers would be in the locations they are in regardless of any incentives. I recently spent some time with some smaller grocery proprietors who specifically choose to go into difficult and impoverished neighborhoods where the larger chains will not locate. For them, the Enterprise Zone tax credits make the difference that enables them to bear the increased costs of security and loss through theft which are barriers for other retailers.

I came across the following article published a few months ago in the Christian Science Monitor which highlights the significant challenges grocers face opening facilities in areas with the characteristics of Enterprise Zones, and the serious consequences to the local population as a result of reduced access to the food:

East L.A. resident Olga Perez has to take two buses to a store about eight miles away to get fresh fruits and vegetables, or decent cuts of meat, for her family.

“The only thing I can get at my corner store are spoiled or expired,” explains Ms. Perez, a dental assistant and single mother who lives in a two-bedroom apartment with two daughters and a granddaughter.

The round trip costs her $5 and limits what she can carry home. “I can only get so much milk and when I get home the eggs are cracked and the bread is smashed,” she says.

And because she works until 6:30 p.m. most nights, Perez doesn’t often have the time to make the trip and get home in time to cook for her family. Her solution: “Open a can of ravioli or make hot dogs,” but that sometimes keeps her daughter and granddaughter up at night, complaining of insomnia and stomach aches.

It’s a situation the Alliance for Healthy and Responsible Grocery Stores, a city-wide coalition of 25 community, faith-based and environmental organizations, is trying to change. They formed a Blue Ribbon Commission in early 2007 to address the chronic absence of quality grocery stores in several L.A. neighborhoods including East L.A. and South Central – and are now trying to draw such stores to these underserved areas.

It’s a real problem, says Cheryl Resnik, assistant professor of clinical physical therapy at the University of Southern California in Los Angeles, which abuts Perez’s neighborhood.

Many of her students come to class either malnourished or jittery from sugar in sodas and fast food, she says.

“We were teaching them how to eat better, but then we realized they don’t have access to the kind of food they need,” says Ms. Resnik, who runs a free clinic. “The only thing they have are mom-and-pop liquor stores with candy bars and cupcakes.”

The dearth of decent grocery stores plagues urban areas across the US including Philadelphia, Chicago, and Houston – contributing to childhood obesity, say health experts, which affects a higher proportion of Hispanic and Black youth.

“Children in these low-income ‘food desert’ communities don’t have enough healthy options and it’s hurting them in a very dramatic way,” says Resnik. She says her free clinic had to buy a 500 lb.-capacity scale, when they found three teenagers under 15 exceeded the 250 lb. limit of the regular scale.

In L.A., the “food desert” problem was exacerbated by the Rodney King riots of 1992, when huge areas of the city burned, says Pastor William Campbell of Mt. Gilead Baptist Church. Many businesses including grocery stores did not return to the troubled neighborhoods.

He cites a California Budget Project study that puts the number of grocery stores at 3.6 per 100,000 residents in East and South L.A. compared with 12.4 per 100,000 people in West Los Angeles, which includes the neighborhoods of Brentwood, Westwood, Pacific Palisades, and Malibu.

East L.A. had one of the worst ratios of full service supermarkets to residents of any community in the county, found a 2002 study by Occidental College in L.A.

Top grocery chains say the high cost and low availability of land keeps them away from these neighborhoods. Full service supermarkets are required to have 50,000 sq. ft. buildings and four acres of parking. The long permit process in California is also a deterrent.

“It’s hard to develop a plan for a large grocery because the building costs and estimates can change significantly over the course of the permit process,” says Dave Heylen, vice president of communications for the California Grocers Association, which represents 6,000 stores in California. The Association says it is working with city officials to overcome legal barriers to new grocery stores.

The grocery industry has divided the city into “haves” and “have nots,” says Elliot Petty of the Los Angeles Alliance for a New Economy, a member of the Alliance for Healthy and Responsible Grocery Stores.

“Everyone, rich or poor, spends money on eating – but if you live in a wealthier community you have more options,” says Mr. Petty. “There just needs be a spotlight put on this to develop the political will to change it.”

Introduced by Assembly Member V. Manuel Perez, chair of the Assembly Jobs Committee, AB 2476 would make two significant changes to the way future Targeted Employment Areas are designated.

(B) For an area designated on or after January 1, 2011, or for a targeted employment area designated before January 1, 2011, following the release of 2010 census data, subject to the deadline in paragraph (5), means an area within a city, county, or city and county that is composed solely of those census block groups designated by the United States Department of Housing and Urban Development as having at least 61 percent of its residents as low- or moderate income levels, using the most recent census data available at the time the targeted employment area is designated to determine that eligibility.

Very similar to the previously reported SBx8 59, SBx8 63 would create a hiring tax credit modeled after the federal WOTC, but only for “qualified veterans”:

For purposes of this section, “qualified veteran” means a member of the Armed Forces of the United States who has been honorably discharged from service within the five calendar years preceding employment by the taxpayer, who received unemployment compensation within California for not less than four weeks within the 12 calendar months preceding the date of employment by the taxpayer, and who is employed by the taxpayer for at least 120 hours during the taxable year in which the credit is claimed.

The Senate Rev. & Tax. hearing on the Enterprise Zone program which was scheduled for Feb. 24th has been changed to March 10th. It will still be at 1:30 in room 3191.

Assembly Member Sandre Swanson from Oakland has introduced AB 1973 which would create a new hiring tax credit for businesses that employ ex-offenders.

SECTION 1. Section 17053.76 is added to the Revenue and Taxation Code, to read:

17053.76. (a) (1) For each taxable year beginning on or after January 1, 2010, there shall be allowed a credit against the “net tax,” as defined in Section 17039, an amount as described in paragraph (2), per each qualified employee employed by the taxpayer during the taxable year.

(2) (A) Twenty percent of the gross salary for each qualified employee employed by the taxpayer, not to exceed $5,000, for the first year of employment.
(B) Twenty percent of the gross salary for each qualified employee employed by the taxpayer, not to exceed $5,000, for the second year
of employment.

(b) The credit under subdivision (a) shall be allowed only with respect to the first year of employment if the qualified employee is employed by the taxpayer for 12 consecutive months from the date of employment and only with respect to the second year of employment if the qualified employee is employed by the taxpayer for 24 consecutive months from the date of employment.

(c) For purposes of this section, “qualified employee” means an individual who is an ex-offender employed by the taxpayer in a part-time or full-time position. “Qualified employee” shall not include an ex-offender who is required to register as a sex offender pursuant to Section 290 of the Penal Code, or the equivalent in another state or territory, under military law, or under federal law, or was convicted of a serious or violent felony.

(d) Any deduction or credit otherwise allowed under this part for the salaries paid or incurred by the taxpayer upon which the credit is based shall be reduced by the amount of the credit.

(e) If the credit allowed by this section exceeds the “net tax,” the excess may be carried over to reduce the “net tax” in the following year, and succeeding years if necessary, until the credit is exhausted.

As part of the Republican’s job package, Senator Dutton has introduced SBx8 59, a tax credit for new hires closely modeled on the federal Work Opportunity Tax Credit.

SECTION 1. Section 17053.76 is added to the Revenue and Taxation
Code, to read:

17053.76. (a) For each taxable year beginning on or after January 1, 2010, there shall be allowed a credit against the “net tax,” as defined in Section 17039, an amount equal to the sum of the following percentages of wages paid or incurred by the taxpayer during the taxable year to each qualified employee of the taxpayer:

(1) Twenty-five percent for each qualified employee employed by the qualified taxpayer for at least 120 hours, but less than 400 hours, during the taxable year.
(2) Forty percent for each qualified employee employed by the qualified taxpayer for at least 400 hours during the taxable year.
(b) The credit under subdivision (a) shall be allowed only with respect to the first six thousand dollars ($6,000) of wages paid or incurred during the taxable year to each qualified employee.
(c) For purposes of this section, all of the following definitions apply:
(1) “Qualified employee” means an individual who is any of the following, as documented by the Employment Development Department:
(A) A recipient of CalWORKs benefits.
(B) A parolee.
(C) A veteran, as defined in Section 980 of the Military and Veterans Code.
(D) Eligible for receipt of unemployment insurance benefits or currently receiving unemployment insurance benefits.
(E) A person on probation.
(2) “Qualified taxpayer” means a taxpayer that is a person or entity engaged in a trade or business within California that has its
principal office located in California.

In an appearance at the Sacramento Press Club, the Sacramento Bee quotes Senate President Pro Tem Darrell Steinberg as saying that he “does not plan to pursue a general tax hike this year.” However, the article goes on to say that Steinberg thinks Democrats will try to reduce “corporate tax benefits” as a means of closing the budget gap.

SBx8 52 is the same as SBx6 1, creating a new Enterprise Zone in Fremont involving the NUMMI facility plus an additional 10 new zones which may be chosen from the previous application round (in which there happened to be 10 applicants who were not awarded new zones).

AB 2044 introduced by Assembly Member Caballero:

The Enterprise Zone Act provides for the designation of enterprise zones by the Department of Community Housing and Development, based on the department’s approval of applications from a city, county, or city and county with a geographic area meeting certain criteria.

Existing law provides that specified entities within a designated enterprise zone may receive regulatory, tax, and other incentives for private investment and employment.

This bill would state the intent of the Legislature to enact legislation to require the Business, Transportation and Housing Agency to evaluate and rank enterprise zones. The bill also state the intent of the Legislature that any cost savings that may subsequently result from any legislative action taken based on that evaluation and ranking be used to fund approved infrastructure projects not being funded by existing bonds.

This is a “spot” bill, or a bill simply stating some kind of intent without all of the details worked out. Boy is this one vague. It sounds like there is some anticipation that if the Enterprise Zones are “ranked” some will be ranked low. The bill goes on to talk about “cost savings” generated as a result of the ranking, but since there is no way to generate new revenues simply by the act of ranking, it must be contemplating doing something like canceling zones based on this unspecified ranking system.

Since tomorrow (2/19) is the deadline to submit new legislation there are a lot of things popping up today.

For example, SB 1086:

Existing law authorizes the Franchise Tax Board, as part of its administrative duties with respect to the collection of taxes, to furnish specified taxpayer information. Existing law generally provides that all taxpayer information obtained by the board is to remain confidential. Existing law provides exceptions to this general requirement.

This bill would, notwithstanding existing law, require the Franchise Tax Board to annually compile information relating to a taxpayer receiving credits of $1,000, allowed from corporate tax expenditures. The bill would require the board to include the information in the California Income Tax Expenditure Report and the state transparency Internet Web site.

It’s not entirely clear what is meant to be accomplished with this legislation. Given that the overriding concern of everyone in Sacramento right now is creating jobs, it must have something to do with encouraging businesses to hire more people, but I can’t quite figure it out yet. Let me know if you have any theories.

Last week I reported on Senator Aanestad’s new bill, SB 939, which would enable businesses in the Oroville Enterprise Zone to sell their tax credits.

The following is a press release from the Senator which explains some of the rationale behind the concept:

Senator Sam Aanestad (R-Grass Valley) has introduced new legislation that is designed to create new jobs and new business opportunities in Northern California, by focusing on the tax advantages that already exist in the Enterprise Zone located within the Butte County City of Oroville. SB 939 would allow businesses located within the Oroville Enterprise Zone to sell employee tax credits they cannot use.

The sale of these credits would generate a steady cash income that can be used to expand business operations, hire additional employees, make additional equipment purchases or be used for any other business-related expenses.

“Many of the businesses located within the Enterprise Zone have been unable to use these employee tax credits because they have zero state income tax liability,” said Senator Aanestad. “These credits only work if the business in question generates enough of a profit to have a state income tax liability. Many of them do not.”

Senator Aanestad says the sale of these credits would result in a win-win proposition for not only the seller – but also the purchaser.

“The sale of these credits will allow businesses within the Oroville Enterprise Zone to gain extra income they ordinarily would not receive, which will result in new employment opportunities,” said Senator Aanestad. “At the same time – the businesses purchasing these credits would receive tax breaks from the State of California – allowing the purchaser to invest the savings into business expansion efforts.”

The Oroville Enterprise Zone was first established in 1991 and re-designated in 2006. Businesses located within the zone can take advantage of five tax-related incentives: the hiring tax credit, the sales and use tax credit, business expense deduction for business property, net operating loss carryover deduction and net interest deduction for lenders.

“Oroville Vice-Mayor Jamie Johansson and Redevelopment Coordinator Tom Fitzpatrick have already indicated to me that some of the city’s largest manufacturers are so heavily capitalized that they can write off equipment depreciation to the point where they have absolutely no state income tax liability,” said Senator Aanestad. “We have a natural advantage in tax credits that we cannot use – and those credits can be used to create badly needed jobs.”

Senator Aanestad says the Governor has already indicated that jobs and job creation will be the first order of business during this Legislative Session and is hopeful that SB 939 will be received favorably in the Legislature.

“We need to get people working again,” said Senator Aanestad. “This is a positive step that government can take to create the new jobs and businesses that Northern California desperately needs.”

Northern California Senator Sam Aanestad has proposed a new bill SB 939 which would allow businesses specifically in the Oroville Enterprise Zone to sell the credits they generate:

SB 939, as introduced, Aanestad. Income and corporation tax credits: Oroville enterprise zone.

The Personal Income Tax Law and the Corporation Tax Law allow a taxpayer to claim certain tax incentives for activities conducted in an enterprise zone, including a credit in an amount equal to the specified percentage of wages paid during the taxable year to a qualified employee, as defined, who is employed by the taxpayer during the taxable year in an enterprise zone.

This bill would authorize the sale of a tax credit by a taxpayer where that credit is attributable to the percentage of wages paid by a taxpayer during a taxable year to a qualified employee employed in the City of Oroville enterprise zone, to an unrelated party.

This bill would make legislative findings and declarations as to the necessity of a special statute for the City of Oroville.

This bill would take effect immediately as a tax levy.

From the Sacramento Bee:

In a showdown over generating new tax revenue, the Assembly today passed by a razor-thin margin legislation touted as closing a tax loophole benefiting multinational corporations.

Assembly Bill 1178 targets an exemption for corporations that benefit financially from doing business in California but are able to avoid paying some state income taxes by locating an office outside U.S. boundaries.

Today’s heated floor debate over the bill is likely to be the first of many skirmishes over how best to create, and spend, new revenue at a time when the states faces a potential $20 billion shortfall by July 2011.

To avoid having to pass AB 1178 by a two-thirds supermajority, the bill’s author, Democratic Assemblyman Marty Block of San Diego, offset the measure’s projected tax revenue of about $120 million per with an identical cut in sales taxes for college books and supplies.

Republicans painted AB 1178 as a new burden on businesses, a blow to job creation at a time of economic recession, and an ill-advised attempt by Democrats to sidestep the supermajority requirement for raising taxes.

“What we’re going to do today is live up to our reputation of being hostile to business,” Republican Assemblyman Dan Logue of Linda said in scolding the Democratic-controlled house.

Democratic supporters of AB 1178 countered that it would not raise taxes but simply keep corporations from evading their “fair share” of taxes.

Proponents also characterized AB 1178 as a fair way to pump new money into a cash-strapped college system that is depended upon to train California’s future workforce.

“This is a no-brainer,” said Assemblyman Charles Calderon, D-Whittier.

Because of a split within the Assembly’s Democratic Caucus, AB 1178 failed passage on the floor Wednesday and was approved today by the bare-minimum number of votes, 41-28, after an initial roll call fell three votes short.

Some Democrats objected to tying any revenues earned from the bill specifically to higher education, rather than to medical care for low-income families or to in-home support services for people with disabilities.

Assemblyman Felipe Fuentes, D-Sylmar, said he cast one of the deciding votes for passage only after receiving a commitment that AB 1178 will be amended in the Senate to link its revenues to another high-priority need.

From The San Bernardino Sun:

To strengthen “green” manufacturing in California, Gov. Arnold Schwarzenegger has introduced a plan to make businesses that make clean technology exempt from paying sales tax on their equipment.

Although some experts agree that it is a first step in jump-starting the state’s manufacturing industry, more incentives may need to be considered.

The proposal is one of five components to Schwarzenegger’s California Jobs Initiative to create jobs and expand business in the state.

“This will help California attract and retain green businesses and jobs like this,” Schwarzenegger said. “It will help us create jobs for the future. If it is in the area of developing alternative fuels or building solar panels or building wind turbines or building clean cars, in all of these areas it will be very helpful.”

In 2009, an agreement was made with Tesla Motors and the California Alternative Energy and Advanced Transportation Financing Authority to give them exemption from paying sales tax on the equipment they purchase to produce zero-emissions vehicles.

The governor’s proposal will expand the Tesla exemption to include other advanced transportation, renewable energy and green-technology projects.

This will be based on a bill by Assemblyman Sam Blakeslee, R-San Luis Obispo. The bill is expected to be introduced to the Legislature next month, according to members of Blakeslee’s staff.

State Sen. Bob Dutton, R-Rancho Cucamonga, said he agrees with the exemption, but the term “green” is vague.
“This whole idea is great, but define `green’ for me,” Dutton said. “I’m fine with the program, but I personally would have a sales-tax exemption on all manufacturing equipment, green or otherwise. I don’t care what color it is.”

California has lost 600,000 manufacturing jobs since 2000, which equals 32 percent of the state’s industrial base, according to the California Manufacturers and Technology Association.

California is one of the only states in the country that taxes manufacturing equipment purchases, association spokesman Gino DiCaro said.

“As for today, certainly green sales-tax exemption is helpful, but 47 other states don’t tax the purchases at all,” DiCaro said. “They don’t necessarily pick and choose select industries. They understand that economic growth and active production is needed.”

DiCaro said the association would like to see all manufacturing equipment purchases in California exempt from sales tax, not just “green” technology manufacturers.

Economically distressed areas have been designated “Enterprise Zones,” offering businesses in those areas incentives to encourage investment and promote the creation of new jobs, according to the program’s Web site.

Enterprise Zones started in 1984, and no more than 42 zones may be created in California.

Parts of San Bernardino County are in such a zone, and businesses receive incentives and tax credits.

Blakeslee’s staff expects the new exemptions to apply within the zones as well as the rest of the state.

Brithinee Electric, a Colton- based company that specializes in electric motors and control-panel systems, is in an Enterprise Zone and already gets sales-tax refunds on the equipment it buys.

“The sales-tax rebate or refund is a modest incentive to us. It is a slight incentive but is not enough to make us go out and say, `We’re going to buy a lot of equipment based on that,”‘ said Wally Brithinee, who owns the company with his brother Donald.

The company has also ventured into the clean and renewable energy field, specifically wind turbines.

Wally Brithinee said he is unsure how the new exemption for “green” technology would work because his company already receives tax incentives.

“Is it enough to make you go out and buy another piece of equipment or add production or add employees?” Brithinee said. “There are other issues in the economy that are more troubling for us.”

Joe Mendoza, founder of Ontario-based Revvo Lighting Systems, which designs and manufactures solar and induction lighting, said he supports incentives to generate more revenue. But customers have to be willing to buy his product to make the incentives worthwhile.

“You could put whatever you want on the table. If I don’t get people to buy my product, I can’t manufacture it, and right now people aren’t spending money,” Mendoza said.

Schwarzenegger outlined two more components to his California Jobs Initiative. The first would allocate $500 million from the Unemployment Compensation Disability Fund to train up to 140,000 people and create up to 100,000 new or retained jobs. He also proposed a $10,000 tax credit to people who buy homes in California.

Assembly Member De La Torre has just introduced AB 1657 to create an Enterprise Zone in the City of Downey:

7073.2. (a) Notwithstanding any other law, the department shall, upon application by the Downey City Council, designate one enterprise zone within the geographic area of the City of Downey pursuant to this section.

(b) For purposes of applying any provision of the Revenue and Taxation Code, the enterprise zone designated pursuant to this section shall be deemed to have been designated pursuant to this chapter.

(c) The enterprise zone designated under this section shall not be included in the calculation of the overall number of enterprise zones authorized under this chapter.

SEC. 2. Due to the unique circumstances of the City of Downey, with respect to the need for sustained employment and business development in the area, the Legislature hereby finds and declares that a general statute cannot be made applicable within the meaning of Section 16 of Article IV of the California Constitution. Therefore, the special legislation contained in Section 1 of this act is necessarily applicable only to the City of Downey.

SEC. 3. This act addresses the fiscal emergency declared by the Governor by proclamation on December 19, 2008, pursuant to subdivision (f) of Section 10 of Article IV of the California Constitution.

In a fascinating interview with Capitol Weekly’s Anthony York, the new Assembly Speaker equates restructuring the Enterprise Zone program with job creation:

Other than the budget, what’s on your priority list?

I came up here to do job creation stuff, and last year was a really bad year for that. I have a bill that looks at restructuring the way we use enterprise zones. I think we under-utilize the half-a-billion dollars a year we have in enterprise zones, to leverage for new jobs that wouldn’t otherwise exist or maintain jobs that otherwise would leave.