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Ending Enterprise Zones – Not So Simple

As this column by Chris O’Brien of the San Jose Mercury News shows, the cost of getting rid of Enterprise Zones could be more than the imagined savings:

Word that a Silicon Valley solar firm was looking for somewhere to build a factory that would bring 1,000 jobs seemed just what the struggling region around Stockton needed to turn its economy around. The courting of Sunnyvale’s AQT Solar brought together numerous local, regional and state agencies who cobbled together a patchwork of economic incentives.

Unfortunately, the region’s best effort was only good enough for second place. The winner was South Carolina, which showered AQT with millions of dollars more in economic incentives that simply aren’t available in California.

As if losing wasn’t bad enough, economic development officials fear their already difficult task is going to get a whole lot tougher if Gov. Jerry Brown succeeds in eliminating enterprise zones.

“We understand that California has no money,” said Shelley Burcham, vice president of the San Joaquin Partnership that led the Central Valley’s pursuit of AQT. But if enterprise zones are eliminated, she said, “it’s going to kill our ability to attract businesses out here.”

This, in a nutshell, is a fiscal dilemma confronting California: How do we balance the need to fix our chronic state budget woes with the need to create jobs?

The governor’s proposal to cut redevelopment agencies has received a lot of attention. But the fate of enterprise zones, 42 of which have been set up across the state to stimulate development in depressed areas, has drawn less publicity. Eliminating the redevelopment agencies and enterprise zones, Brown has said, would increase the flow of tax revenue to state coffers, which would in turn free up more money for schools, police and a host of other local services. His campaign has been bolstered by public polls that show clear majorities favoring the elimination of these programs.

What’s more, recent studies from the Public Policy Institute of California, the California Budget Project and the Legislative Analyst’s Office have stated that the enterprise zone program in particular has cost the state hundreds of millions of dollars in tax revenue while failing to create many new jobs. The Budget Project estimated that ending the enterprise zone program alone would generate about $1.5 billion in taxes in just the first three years.

So killing enterprise zones might seem like a no-brainer. But what looks obvious from a distance becomes a lot more complicated when you zoom in on a place like Stockton.

Located in San Joaquin County, Stockton was particularly hard hit when the housing bubble popped. The devastating impact on the economy earned it the title of the country’s “Most Miserable City” in Forbes magazine two years ago, and unemployment in the region is still 17.6 percent.

So when word got out 18 months ago that AQT was planning a second factory, city and regional leaders joined with developers and Gov. Arnold Schwarzenegger to woo the company. They tapped a couple of little-known state tax credits, pulled in PG&E to help find ways to lower power costs, and found several sites that might fit AQT’s needs. They also stressed the relatively close location to the company’s headquarters, a sizable workforce eager for jobs, and community college training programs.

But one of the most crucial pieces of the package, one that made it competitive, was a tax credit on purchases of machinery in the region’s enterprise zone. Indeed, AQT CEO Michael Bartholomeusz said it was a “horse race” right until the end.

Fran Aguilera, economic development director for the San Joaquin County Enterprise Zone, concedes that the program may be in need of some fixes. Critics, for instance, have noted that many of the job-related tax credits can be claimed for hiring new employees rather than creating new jobs. But Aguilera said the discussion should focus on improving enterprise zones, rather than killing them.

“If we need to make adjustments to make it better, then let’s do that,” he said.

Are the enterprise zones worth it? In the case of San Joaquin and Stockton, it seems undeniable that having a company spend $400 million in the community and creating 1,000 new jobs would have been a huge lift, even with the tax incentives. And that doesn’t include the second wave of AQT vendors and suppliers who might have been drawn to the area.

But if those tax breaks require even deeper cuts in the state budget in the short term, and the elimination of more educational programs and jobs and various other services, are they still justified? Can we afford that kind of economic development strategy?

I’ll confess, I don’t see an easy way to resolve this tension. But unless we do, it’s hard to see how California’s economy gets back on its feet.

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