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FlashReport Column by Assemblyman Cameron Smyth: EZ Elimination Big Tax Increase

Assemblyman Cameron Smyth has penned an exclusive column for the FlashReport, which appears below.  Smyth is the Chairman of the Assembly Local Government Committee:

When the governor released his 2011-2012 budget proposal, much ado was paid to the governor’s special election tax increase maneuver.  But hidden in the budget is another, nearly $1 billion tax increase—his proposal to eliminate enterprise zones.

Enterprise Zones are one of the only tools we have to attract jobs to California. We are faced with a lot of tough choices this year, but for those of us who signed the Taxpayer Protection Pledge, we should oppose this proposal just as vigorously as we’re opposed to the other tax increases the governor has put on the table. 

The reason the governor’s hidden plan to raise taxes by $1 billion has gone largely unnoticed is because it’s in the details – you have to dig to know it’s there.

Under the Enterprise Zone program, companies that choose to locate in the zone areas, which are among the most economically challenged in the state, are eligible for tax credits when they hire people who fall into specific categories including veterans, those living in the area, those on public assistance and ex-convicts.

In a given year, a company may not be able to use all of the credits it has earned and under the Enterprise Zone program they can accrue these credits for use in future tax years. It is similar to the concept of rollover minutes on your cell phone plan.

The governor’s proposal would do the unprecedented—erase from the books these previously accrued tax credits.  That’s like the phone company telling you your rollover minutes are no longer good after you’ve used them.  

Now, companies across the state are struggling to figure out what they’re going to do.  They made businesses and financial plans on the assumption—the promise—of the tax credits provided under the Enterprise Zone program. The governor’s proposal would break that promise and retroactively raise taxes on companies that have taken the risk of locating in a tough neighborhood and hiring Californians who otherwise have serious barriers to employment.

But it is not just that this tax increase maneuver is unprecedented, it is most likely illegal and there are already rumblings in the Capitol that it will be challenged in court.  When a business hires a tax credit-eligible employee, they are entering into a contract with the state.  By eliminating the program and retroactively eliminating previously accrued credits, the state is likely violating both the due process and contracts clause of the United States Constitution. 

Nearly all of the assumed savings in the governor’s budget rely on the constitutionality of this retroactive taking of tax credits, not on the costs of running the program in this budget year. For too long the Legislature has passed a legally questionable budget and just hoped it would stand up in court.  When the state loses, we don’t fix the budget, we just roll over the loss to the next year. But since this litigation will happen after the budget is signed, the Legislature continues to use these gimmicks to pass a “balanced” budget. 

Like the governor, I believe that it is time for these kinds of budget schemes to end and to pass an honest budget. That starts with taking his proposal to eliminate Enterprise Zones off the table. And, if he wants to have a conversation about instituting some common-sense reforms to the program we should do that, but not as part of the budget. 

It is simple. At a time when businesses are already closing their doors, we shouldn’t be raising their taxes by nearly $1 billion in one year. That’s a recipe for future fiscal disaster at a time when we need to be finding ways to get businesses back on their feet. That is a key component of a lasting long-term solution to California’s dismal financial mess.

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