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Governor Brown’s Proposal

The following is the full text of Governor Brown’s proposal for the Enterprise Zone in the upcoming budget. It is important to keep in mind that final budgets never look the same as January proposals, and that these proposals will need to pass the legislature as bills that will go through the rigorous legislative process:

Consistent with the new model for funding economic development (See Tax Relief and Local Government Chapter), the Budget proposes to eliminate all enterprise zone (EZ) tax incentives and similar tax incentives for specific areas for tax years beginning on or after January 1, 2011. These areas include EZs, Targeted Tax Areas, Manufacturing Enhancement Areas, and Local Agency Military Base Recovery Areas. The tax benefits provided for most of these areas include; a hiring credit, a credit for sales tax paid, a credit for employees who earn wages within the area, and a deduction for interest received from businesses in an area. This proposal would eliminate these tax benefits, both for newly earned credits and deductions and for credits that had been earned in prior years, but had not yet been used. Local agencies that want to keep any local incentives could continue to do so.

This proposal is expected to generate additional revenues of $343 million in 2010 11 and $581 million in 2011 12.

Within the context of a budget that proposes deep spending reductions across state government, all spending must be scrutinized. The EZ program is a tax expenditure — an expenditure program for local economic development run through the tax system. The Budget proposes to make significant changes in the way funding of local development efforts is handled. These changes are intended to move the responsibility and the authority for local development efforts to the local jurisdictions and their voters. Eliminating state tax benefits for EZs is a fundamental part of this change. Because the primary benefit of these zones is to shift economic activity from one geographic region within California to another geographic region within California, they are not of statewide interest.

The Legislative Analyst’s Office “California’s Enterprise Zone Programs” – 2005 found that EZs have little if any impact on the creation of new economic activity or employment. They also found that EZs appear to be somewhat effective in increasing economic activity within smaller geographic areas – such as within metropolitan regions. However, these increases are not generally a result of new activity, but, instead, from the shift of activity into a zone that otherwise would have occurred elsewhere.

According to a report by the W.E. Upjohn Institute for Employment Research (State Enterprise Zones: Have they Worked – 2002), “most enterprise zone incentives are too small to materially affect the investment and location behavior of most firms.” The jobs created in many zones are filled by people who are not economically disadvantaged or do not live in the targeted area. They also conclude that since many of the benefits will be jobs that would have been created anyway, state and local government will see a net loss of $60,000 for every job created in a zone.

The Public Policy Institute of California found “Do California Enterprise Zones Create Jobs?” – 2009 that there was “no statistically significant effect on either employment levels or employment growth rates” within enterprise zones as compared to neighboring areas.

There is some evidence that benefits from the EZ programs go to taxpayers whose behavior has not been affected at all by the EZ program. There are firms that specialize in finding businesses that could benefit from an EZ program and offering to prepare the taxpayer’s return on a percent of benefit basis. This is done for both current year and back year tax returns. Clearly taxpayer’s behavior to relocate or expand is not being driven by the existence of the EZ program if they have to be told that the program exists after they have already relocated or expanded.

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