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Legislative Analysts Office Budget Recommendation: Cancel Enterprise Zones

The LAO’s recent, and somewhat unprecedented, budget recommendations have gotten an extraordinary amount of press. A search on Google News for “Elizabeth Hill Budget” reveals well over 400 news items. Within the recommendation is a broad attack on the Enterprise Zone program (George Skelton’s Los Angeles Times column on the subject refers to Enterprise Zones as a “business loophole”). The following appears within the report “LAO Revenue-Raising Proposals“:

Phase Out Enterprise Zone Programs

Background. California offers several tax programs that provide benefits only to taxpayers affiliated with designated areas of the state. (These are typically blighted areas in need of economic redevelopment.) Tax programs for these areas include hiring credits, wage credits, credits for sales taxes paid on purchases of certain machinery, exclusions of interest earned on qualifying loans to businesses, and expensing of qualified business investments. Current law allows for the designation of 42 enterprise zones (EZs) as areas qualifying for these treatments. Zone designations are for 15 years, with some zones having received an additional five–year extension. More recently, Chapter 718, Statutes of 2006 (AB1550, Arambula), enabled roughly 20 EZs whose designations had expired to be redesignated as EZs for an additional 15 years. Thus, many EZs have now been in existence for more than 20 years.

Proposal. Cancel the recent redesignations of EZs and deny future extensions for all other EZs. Revenue gain of about $100 million in 2008–09 and $120 million in 2009–10.

Rationale. Many studies of EZs question whether they are efficient or cost–effective tools for improving the economic conditions of the targeted areas. Our December 2003 report, An Overview of California’s Enterprise Zone Hiring Credit, concluded that EZ incentives have little, if any, impact on the creation of new economic activity or employment, but that they can be effective in shifting activity into the EZ that otherwise would have occurred elsewhere in the same geographic region. As noted above, many EZs have already been in effect for many years. It is not clear what additional benefits will be gained by extending the same incentives that have already been in place for as many as 20 years. Rather, other redevelopment policy tools could be more effective than extended use of EZ tax incentives.

The basis of these assertions are simply inaccurate. AB 1550 did not enable expiring zones to be redesignated and no expired zones were in fact redesignated. The expiration of zones initiated a completely open application process available to every jurisdiction in the State. It happened that in most cases the same jurisdictions who had expired zones applied for new zone designations and received them, but these were by no means redesignations.  Besides the significant technical differences, the misrepresentation is disturbing.

Therefore the proposal that grows out of the inaccurate background is equally disturbing if not preposterous.  Jurisdictions who recently applied for Enterprise Zone designations invested heavily in the process.  It would be the height of unreliability for the State to then pull the rug out from under these communities.  I would think that applicants, both successful and unsuccessful, would have a valid basis to sue the State for damages.  What kind of message would be sent to the business community if commitments could so easily be discarded, and what impact would that have on the economy?  There is no need to deny future extensions of EZs since there is no statutory basis on which to extend them, nor are extensions contemplated.  In addition, I think to achieve a $100 million revenue gain would require changing existing law in order to cancel all tax credits immediately notwithstanding credits already generated or qualified employees already vouchered, etc.  I don’t know how one would calculate the negative revenue impact of such a colossal reneging of commitment.

It seems disingenuous to generalize that studies show Enterprise Zones to be ineffective.  There have been a series of studies touting extraordinary benefits and return on investment from the program.  Specifically, the August, 2006 study, “Report to the California Department of Housing and Community Development on Enterprise Zones” which was commissioned by a state agency and is three years newer than the study cited by LAO.

Anyway, it seems highly unlikely that the Governor would agree with such a proposal.

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