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Long Beach Press-Telegram Examines Enterprise Zones

Here is an extensive article on the Enterprise Zone Program in the Long Beach Press-Telegram:

When The Designory, Inc.’s lease for its downtown Long Beach office was up in 2007, the company began looking at other location options.
The advertising and marketing firm had been in Long Beach since its founding in 1970, but executives thought they might be able to get a better deal elsewhere, said Matthew Radigan, chief financial officer and managing director. They ultimately stayed.

“One of the considerations that we took into account was the enterprise zone tax credit, so it was an influencing factor in us staying in Long Beach,” said Radigan.

However, the Long Beach Enterprise Zone, along with 41 other such zones throughout the state, could soon disappear under Gov. Jerry Brown’s budget proposal that is gaining traction in Sacramento.

Radigan’s business is one of the hundreds that have benefitted since the original Long Beach Enterprise Zone was established in 1992 — it expired in 2007 and a new, larger zone was created — by receiving tax breaks for employees who face challenges finding work. The current zone encompasses about 70 percent of Long Beach, more than

41 square miles.

Proponents say California enterprise zones encourage companies to come to Long Beach, stay here, hire workers and grow, but critics say it is ineffective, providing only corporate giveaways.

Call it a giveaway or call it a tax incentive, the enterprise zone has certainly helped one business — International Transportation Service Inc., which operates a cargo terminal at Pier G in the Port of Long Beach.

From 1998 to 2008, ITS saved around $3 million to $4 million in taxes through the city’s enterprise zone, according to Larry Crum, the company’s assistant treasurer. That amounted to almost 90 percent of ITS’s state taxes, he said.

“Our tax liabilities have been pretty small,” Crum said. “For us, it’s mostly been a wonderful windfall.”

In 2010, ITS received about the largest number of new enterprise zone tax credit vouchers from the city — 311, all for longshoremen, out of almost 2,000 that were given out that year, according to city records obtained by the Press-Telegram.

In 2008, the most recent year for which state data is available, Long Beach companies received a combined $14 million in tax incentives from the city’s Enterprise Zone, according to the California Franchise Tax Board.

State officials say enterprise zones have kept desperately needed money — around half a billion dollars a year statewide — out of the state’s coffers while California’s budget deficit has grown to $26.6 billion.

Benefit or bust?

Last week, a joint budget commission of state senators and Assembly members voted to support Brown’s plan to eliminate enterprise zones. Both houses are expected soon to vote on the proposal and other budget-balancing measures.

Eliminating the enterprise zones will produce $343 million in tax revenue through June 30, which is the end of the current fiscal year, and $581 million in the next fiscal year, according to H.D. Palmer, deputy director of the California Department of Finance.

“It makes a significant dent in the budget gap,” Palmer said.

Craig Johnson, the Long Beach Enterprise Zone manager, and other supporters of the program, say state officials are using fuzzy math.

“Folks in Sacramento believe it’s going to be a dollar-for-dollar exchange,” Johnson said. “That’s absolutely not true.”

Johnson said that businesses will find other ways to reduce their taxes and that companies may cut back on hiring or leave California altogether.

“The governor’s announcement alone made a lot of businesses pause about their business plans,” Johnson said, though he couldn’t cite any specific Long Beach examples.

Palmer said he doesn’t believe that enterprise zones impact business growth or make California, which is often regarded as unfriendly toward business, more competitive with states. At most, the zones “have the effect of moving existing economic activity from one area to another,” Palmer said.

Studies have given conflicting reports about the effectiveness of enterprise zones.

One report by the Public Policy Institute of California released in 2009, and often referenced by state officials, determined that the zones have no effect on business creation or job growth. A University of Maryland study published last year found just the opposite — that enterprise zones around the country do in fact reduce unemployment and poverty while often increasing wages.

“Businesses are fleeing the state,” said Blake Christian of Holthouse Carlin & Van Trigt LLP, a consulting firm that specializes in corporate taxes and helps companies locate in California, often in enterprise zones. “I have at least one meeting a week with a client or a prospect and the top topic of why they called me is that they want to talk about moving out of state.”

The enterprise zones are a primary tool to attract new businesses or convince existing ones to stay, he said.

“It levels the playing field with all of these other states,” Christian said.

The program isn’t designed just to foster business growth, but also to hire the people who most desperately need jobs.

Tax incentives are given for workers who live in certain low- and moderate-income areas, those with a low household income, laid-off workers whose unemployment benefits have run out, some military veterans, and people who have been convicted of misdemeanors or felonies, among other qualifications.

The qualifications under the state program are quite specific — to meet the residency requirement, workers must live within specific census tracts within the city.

In Long Beach, the workers who have qualified to give tax credits to their employers are varied, from retail workers to fast-food restaurant employees to professionals.

Smaller local companies, such as E.J. Malloy’s restaurant, King’s Fish House and Cabe Toyota Scion, are just a few of the tax credit recipients.

Larger businesses and national chains also benefit, such as Molina Healthcare, Boeing Co., Wal-Mart, Carl’s Jr. and Staples.

Cashing in — sometimes

However, even representatives of some local businesses admit that the Long Beach Enterprise Zone, while beneficial to businesses, doesn’t do everything that some of its supporters claim.

Radigan, of The Designory, said that while the enterprise zone may have influenced the company’s decision to stay in Long Beach, it doesn’t impact who or how it hires.

“We don’t necessarily consider it as a factor because we typically consider the greater United States as a recruiting base,” Radigan said. “It reduces our tax. That’s primary and No. 1. What increases our hiring or our capital expenditure spending is business volume.”

In certain industries, enterprise zones might have even less of an impact on operations.

A representative of another port terminal company that has received enterprise zone tax credits, who didn’t want to be identified, said the incentive hasn’t changed the company’s hiring practices. Neither, he said, would losing the enterprise zone likely make the company look for a new port from which to operate.

“I think there’s a little justification for the legislature’s attitude — in our business,” he said. “We’re at the port, we can’t move.”

Sometimes, being in the enterprise zone and hiring qualified workers doesn’t really make a difference. Ristorante daVinci, located on Spring Street next to Long Beach Airport, received 23 tax credit vouchers from the city in 2010, records show, but the restaurant recently closed anyway.

Christian pointed out that the tax incentives only help if a company is actually making a profit, which is for what businesses pay taxes. The state doesn’t hand out cash to unprofitable businesses that qualify for enterprise zone credits.

“In order to get benefits, you have to have profits,” Christian said. “If you have a company that loses money, you can bank all of the credits you want, you’ll just never be able to use them.”

A similar example is The Boeing Co., which in 2008 received tax credit vouchers for 112 workers in 2008, the same year that it laid off 70 workers at its Long Beach C-17 plant.

Boeing responded in a written statement that it considers many factors in determining the size of its workforce and that the size of the C-17 program is managed through its contract with the U.S. Air Force.

Still, Boeing said it supports enterprise zones, which it said can benefit the community.

Zone applicants favored

Some small businesses, such as E.J. Malloy’s, a pub and restaurant with two locations, one on Atlantic Avenue in the Long Beach Enterprise Zone, and one on Broadway outside of the zone, work hard to take advantage of the tax incentives.

The owner of the Atlantic Avenue location didn’t return phone calls seeking comment, but Janine Ritter, the restaurant manager, said she has been directed to only hire job applicants who qualify for tax credits.

That means that Ritter sometimes must turn away applicants who are otherwise qualified, which she said she doesn’t like.

“I just thought it was a little discriminating if you can’t hire anybody but people in the zone,” Ritter said. “I found as a hiring person that it was more difficult doing it that way.”

Johnson, the city’s enterprise zone manager, said he doesn’t see it like that.

“The program is geared to create opportunity for individuals who face significant barriers to unemployment,” Johnson said.

By giving preference to people with criminal records, for example, they are less likely to commit a crime again if they have a job, he said.

Christian said that it also costs the state far more to keep someone on unemployment and other benefits than to give a tax incentive to get them hired.

He said that state CalWORKS program data has shown that it costs $37,000 per year to support someone receiving these benefits, which is about three times the maximum enterprise zone tax credit a business can receive for an employee in the first year. The tax credit shrinks each year after that for up to five years of total credits.

Ultimately, how each business uses those tax credits is up to them, Johnson said. Most businesses, however, tend to reinvest the money, so the more profit they can make, the more they will stimulate the local economy, he said.

“We want our Long Beach companies to be as profitable as possible, because what profitable companies do is they put it back into their business,” Johnson said.

“These are all go-getter people. The people who own businesses want to thrive and grow, and the only way you grow is by expanding and hiring and expanding and hiring.”

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