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Modesto Bee Editorial Good But Flawed

Here is an interesting editorial from the Modesto Bee that argues for certain reforms to the Enterprise Zone acknowledging that elimination of the program would be a mistake. There is, however, a flaw with the paper’s analysis of the cost of the program. The editorial quotes a County official explaining that the Enterprise Zone created or retained 1,162 jobs in Stanislaus County in 2010. But then they claim that this “came at a high price — $59 million in tax breaks.” I have no idea how they calculated this cost. 59 million divided by 1,162 = $50,775 in tax credits per job. Even if this figure were meant to represent the full five year credit, it is too high.

Factoring for turnover and a variety of other factors, the average tax credit claimed by employers for qualified Enterprise Zone employees is between $3,500 and $5,000 a year. Using $5,000, the tax expenditure to the State for 1,162 jobs would be more like $5.8 million for 2010, but probably much less. That’s less than 10% of the cost contemplated by the editorial.

Here is the full text of the editorial:

As one of his proposed budget solutions, Gov. Jerry Brown is calling for an end to enterprise zones — areas in which businesses get big tax incentives for adding or retaining jobs.

Inevitably this will turn into a major political fight, perhaps with a small twist — politicians from both parties champion enterprise zones, which are scattered throughout the state.

Los Angeles Mayor Antonio Villaraigosa has declared that Brown’s effort to close the enterprise zone loophole is a “non-starter.” Los Angeles, with expansive enterprise zones, offers businesses in the zones discounts on local taxes and fees. Brown’s proposal would not affect local breaks, only those provided by the state.

The state estimates it loses almost $500 million a year in corporate and other tax revenue by providing these tax incentives. Critics claim that the credits and breaks amount to a giveaway, with little actual gain in jobs.

But others, including Bill Bassitt, chief executive officer of the Stanislaus Economic Development and Workforce Alliance, are passionate about the value of enterprise zones. He calls the enterprise zones nearly the best incentive program he has seen in 30 years. One of the reasons for its success is that both existing and new companies are eligible. Most incentives are aimed at luring new businesses.

In 2010, Bassitt says, 563 companies in Stanislaus County inquired about hiring people under the enterprise zone tax credits. Of that number, 116 businesses created 686 new jobs, and 476 jobs were retained. The retained jobs had an average hourly salary of $10.28 per hour; the new jobs paid an average of $15.02 per hour. In an area such as ours, with tremendously high unemployment, those jobs are critical.

But we acknowledge the success came at a high price — $59 million in tax breaks.

Stanislaus is a latecomer to the enterprise zone strategy. The zones have been around since the mid-1980s, but Stanislaus did not receive its zone authorization until 2005. Since then, the Stanislaus Alliance has been aggressive in promoting the tax benefits to local employers and to those considering locating here.
Instead of eliminating the whole program, as Brown proposes, we would urge legislators to restructure it. A few ideas:

• Spread the tax breaks evenly across more years, in order to spread the cost to the state and to encourage businesses to keep employees for a longer period.

• Limit the tax breaks to the truly distressed areas, as was originally intended. One legitimate measure would be limiting tax breaks to the communities with the highest unemployment rates.

• Limit the tax breaks to companies that make the kind of product or perform the kind of service that could be done in another state. In otherwise, use the tax breaks to be competitive with other states, not to determine where within California a company locates or expands.

• Consider limiting the tax incentives to companies owned and headquartered in the United States.

There’s no doubt some gaming of the system and there’s no doubt that there is some gaming of enterprise zone tax credits. But in our state, which has such a reputation for being anti-business, we would hate to see a business- friendly program thrown out entirely.

Return enterprise zones to their original purpose. Make them leaner and more effective. That will reduce their cost to the state and still help put people to work or keep them employed.

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