The Center of the California Enterprise Zone Information Universe


Performance Review For California’s Enterprise Zone Replacements

When California did away with its enterprise zone tax incentive program in 2013, it replaced that program with three new tax incentives: (1) the California Competes tax credit, (2) a partial sales tax exemption on manufacturing and R&D related equipment, and (3) the New Employment hiring tax credit (NEC). At the time, a press release from Governor Brown noted: “The new Initiative will be funded by redirecting approximately $750 million annually from the state‚Äôs outdated and ineffective Enterprise Zone program.” In order to obtain the necessary bi-partisan support, the legislation needed to be revenue neutral and shift the economic incentives from the enterprise zone program to the new programs.

How are these programs tracking compared to the original commitment of $750 million for business incentives?

For fiscal year 2015/2016, the California Competes program was authorized to allocate just over $200 million (which is the amount allowed by statute).

A source from the State Board of Equalization confirmed that taxpayers received $209 million in tax savings as a result of the partial sales tax exemption between July 2014 and December 2015. This is consistent with the Governor’s budget from January which said that utilization of this benefit was forecast to be $160 million in 2015-16 and $180 million in 2016-17 (see here, page 157).

For the NEC, the legislation required that FTB publish the names of taxpayers who claimed the NEC and the amounts claimed. The FTB recently published the first list which pertains to the 2014 tax year. So far, 37 taxpayers have claimed a total of $299,164 in NEC tax credits.

$200 million for California Competes, plus about $200 million for the sales tax exemption comes to about $400 million. That leaves about $350 million before reaching the revenue neutral $750 million mark which convinced legislators to eliminate the enterprise zones. So far, the NEC is providing less than one tenth of one percent of that benefit to California businesses.

One of the requirements of the legislation was that the efficacy of the New Employment tax credits be evaluated annually. From AB 93:

(m) (1) Upon the effective date of this section, the Department of Finance shall estimate the total dollar amount of credits that will be claimed under this section with respect to each fiscal year from the 2013-14 fiscal year to the 2020-21 fiscal year, inclusive.

(2) The Franchise Tax Board shall annually provide to the Joint Legislative Budget Committee, by no later than March 1, a report of the total dollar amount of the credits claimed under this section with respect to the relevant fiscal year. The report shall compare the total dollar amount of credits claimed under this section with respect to that fiscal year with the department’s estimate with respect to that same fiscal year. If the total dollar amount of credits claimed for the fiscal year is less than the estimate for that fiscal year, the report shall identify options for increasing annual claims of the credit so as to meet estimated amounts.

I have not yet been able to confirm if such a report has been provided by the FTB.

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