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Sacramento Bee Goes After Enterprise Zones

Having followed the budget process closely this year, one of the Capitol reporters I came to rely on was the Sacramento Bee’s Kevin Yamamura. So when Kevin called me last week to discuss recent developments regarding the Enterprise Zone program, I was happy to speak with him for a while.

Just in time for the kick-off of CAEZ’s annual conference, the Bee has published Kevin’s article with the headline, “California’s enterprise zone program lets companies cash in on existing workers.”

Since I have come to respect Kevin’s work on budget reporting, I found this article disappointing primarily because it doesn’t really add anything new to the discussion. Most of the article focuses on the, admittedly poor, marketing approach of one small industry consultant. Anyone who has attended a few legislative hearings will recognize this as one of California Labor Fed’s talking points. There are plenty of interesting new issues to explore which are only hinted at in this article.

The following is the whole article:

Against a snapshot of $100 bills, the Wincentive Corp. asks on its website, “ARE YOU LEAVING MONEY ON THE TABLE?”

The cash isn’t generated from sales or casinos, but state taxpayers.

As California struggles to combat an 11.9 percent unemployment rate, a $581 million economic development program designed to create jobs has drawn scrutiny for rewarding companies that hired workers years ago.

The state’s enterprise zone program offers $37,440 tax credits to employers for new workers in beleaguered areas. But employers also claim tax rebates for existing workers by amending old tax returns, often at the urging of consultants such as Wincentive.

“The concern is, if the program is intended as an incentive to change companies’ behavior, why are we essentially rewarding them for something they did in the past?” said James Nachbaur, who studies enterprise zones for the state Legislative Analyst’s Office.

The enterprise zone program promotes economic growth in 42 distressed areas around the state. It encourages companies to hire disadvantaged job candidates such as parolees, disabled residents and welfare recipients.

But employers also can qualify for tax credits simply based on where their employees live.

State officials say most hiring credits are claimed based on residency rather than disadvantaged criteria, in part because residency is easier to verify. The qualifying residential areas generally encompass impoverished neighborhoods, but some are drawn so broadly they include middle-class and wealthy blocks.

Besides worker tax credits, the program offers sales tax credits, greater tax flexibility and preference for state contracts.

The hiring and sales tax credits alone cost the state $674,504 in lost revenue when the program began in 1986, according to the Franchise Tax Board. In 2009, after expansion and greater awareness, those same credits cost $262.5 million. Companies worth at least $1 billion received 68 percent of those credits.

Gov. Jerry Brown sought to eliminate enterprise zones in January to raise an estimated $581 million in additional tax revenue for the state in the current fiscal year and $924 million over 18 months. Stymied in the Legislature, he sought to scale back the program in May by eliminating retroactive job credits.

That proposal failed, too, as industry experts likened the practice to an individual taxpayer who realizes after filing he qualified for a credit to which he was entitled. Businesses and individuals have four years to amend their returns.

Business advocates also argued that enterprise zones help California compete for jobs, and said it would be wrong to remove hiring subsidies as the state struggles with the second-highest unemployment rate in the nation.

“Businesses are continuing to scale back, to leave, to be wooed by neighboring states,” said Craig Johnson, president of the California Association of Enterprise Zones.

Eliminating retroactivity altogether isn’t possible, those in the industry said, because the program requires that employees remain on the job for 270 days to validate the credit.

It is unclear how widespread the practice known as “retroactive vouchering” is because the state does not regularly gather such data from local enterprise zone administrators. In 2006, the California Budget Project determined that corporations claimed, on average, 14.5 percent of enterprise zone tax credits through amended returns from 1999-2003.

Besides its picture of $100 bills, Sacramento-based Wincentive quotes one client, a San Francisco restaurateur, describing $850,000 in enterprise zone credits as “manna from heaven.”

Wincentive CEO Sidney Singleton was unavailable for comment.

Another client, William Mendonca, president of Universal Service Recycling in Stockton, said he hired Wincentive in 2005 after learning about the program in a city seminar. Mendonca said he received $250,000 from the state after amending tax returns.

“Would I hire someone of less quality because they happen to live in an enterprise zone?” Mendonca said. “No. But we’ve kept a lot of people on staff and not laid people off because we’re part of the program.”

Christian Larsen, a partner at the Newport Beach-based CLC Tax Credits, said tax consultants help business owners who lack the expertise to file the necessary paperwork.

“Some are savvy enough to decide that if I move to Santa Ana instead of Irvine, I can qualify for the enterprise zone program,” Larsen said. “But I find there are businesses in these enterprise zones who have no idea they’ve been in one, and they’ve been around 20 years. The state doesn’t have the budget to market it properly, so a lot of times the marketing these companies get are from companies like ours.”

As the state considers further cuts in education and social services, labor groups are pushing Brown and lawmakers to continue looking at enterprise zones.

“The retroactive vouchering spawns some of the worst abuses, so if there’s a way we can rein that in, we’d be very supportive,” said Sara Flocks, public policy coordinator at the California Labor Federation.

Brown’s administration hopes to reshape the program through its own rule-making process – and without legislative approval – where possible.

In a memo released this month, the state Department of Housing and Community Development suggested two changes to retroactive vouchering. One proposal would limit to one year how long a business could retroactively claim a credit. Another would require firms to submit preliminary paperwork at the time of hiring.

Enterprise zone advocates indicate they are open to some change.

“I think it’s reasonable to expect there should be some limitation on it, but there are a lot of different tax rules that make (retroactivity) a necessity,” said Max Shenker, vice president of the Los Angeles-based consulting firm Tax Credit Co. and an adviser to the association.

Assemblyman V. Manuel Pérez, D-Coachella, represents Imperial County, which had a 29.6 percent unemployment rate in September, highest in the state.

With three enterprise zones in his district, he is among a handful of Democrats who opposed Brown’s elimination plan. But he is working on legislation, Assembly Bill 231, to change enterprise zones, including a reduction in the amount of time companies could file for retroactive tax credits.

He also wants to tighten the program so that more impoverished residents find work via the tax credits.

“People are really struggling and this is an opportunity for them to have a job,” Pérez said. “The best social welfare program for them at end of day is a job.”

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