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San Francisco Chronicle: “Enterprise zone plan revise may help S.F. firms”

The following is from today’s San Francisco Chronicle:

Gov. Jerry Brown’s latest proposal to revamp rather than eliminate the state’s enterprise zone program would hurt many businesses but could help others, including some fast-growing companies in large parts of San Francisco.

The program provides state income and sales tax incentives to companies in 42 designated enterprise zones. It has two goals: to foster economic development in these areas and provide employment for disadvantaged people. Brown’s new plan would refocus the program squarely on job creation.

“We want to make this a clean credit with a clear focus,” says California Department of Finance spokesman H.D. Palmer.

Today, companies in enterprise zones can get an income tax credit – worth up to $37,440 over five years – for each employee who meets certain eligibility requirements, but the company does not have to be expanding to claim it. The new worker could replace an existing one or fill a vacant position.

Under Brown’s new plan, companies that are expanding could claim a one-time credit worth $5,000 for each net full-time addition to its workforce, regardless of the new hire’s background.

The new credit would replace the existing credit. Although the new one would be smaller, fast-growing companies that hire lots of professionals ineligible for the existing credit could be better off.

Expanding companies in San Francisco’s large enterprise zone – such as Zynga, Salesforce.com and Twitter – could benefit. This assumes they are not claiming many credits today and would earn enough profit to make full use of the new credits before they expire.

Zynga and Salesforce.com declined to comment. Twitter, which recently won a temporary exemption to the city’s payroll tax, did not respond to a request for comment. Neither the zones nor the state discloses the names of companies that receive the tax credits.

Radical change

Brown’s proposal represents a radical change for enterprise zones, which include parts of San Francisco, Oakland, San Jose, Pittsburg and Richmond.

Although the zones are supposed to be economically disadvantaged, San Francisco’s includes almost all of the Financial District, South of Market, Fisherman’s Wharf, Chinatown, Hayes Valley, Third Street Corridor, Mission District and Bayview-Hunters Point.

Companies in enterprise zones can get state income tax credits when they hire employees who meet certain criteria and sales and use tax credits when they buy certain machinery and equipment to use in the zone.

The hiring credit is worth up to $37,440 per person over five years, most of it coming in the early years. If the employee quits before five years, the employer loses any unused credit.

Companies request a voucher for eligible employees and use it to reduce their state income tax. If they can’t use the entire voucher because it exceeds their tax liability, they can carry any unused portion forward indefinitely.

Employers can claim the credit for workers who meet at least one of 19 eligibility criteria. For example, they could be unemployed, disabled, a military veteran or live in targeted employment areas that have somewhat different boundaries than the enterprise zone.

The vast majority of all hiring credits awarded are based on the employee’s address, in part because it’s the easiest requirement to document. Critics say this lets companies hire high-salaried professionals who live in mixed-income neighborhoods such as the Mission.

But Craig Johnson, president of the California Association of Enterprise Zones, says the average wage paid to “vouchered employees” last year was only $11.68 per hour statewide and $18.96 in San Francisco.

Companies can get vouchers for employees hired up to four years in the past by filing amended tax returns.

Many firms don’t know they are eligible until contacted by a consultant offering to help them claim credits retroactively for a fee. This makes the credit a reward rather than an incentive, critics say.

In 2010, San Francisco’s zone approved 9,940 vouchers submitted by 983 companies. Of these, 2,098 were for new positions and 7,842 were for existing positions.

Most of the vouchers – 7,835 – were awarded based on the employee’s address, while 1,425 were on behalf of “economically disadvantaged” employees. The rest were based on other criteria.

Howls of protest

In his original 2011-12 budget proposal, Brown wanted to eliminate the enterprise zone program entirely. That would have a positive revenue impact of $581 million, largely because all unused vouchers would expire Jan. 1, 2011.

That raised howls of protest. “Companies have those as deferred assets on their books. That’s an unprecedented taking of private assets,” says Max Shenker, a vice president with the Tax Credit Co.

After intense lobbying by enterprise zone participants, Brown introduced a less-draconian plan in his May budget revision. It would leave the sales and use tax credits intact, for now, but make major changes to the hiring credit. It would:

– Make it available only to employers who increase their workforce.

– Reduce it to $5,000 for each incremental full-time equivalent hired.

– Eliminate all other eligibility criteria.

– Eliminate retro-vouchering. Employers could only claim it on an original return.

– Limit carry-forward to five years. Unused credits earned before 2006 would expire. Credits earned in 2006 would expire after five years.

The revenue impact from the revised plan would be only $70 million in 2011-12, mainly because businesses could still carry some tax credits forward. “That understates the size of these changes,” says Jed Kolko, a research fellow with the Public Policy Institute of California. “Most of the savings don’t kick in for several years.”

Zone advocates are still upset with the latest plan.

“There is nothing in the governor’s proposal that we find acceptable. While we have advocated for the last two years that we are open to reforms, we don’t believe in reforms that have the practical effect of gutting the program,” says Chris Micheli, lobbyist for Communities to Save Enterprise Zones, a coalition of business and city groups.

Johnson, who is also the Long Beach Enterprise Zone manager, says it “would effectively make (the hiring credit) unusable for many of those businesses it is intended to assist.”

Startups that take more than five years to reach profitability could lose all or some of their credits. “This will jack up the unemployment rate, I guarantee it,” he says.

Some firms would be better off. Richard Gunn, a partner with San Francisco accounting firm Burr Pilger Mayer, says that in a year when his firm hires 35 people, it might get the credit for three who live in neighborhoods such as the Mission. “It might be nice to get it for all 35,” he says.

Although the dollar amount per employee would be less, “We have had some strong growth years, where if we got a credit for every person we hired,” it would have come out ahead.

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