News

Democrats take on enterprise zones

In recent months, Democrats have begun the most serious push in years to
reform California’s enterprise-zones program. Enterprise zones are areas
where employers are given tax credits, with the idea that they will use the
money to hire otherwise disadvantaged workers.

Twenty-three of the state’s 42 enterprise zones expire by the end of 2007. A
growing number of Democrats are seeking to use this opportunity to create a
full-scale re-evaluation of the program–and end what they see as routine
renewal of large tax breaks to big business. Last year, Senate Revenue and
Taxation Committee chair Mike Machado, D-Linden, managed to hold up two
bills, SB 6 and AB1361, that would have extended the life of current zones.

Budget researchers say the cost of these programs has expanded greatly since
their inception. On Monday, the liberal-leaning California Budget Project
introduced a report that showed that these zones cost the state $299 million
in 2003, the most recent year for which data was available. This is more
than double the number of tax breaks given out in 1999, and twenty times the
amount in 1993.

The Budget Project report also cited numerous statistics claiming the state
isn’t getting a good return on the $1.5 billion it has invested in
enterprise zones. It quoted Franchise Tax Board numbers that show 81 percent
of the benefits going to corporations with assets of over $100 million–not
the small, family-owned businesses that supporters often have claimed.

Jean Ross, executive director of the California Budget Project, said that
lawmakers should close a loophole that allows administrators in one
enterprise zone to issue permits used in another. She said this abuse is
particularly common with administrators in Oakland’s enterprise zone. The
report notes that over three-quarters of the benefits go to 15 of the 42
zones, mostly centered in urban areas like Los Angeles, Fresno, Bakersfield
and Sacramento. A whopping $30 million went to San Francisco in 2003 alone.

“It should be used to laser target areas that otherwise would have a tough
time,” said Ross during a conference call. “If you could locate in San
Francisco or Long Beach and get the benefit, why should you locate in
Calexico, Del Mar or Shafter?”

Democrats currently have two live bills designed to accomplish this goal: AB
1766 by Mervyn Dymally, D-Compton, and SB 1008 by Denise Ducheny, D-San
Diego. Colin Grinnell, a consultant to Machado, said the bills are
“substantially similar.” If implemented, these bills would create more
stringent requirements for an area to qualify as an enterprise zone, place a
hard cap of 25 years on the life of a zone and require regular reviews of
zones when new census data becomes available, among other reforms.

In exchange, the bills would allow for extending the life of current
enterprise zones. This is intended as an olive branch to enterprise-zone
supporters, including the California Chamber of Commerce and the California
Taxpayers Association. Grinnell said the bills are “the result of
negotiations between local governments, enterprise-zone administrators,
tax-reform advocates, and authors and committee staff.”

“You couple those two things together and you have a chance of getting
reforms you wouldn’t get in a stand-alone bill,” Grinnel said.
Democrats also have bolstered their case for reform with a legislative
report from Juan Arambula, D-Fresno, titled “20 Years of California
Enterprise Zones.” Issued in March and updated this month, it also calls for
stricter qualifications and greater oversight. Arambula is chair of the
Assembly Committee on Jobs, Economic Development and the Economy.

Chris Micheli, a lobbyist for California Strategies and a spokesman for the
California Association of Enterprise Zone employers, said that his group and
other supported SB 6 and AB 1361, two bills that died last year that would
have extended the lives of current enterprise zones, but “strongly oppose”
AB 1766 and SB 1008. The bills, he said, propose “wholesale changes” in
order to fix what he said are minor or nonexistent problems.

For instance, Micheli said opponents claim that some companies have
improperly claimed hiring credits for “ex-offenders” who merely have parking
tickets. This isn’t the fault of current law, which uses the federal
definition of an ex-offender as laid out under the Work Opportunity Tax
Credit program. The federal definition includes those convicted of most
misdemeanors, but the new legislation seeks to limit credits to felons.

He also said the California Department of Housing and Community Development,
which oversees enterprise zones, began reviewing Oakland’s zone last year
and has forced them to make numerous changes in order to maintain their
eligibility. If reformers really want to improve the program, he said, they
should increase the department’s monitoring budget.

“Oakland is old news, but it continues to be used by opponents of the
program,” Micheli said. “A lot of the alleged abuses and problems have
already been taken care of.”

But Democrats proposed reforms don’t go nearly as far as some have called
for. The California Budget Project report made numerous recommendations,
including requiring local governments to share the cost of the tax credits
and giving hiring credits only to companies that use them to hire new,
low-income workers.

Another longtime voice in the wilderness on this issue has been Lenny
Goldberg, executive director of the California Tax Reform Association. Ross
and Goldberg said that enterprise zones are a significant factor behind the
shirt of the tax base from corporations to individuals. According to a
January 2004 report from the Legislation Analysts Office, the percentage of
state revenues from personal-income tax grew from 18 percent in the 1963-’64
fiscal year to 45 percent in 2003-’04.

Goldberg also said that the state subsidized the excesses of San Francisco’s
dot-com boom via that city’s South of Market enterprise zone.

“It runs from SBC Park to Union Square,” Goldberg said. “They just got the
money for doing what they would have done anyway.”


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