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Governor’s Budget Bill Language on Economic Development/Enterprise Zones Released

Conference Committee Discusses and Keeps Item “Open”

June 4, 2013
Budget trailer bill language, including details of the Governor’s economic development proposals, which contemplates a phase-out of the Enterprise Zone (EZ) program, was released late Monday.
Additional language to eliminate enterprise zones remains under development. The Governor proposes to spend the $750 million used for enterprise zone tax credits on the following three programs:
  • An exemption from the state share of sales taxes for the purchase of manufacturing equipment. (Local shares of sales tax are not affected);
  • A new and more restrictive hiring tax credit program focused on the poorest 25 percent of the state’s census tracts; and
  • Empowerig the Governor’s office of Business and Economic Development (GO Biz) with broad authority to negotiate tax benefit packages with employers. 
The League’s initial review and analysis of the language finds the following:
  • No new existing enterprise zone sales tax credits are allowed under the program to be issued after Jan 1, 2014. Unused credits can be carried forward for up to five years (depending on when they were first issued). Discussions with the Governor’s office following the release of this proposal revealed that a similar five-year phase out of EZ hiring tax credits will be contained in the language proposing to eliminate the zones.
  • A new state sales tax break for manufacturing equipment is provided, with a maximum cap of $200 million in purchases for any one entity. A sunset date is not identified, so it is not clear how long it would last. The duration of this program is expected to be negotiated.
  • The hiring tax credit program includes the following features:
    • The Department of Finance will identify the poorest bottom 25 percent of all census tracts by income.
    • Eligible employees are limited to three categories: those unemployed for at least six months, unemployed veterans discharged from military service, and recipients of the federal earned income tax credit. (The Governor’s office claims this represents a pool of approximately 4 million people).
    • Wages paid must be more than 150 percent of median (approximately $12 dollars/hour) but qualifying entities would only receive an initial 35 percent credit for wages paid over that amount. There is little certainty what the credit amounts offered in the second and ongoing years of the program would be because they can be limited by future legislative and administrative decisions. This does not provide sufficient certainty for employers.
    • There is no appeal process of Franchise Tax Board (FTB) decisions and it contains a punitive clawbacks of the tax benefits for employees that leave within three years. Several exceptions are listed, but, this will likely be an area of controversy.
    • Retail and food service industries are not eligible with the exception of small employers (annual income of $2 million maximum). 
  • The language provides more details on the proposed Go Biz (Governor’s Office of Business and Economic Development) program. The agency would be given broad flexibility to negotiate income tax credits to employers based on the number of jobs created, the size of the business and other factors. Oversight would be provided by the newly created “California Competes Tax Credit Committee,” which is comprised of the treasurer, the DOF director, and the Go Biz director.  Thus, the Administration would have a 2–1 majority on the committee.
The problems with this proposal lie in its approach more that the details of new programs. While some aspects of the Governor’s offerings may be intriguing, the notion that they would be funded by decimating the existing enterprise program is unacceptable. California cities are still reeling from the elimination of their redevelopment agencies, and this proposal rings a similar note. The Enterprise Zone program is a state run program. The state made the rules for these zones, and the process for getting a zone is always highly competitive. Local agencies and businesses have made decisions and investments based upon the state’s commitments, and such agreements must be respected. To the extent there are problems with these zones, the state should be working in a good-faith process with stakeholders to address them with reasonable reforms. Lurching from one program to another sends a destabilizing signal about the business climate of our state, and the reliability of these new proposed programs. 
Next Steps
Both the Governor’s language and the yet-to-be-revealed language that would eliminate enterprise zones will require two-thirds legislative votes to pass.
In today’s brief discussion of this matter by the Budget Conference Committee, legislators’ responses were mixed. The Legislative Analyst Office representative characterized the proposal as a “good start” but needing refinement in various areas, and also raised questions over how much discretion the Legislature should give to Go Biz. Assembly Member Jeff Gorell (R-Camarillo) wanted more details about various aspects of the proposal and to be included in future discussions. Sen. Bill Emmerson (R-Redlands) voiced concerns about eliminating enterprise zones. Conference Committee Chair Sen. Mark Leno (D-San Francisco) offered his support for the Governor’s proposal. The committee then agreed to keep the item “open’ and return to it later.
A list of members of the Budget Conference Committee is available by reading: “Budget Conference Committee Members Announced,” CA Cities Advocate, May 31, 2013.
Cities with enterprise zones are encouraged to contact their legislators and urge them reject the decimation of one program for the promises of another, and encourage win-win solutions that respect commitments that have been made.
For more information on the Governor’s May Revise:“Governor Releases FY 2013–14 Budget,” CA Cities Advocate, May 14, 2013.

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