CA Enterprise Zone Reform Proposal Takes on New Details

An amended version of California Assembly Bill (AB) 231 was posted yesterday on the Official California Legislative Information website. As originally introduced on February 2 by Assembly Members V. Manuel Pérez and Luis Alejo, AB231 made some relatively minor changes in the way tax payers enjoy enterprise zone tax benefits.
As amended on March 22, the bill now proposes very significant modifications, to be implemented in steps.  It has also gained a few new co-authors including Assembly Members Bradford, Galgiani,Roger Hernández, Hueso, Perea, and Solorio.
Meaningful reform is important for the future of California’s enterprise zone program.  Without meaningful reform, the program will be marked for repeated political attacks even if it survives the current legislative battle.  Such an unstable environment is bad for business, bad for California, bad for tax payers.  I am eager to see what discussion will come out of Sacramento in connection with these proposals.
Many of the proposed changes affect how enterprise zones and other economic development areas are to be designated, managed, and evaluated by the state and local bureaucracy. Notably, provisions are added to UN-designated zones that are not performing well.
AB 231 as amended is 158 pages – a long day’s reading if you’re so inclined. However, my 90-minute review (and relying on the bill’s summary introduction) suggests there are some very significant proposals that would affect individual tax payers.
Most notable is the phasing out of the 5-year enterprise zone hiring credit in favor of a new 3-year hiring credit. Whereas the current 5-year credit is frontloaded – meaning that the largest amount of credit is generated by an employee’s 1st year of work – the proposed 3-year credit emphasizes employee retention by increasing the amount of credit each year.
The bill proposes to discontinue the state’s Manufacturing Enhancement Areas and Targeted Tax Areas while retaining the 42 Enterprise Zones and 8 LAMBRAs (Local Agency Military Base Recovery Areas).
The proposal would require a new business registration process and would limit carryover of excess tax credits to 15 years. Under the current program, excess tax credit can be carried forward indefinitely, without expiration.
There is also a temporary 50 percent-cap on tax credit utilization – meaning that some tax payers could only reduce their net CA income tax by 50%. This limitation would affect businesses with gross revenues of $1 million or more and would apply only to the businesses’ 2011 and 2012 tax years.

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