California Enterprise Zone Program Has Supporters and Foes

There was a spree of negative press in June, stemming from a study by the Public Policy Institute of California, which concluded that California’s enterprise zone program was not beneficial. However, there have been two other recent studies which concluded that the program is beneficial to California’s enterprise zone communities. One of these was published in February by researchers at the University of Southern California.
So, we have a classic case of dueling academics. As a result, there has also been a significant amount of positive press about the program during the past month, including legislators making public statements of their support of enterprise zones within their own districts.
What raises the most concern right now are the unknown outcomes of the current budget process. Unlike the normal legislative process, which is usually drawn out, we frequently get sudden new pieces of legislation as riders to the budget. So, it’s possible that California’s enterprise zone program could get a surprise when the budget dust settles. Or maybe not.
California’s enterprise zones have both friends and foes within the California legislature. Governor Schwarzenegger himself has also shown support for the program. Nevertheless, the halls of Sacramento have remained very quite during this latest attempt to solve the state’s budget woes. Very few people outside really know what is happening.
But what are the other signs?
The only major bill on the monitor that would have a significant negative affect on California’s enterprise zone program is AB 1139. This bill was introduced on February 27th with amendments in April 2009. Currently still in draft form, it has been held in committee and will be considered again in 2010. We provided an analysis of AB 1139 on May 5, 2009 (read it here). AB 1139 does not eliminate the enterprise zone program, but would significantly diminish businesses’ ability to secure the program’s Hiring Credit. Opposition to the bill is already organized.
On the other hand, there are numerous positive developments for the program.
1. Word has it that the California Department of Housing and Community Development has completed its rankings for the 4 newest enterprise zone designations. That means four new enterprise zones should be announced soon! The four were chosen through a competitive process. There were thirteen communities throughout California contending for the designations.
2. During the last budget cycle, the Governor signed AB 1542, which set a temporary cap on hiring credit utilization for tax payers with net income of $500K or more. The cap applies only to the 2008 and 2009 tax years. AB 1542 also enhanced California’s enterprise zone program by permitting “tax-credit sharing” between affiliated companies. Unlike the credit utilization cap, however, the tax-credit sharing provision is not temporary — it’s permanent.
Interestingly, on July 7, 2009, tax-reform activist Lenny Goldberg (Executive Director California Tax Reform Association) filed a request with the Attorney General’s office to place an initiative on the CA ballot. This ballot initiative would propose to change various elements of the CA tax code, one of which relates to the EZ program. It would repeal the “tax credit sharing” provision of AB 1542 — which I mentioned above. What are the chances of this proposal actually making its way onto the ballot? Probably slim.
3. A new bill, AB 1159, was introduced in February 2009 with amendments in May 2009. This bill expands the enterprise zone sales & use tax credit to include tax credit for renewable energy equipment purchased for use within an enterprise zone.
4. The July 2009 FTB Tax News announced that the California Franchise Tax Board has made a policy change that enhances the enterprise zone Net Interest Deduction or NID. The policy change allows banks and other lenders to claim a net interest deduction when they loan money to non-profit organizations within an enterprise zone. Previously, the FTB only allowed the NID benefit when money was being loaned to a for-profit business.
And finally . . .
5. According to an article today in the Los Angeles Times, in the midst of all the budget wrangling, a bill is expected to be introduced in the California Senate today that would create a new enterprise zone around the United Motor Manufacturing Inc. automobile plant in Fremont in an emergency attempt to keep the plant open.
According to the Times article, “The plant, which employs about 5,000 people, was opened as a joint venture between Toyota Motor Corp. and then-General Motors Corp. in 1984….” However, “as part of its bankruptcy process, GM said in June that it would abandon the relationship, prompting Toyota to say last week that it ‘must also consider taking necessary steps to dissolve’ ” the manufacturing facility.
According to the Times, Toyota has given no sign that the tax incentives being considered will sway its decision; nevertheless, I believe it’s a promising sign that lawmakers turn to the enterprise program for this purpose, even as the budget debate rages.
While there are some outspoken voices who want to curtail California’s enterprise zone program, the objective evidence suggests that the program has momentum.

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