Governor Brown’s Budget Includes Significant Regulatory Changes to Enterprise Zone Program

California Governor Jerry Brown released his administration’s 2013-14 state-budget proposal today.  Like the 2011-12 proposal of two years ago, this budget includes changes to the state’s  Enterprise Zone hiring credit program.  Unlike that previous attempt, however, the Governor intends to make these changes without the help of the CA legislature.  The changes are based in regulatory power through the Department of Housing and Community Development, which oversees the program statewide.
Warning!  The Governor’s budget summary clearly states that additional changes will also be sought through legislative means.  We do not know yet how far reaching those proposals may be.
Here’s the current proposal, copied directly from pages 151 and 152 of the budget summary released today.

The Budget includes savings relating to new regulations for the Enterprise Zone program.The proposed regulations will accomplish the following reforms:

  • Limit retrovouchering by requiring all voucher applications to be made within one year of the date of hire.
  • Require third party verification of employee residence within a Targeted Employment Area.
  • Streamline the vouchering process for hiring veterans and recipients of public assistance.
  • Create stricter zone audit procedures and audit failure procedures.

These regulatory reforms will primarily affect Corporation Tax revenue, but will also have an impact on Personal Income Tax revenue. The regulations, in total, are expected to increase General Fund revenue by $10 million in 2012-13 and $50 million in 2013-14. The Administration will be pursuing further Enterprise Zone reform through legislation.

My Comments:
The first bullet point will have a large impact on current business practices withing the enterprise zones.  It would limit the time available for retroactive “vouchering” or certification of eligible employees to within one year of their hire date.
Currently, an enterprise zone business that has failed to utilize the program can reach back any number of years to certify eligible employees based on their circumstances at their time of hire.  Since California’s statute of limitations for claiming a tax refund is 4 years, many businesses have used retroactive vouchering to catch up on their eligibility and, as a result, have claimed significant tax refunds from the previous 4 tax returns.
This change alone will have a significant financial impact on enterprise zone businesses. It will also cause some of the consultants who assist them with enterprise-zone related services to go out of business.
Unless someone discovers a statutory or constitutional issue to prevent this procedural change, there is probably very little chance that opponents can defeat it.  Businesses and consultants with an interest in California’s Enterprise Zone program should consider adjusting their expectations accordingly.

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