Governor’s CA Enterprise Zone Proposal Calls for Elimination Not Revision

On May 22, 2013, the California State Assembly’s Budget Subcommittee #4 held a hearing that explored Governor Jerry Brown’s latest economic tax incentive proposals as they relate to the State’s current enterprise zone program. In my previous post on this subject, based solely on the language published in the Governor’s May 2013 budget revision, I concluded that significant “revisions” were the target. The recent hearing makes it abundantly clear, however, that the words “elimination” and “replacement” better describe Governor Brown’s proposal.

Thank you to Max Shenker of TCC (Tax Credit Company) for posting a video of the hearing on Vimeo.

During the hearing, a representative from the Department of Finance offered the Governor’s perspective and responded to questions. After listening through all 69 minutes of the Subcommittee’s discussion and public comments on this issue, I can make the following observations.

The Governor’s proposal would create a new statewide tax incentive program with three prongs:

  1. A revamped hiring credit available to businesses who show a net increase in jobs and hire the long-term unemployed, unemployed veterans, and individuals receiving the federal earned income tax credit. In place of the administrative enterprise zone, the revamped hiring credit would be available to businesses within any census tract with demographics demonstrating a certain level of economic distress (to be defined by the program). 
  2. A new sales tax exemption for manufacturing industries. Unlike the State’s now abandoned Manufacturing Investment Credit (MIC), which offered an income tax credit based on the amount of sales tax paid on manufacturing and production equipment, this replacement would exempt manufactures from paying the State’s portion of the California sales tax (4%).
  3. A tax credit fund administered by the Governor’s Office of Business and Economic Development (aka GO-Biz) that would authorize the agency to offer negotiated tax benefits to businesses moving into or expanding within the State of California.

If you are familiar with California’s current enterprise zone hiring credit, it should be clear to you that this revamped hiring credit would be profoundly different.  Most employers currently benefiting will no longer be eligible for a hiring benefit — if simply because they are not regularly showing a net increase in jobs.

There was no discussion about the how much tax benefit the revamped hiring credit would offer.  Nor was there any discussion about how qualifying employees would be identified, documented, or certified.

Businesses holding existing tax credits could continue to carryover and utilize them for another 5 years.

Other EZ Benefits Not Mentioned
There was no mention of the current enterprise zone program’s other benefits: the Net Interest Deduction, EZ Business Deduction, Net Operating Loss Carryover, or bid preferences for vendors bidding on state fulfillment contracts. It is not clear to me if these would also be eliminated or modified.

Agency Players
The current enterprise zone program is administered by the California Department of Housing and Community Development (HCD). With the proposed changes, HCD could be removed from the picture. The revamped hiring credit would be administered by the Franchise Tax Board. The Sales Tax Exemption would fall to the Board of Equalization.  And, as stated above, the negotiated tax credit fund would be managed by Go-Biz.

 

Finalized! CA Sequoia Valley Enterprise Zone Designation Completed

The California Department of Housing and Community Development (HCD) announced Tuesday the final designation of the Sequoia Valley Enterprise Zone (EZ). This designation is effective retroactively to October 6, 2010 and will expire in 15 years. Read about it at The Recorder Online.

In September of last year, I reported on some controversy affecting this and eight other “conditionally” designated zones.  California Governor Jerry Brown’s office had instructed HCD to delay the final designation of these zones.  That order has since been retracted and the remaining designations are being processed.

According to the zone’s website, the Sequoia Valley EZ affects the California communities of Cutler/Orosi Dinuba, Ducor, Earlimart, Exeter, Farmersville, Goshen, Ivanhoe, Lindsay, North Delano, Pixley, Poplar, Porterville, Richgrove, Strathmore, Terra Bella, Tipton, Traver, Tulare, Visalia, Woodlake.  However, if your business is located within any other part of Tulare County, don’t rule out eligibility until you have confirmed it with a phone call.

Businesses located within the EZ are eligible for a number of valuable tax incentives including:

EZ Hiring Credit
Firms can earn $37,440 or more in state tax credits for each qualified employee hired

EZ Sales & Use Tax Credit
Sales tax credits on purchases of qualified machinery and parts

Net Operating Loss Carry-forward
Up to 100% Net Operating Loss (NOL) carry-forward (which can be carried forward for 15 years)

EZ Business Expense Deduction
Up-front expensing of certain depreciable property

Net Interest Deduction
Lenders earn tax-free interest on qualifying loans to EZ businesses.

Bid Preferences
EZ vendors can earn preference points on state contracts.

Please feel welcome to contact me with your questions about the State of California’s EZ program, or about this or any other particular CA zone.  I am Vaughn Hromiko, vah@WOTCPlanet.com

 

CA San Bernardino Valley Enterprise Zone Having a Wiz-Bang Year!

According to an article published today in the Highland Community News, the San Bernardino Valley Enterprise zones is already at the brink of certifying more qualifying employees to date this year than it did during the entire year of 2010.

CA San Bernardino EZ

This is, of course, in reference to the program’s state hiring credit, which provides state tax reduction for employers that pay eligible employees to work within the boundaries of a CA enterprise zone.

In 2010, the SBVEZ certified 2,300 eligible employees for 182 employers. So far in 2011, the zone has received more than 2,000 employee applications from 145 employers. Easy to see that last year’s record will be easily beaten.

Accountants, payroll service providers, and other professional service firms with clients in the San Bernardino Valley would be wise to investigate the enterprise zone’s benefits. I can help . . . if you have questions please feel welcome to contact me. Vaughn Hromiko, vah@WOTCPlanet.com

CA Senator Bob Dutton – Enterprise Zones Work, Don’t Mess With Them!

This opinion piece by California Senator Bob Dutton was originally published in the Riverside Press Enterprise.  Senator Dutton reposted it on his own website yesterday.

Enterprise zones are proven job creators, help small businesses expand and save the state’s general fund millions of dollars each year. Gov. Jerry Brown’s proposal to eliminate the program was misguided, and his new idea to “reform” it is equally devastating to the tens of thousands of Californians desperate to find work during this recession.

The enterprise-zone program was created by the Legislature to give employers incentives to hire people receiving government assistance or who, for some reason, have difficulty finding employment.

Enterprise zones empower people by giving them a private-sector job, taking them off taxpayer-funded services and giving them long-term job stability.

According to Brown, eliminating the program would save the state $93 million.

But by getting people back to work and off unemployment and food stamps, the enterprise-zone program actually saves the state more than $120 million each year.

Eliminating the program would actually cost the general fund more money. This is just another example of shortsighted state budgeting.

Employers are also eligible for the tax credit if they hire recently released felons. California has an abysmal recidivism rate of nearly 70 percent. But a stable job is one of the key factors that helps keep former inmates from reoffending.

At a time when our state is on the brink of releasing thousands of convicted felons from prison, shouldn’t we ensure that these individuals have every incentive possible to keep them from re-offending?

Enterprise-zone opponents have made much ado about a report by the legislative analyst, which was critical of the program.

However, other analyses done with better and more precise economic indicators have proven that enterprise zones help bring entire neighborhoods out of poverty by increasing wages and encouraging businesses to invest in blighted areas.

Enterprise zones are a key component of our state’s continued economic recovery. But the governor’s wavering on this program has already caused several businesses to pack up and leave town.

While he has abandoned his attempts to eliminate the program, the governor’s proposal of so-called reforms decimates the program’s benefits and undermines the intent of the original legislation.

The governor’s “reforms” would allow a business to claim a hiring credit when it creates a new position and hires a new employee. By limiting the credit to new jobs, not new hires, the governor is undermining the very important need to retain jobs.

At a time when businesses are struggling just to keep their doors open, job retention is as important as job creation. Let’s not make our unemployment problem any worse.

Moreover, Brown’s new proposal is still a significant and retroactive tax increase on businesses both large and small currently relying on the enterprise-zone program.

Instead of crippling businesses’ ability to start, grow or retain employees, we should be focused on improving our state’s economic climate to encourage companies to stay or relocate in California instead of moving off to more business-friendly states.

Eliminating the enterprise-zone program or attempting to pass deceptive reforms is a significant step back in our shaky economic recovery.

We need state government to make it easier to create jobs and get people back to work.

Vote Anticipated on California Governor’s Enterprise Zone “Reform” Bill

Governor Jerry Brown’s May-budget revision proposal to “reform” California’s Enterprise Zone program has sailed through legislative committees in both CA chambers. Although dubbed a reform, the legislation would effectively dismantle the enterprise zone hiring credit program (see previous posts here  and here).

To my knowledge, the current vote counts are not being publically announced at this point; however, I have reason to believe the issue is very close – within just a few votes of the 2/3 majority required to pass such a tax increase on businesses.

Efforts continue to inform lawmakers, some of whom have been confused by the Governor’s use of “reform” language in pursuing his proposal. Citizen-fueled lobbying efforts have been organized at the Capital, including one for Tuesday of next week. We anticipate a vote on the proposal as soon as Wednesday

Communities to Save Enterprise Zones: Statement on the Governor’s May Revision of the California State Budget

SACRAMENTO – Communities to Save Enterprise Zones today issued the following statement from their counsel, Marty Dakessian, in response to the Enterprise Zone proposals in Governor Jerry Brown’s May revision of the California State Budget:

“Communities to Save Enterprise Zones is strongly opposed to this new Enterprise Zone proposal,” said Marty Dakessian, counsel for Communities to Save Enterprise Zones.

“While we continue to analyze the details of the Governor’s May revision, our initial perspective is that the Governor’s proposal with respect to Enterprise Zones is not much better than the Governor’s January proposal to retroactively repeal the tax credits,” Dakessian, who also serves as a partner with Reed Smith LLP.

“In fact, the Governor’s new proposal amounts to an illegal billion dollar tax increase on businesses. It would effectively eliminate the program’s benefits, eviscerate its value and burden businesses by replacing it with another hoop-laden program that does nothing to benefit the budget, the economy, workers, businesses or the communities they live in,” Dakessian continued.

He concluded, “The Governor’s new proposal is a continued attack on small business because it takes away promised benefits and penalizes employers for creating jobs in the state. It fails to recognize job retention as an important factor in our economic recovery, reduces tax credits for new jobs thereby reducing incentives for new hires, creates conflicting bureaucratic hoops that would make it difficult for business owners to collect on tax credits. Finally, because it limits carryforwards and violates the contracts clause, it is still clearly unconstitutional.”

Communities to Save Enterprise Zones is a coalition of more than 500 local elected officials, businesses, community leaders and organizations.

California’s Enterprise Zone Program is one of the State’s most vital programs aimed at creating jobs and reducing poverty. This program enjoys widespread support from Democrats and Republicans, businesses, chambers of commerce, taxpayers, and local government.

Repealing the Enterprise Zone Program will harm the very communities that are hurting the most in this recession, would amount to an increased tax on businesses, and is illegal because it would violate the Due Process and Contracts clauses of the United States Constitution.

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CA Governor’s EZ Proposal Not So Good After All

Details from the CA Governor’s May Budget Revision, released yesterday, are now hitting the news. What we thought was potentially good news for the state’s enterprise zone program (based on Friday’s leak), is not what we are hoping for.  As you consider this news, do not simply assume Governor Jerry Brown’s proposals will be adopted. 

We’ve already seen legislators supporting the enterprise zone program from both sides of the political aisle.  Governor Brown’s proposals, on the other hand, are draconian and unlikely to sway many into supporting his anti-enterprise zone views.

The Governor’s office is proposing radical and unworkable changes to the enterprise zone program – very much unlike the meaningful reforms proposed by Democrat Assemblyman V. Manuel Pérez.

The following quotes are directly from the budget summary released by Governor Jerry Brown’s office.

“Instead of repealing state tax benefits for Enterprise Zones, the May Revision proposes to reform Enterprise Zone hiring credits so that credits are only available to firms which actually increase their level of employment. Taxpayers would be eligible for a $5,000 credit for each incremental full-time equivalent employee that they hire.”

Response: Frequently, firms struggling to operate in economical depressed area of the state can neither hire full-time employees nor increase their level of employment. This is especially true of the smallest businesses.

While most business owners want to expand, too many are struggling to survive. Even while they struggle, however, they provide jobs for grateful employees who otherwise would join the ranks of the unemployed. The populations within some of California’s enterprise zones are currently experiencing unemployment rates of more than 20%.

“These credits would only be allowed if claimed on the taxpayer’s original return.”

Response: In other words, an employer cannot file an amended return to claim credits that were missed. This unfairly discriminates against business owners who may not have the immediate time or means to win this race against the clock — to comply with all the program’s procedures and stipulations before their tax return is due.

“Additionally, the May Revision proposal would not allow any new vouchers to be granted for tax years prior to 2011 when the application for that voucher was made more than 30 days after the date that the employee first begins employment.”

Response: This proposal is completely unworkable and probably exposes an ignorance of enterprise-zone program realities. Unless other regulation and documentation standards are also revised, in most cases it is NOT possible to submit a complete application within 30 days of hire.

Even someone who knows the program very well – and knows the secrets to obtaining hard-to-get documentation – will be pressed to complete an employee application in 30 days. In most cases, it is impossible unless an employee is able to provide what is needed from his or her own personal files  (and this is rare).

“Additionally, to ensure that credits are creating incentives for relatively profitable, tax-paying businesses, the Enterprise Zone credits will be limited to a five-year carry-forward period.”

Response: Limiting to a 5-year carry forward period plainly contradicts the previously stated goal of reforming the program so “that [hiring] credits are only available to firms which actually increase their level of employment.”

Expanding businesses – the ones that increase the size of their workforce – frequently experience losses during the short-term as they invest in their workforce and other assets. Then, as the investments begin the pay off, those operating losses also carry forward and offset the company’s tax liability during its initial year(s) of profitability.

The Governor’s proposal contradicts itself by encouraging expansion with a hiring tax credit but then limiting its use to a five-year period – during which the company is least profitable and least in need of tax savings.

New Legislation Announced to Reform and Preserve California EZ Program

The pace is picking up in the debate between Governor Jerry Brown’s budget proposals and the California enterprise zone program.

On Friday, Assemblyman and Chair of the Assembly Jobs Committee V. Manuel Perez unveiled three related bills to reform certain aspects of the enterprise zone program.   Perez is a strong supporter of enterprise zones and the proposed legislation seeks to preserve them in California. 

The proposed legislation includes AB 231 , AB 232, and ABX1 11.  My quick read of all three bills does not reveal anything to shake my confidence in the program — just the opposite. The proposals strengthen the program by increasing accountability and synergy among local agencies involved.

Contrary to my previously expressed concerns, the proposals do not place a limitation on the amount of time allowed for companies to apply for employee certifications under the hiring credit program.  Nor do they eliminate Targeted Employment Areas (or TEAs).  The debate is far from over, however, and I fully expect modifications and new proposals to emerge during the next few weeks.

Perez’s proposal modifies but retains the TEA. It also preserves TEA residency as one condition for employee qualification under the hiring credit program.  Employee-eligibility under the TEA category would be limited, however, based on the employee’s compensation.

If I am reading the bills correctly, this would be the first time an employee’s eligibility under the hiring credit program is limited by his or her circumstances after hire.  All other criteria look solely at the employee’s circumstances immediately before the date of hire.  Under the new TEA category, higher-paid positions would not be eligible to generate the hiring credit.

Perez announced the bills during an event on Friday at Ernie Ball Guitar Strings in Coachella, CA.  Sterling Ball, the CEO of Ernie Ball Guitar Strings, is throwing his support behind Perez and the effort to counter any proposals to dismantle the program.

California Gives Life to Three New Enterprise Zones!

According to an article published this afternoon at CaliforniaNewsWire.com, the California Department of Housing and Community Development (HCD) announced today the conditional designation of three new enterprise zones.  The new zones are Anaheim, Harbor Gateway and Santa Clarita Valley.  I checked the HCD website minutes ago and find no mention of the announcement there, so I guess we’ll find out more later.

California has authorized 42 enterprise zones state-wide.  The three new zones are taking the place of enterprise zones that recently expired — typically after a designation period of 15 years (although some early zones received short extensions after their original 15-year lifespan had expired).  New zones receive their designation through an expensive and highly competitive application process.

  • Tax benefits associated with the new enterprise zones will be identical to those offered by existing zones.
  • Hiring Credit — offers a state income tax credit based on a percentage of the wages paid to qualifying employees
  • Sales & Use Tax Credit – offers a state income tax credit based on the amount of sales tax paid in purchasing qualifying equipment for use within the enterprise zone
  • Net Interest Deduction – provides tax free interest income to lenders who loan money to qualifying enterprise zone businesses
  • Upfront Business Expense Deduction for qualifying capital investments (rather than depreciation)
  • Zone Net Operating Loss Carryover

My firm specializes in helping employers identify and document their eligibility for enterprise zone hiring credits.  Although the program provides a substantial tax benefit, the qualification is primarily a human resources process.  Most businesses already hire qualifying employees, but need assistance to identify and document qualifying factors.  It sounds hard — and it is for the uninitiated — but we make it look easy.

If you have questions about the California enterprise zone program, please contact me.  I am Vaughn Hromiko.  vah@WOTCPlanet.com or (800) 655-5281, extension 101.

CA Darrell Steinberg’s Office Concedes that EZ Killer Bill Unlikely to Become Law

Can this be true?  SB 974 was introduced by California Senator Darrell Steinberg  (Dem) early this year in an attempt to substantially limit the impact of California’s Enterprise Zone Hiring Credit program.  According to an article in the Santa Clarita Valley Signal today, “officials from Steinberg’s office said Wednesday that the legislation will probably not become law.”

Sounds good to me.  However, so far I haven’t seen any other mention of any word from Senator Steinberg.

Enterprise Zone program changes proposed by SB 974 are: (1) Eliminate Targeted Employment Area residency as a criteria of employee qualification for the EZ hiring credit and (2) create a 42-day deadline for businesses to “apply for and obtain” an employee’s certificate of eligibility.

Please see previous posts for more discussion of this bill.