Enterprise Zones: Just the Facts
Enterprise Zones are geographic areas where companies can receive a host of tax breaks. California has 40 zones across the state and each zone is designated for 15 years. The Governor proposed eliminating Enterprise Zones in his 2010-11 budget and in 2013-14 called for initial reforms to rein in the cost and halt abuses in the program.
The EZ program began three decades ago to help create jobs and grow businesses in economically-distressed areas of the state. The program was also established to help disadvantaged groups, like veterans and public benefit recipients, get those jobs. These original goals have been perverted over time and the program has grown to a million-dollar giveaway to major corporations and tax consultants at the expense of workers, taxpayers and the state.
Basic Facts about the Program:
- The cost of the EZ program to the state has skyrocketed 35 percent annually, on average, since it began in the 1980s. The Franchise Tax Board estimates that EZs will cost the state $700 million in 2013-14.
- The most reliable, independent research finds that the EZ program fails to create jobs or new business. The Public Policy Institute of California’s comprehensive study of EZs in 2009 found that EZs failed to increase employment.
Who gets EZ tax breaks?
- Corporations with assets of $1 billion or more claimed 61 percent of EZ tax credits, while corporations with assets of less than $1 million claimed less than 1 percent of hiring, sales and use tax credits.
- The vast majority of hiring tax break vouchers were claimed by businesses in Los Angeles (Hollywood) and San Francisco, not in the highest unemployment areas.
- Retailers, such as Wal-mart, claimed at least 25 percent of EZ hiring tax credits.
What kind of tax breaks do EZs provide?
- The hiring tax break is the largest piece of the program—employers can claim up to $37,440 per qualified employee over five years.
- EZs allow employers to retro-actively voucher, or retro-voucher, employees for credits as far back as four years, and even claim a hiring credit if the person no longer works for them.
- Retro-vouchering accounts for 30 percent of all EZ vouchers.
- Vouchers for employees who live in Targeted Employment Areas (TEAs), rather than employees who are veterans or economically disadvantaged, account for 79 percent of all voucher applications. TEAs can encompass high-income neighborhoods.
- Other tax breaks include sales or use tax credit for equipment, business expense deduction, net operating loss deduction (NOL) and net interest deduction for lenders.
What’s wrong with Enterprise Zones?
- They’re a huge cost to taxpayers and do not create jobs in return, creating a public subsidy to billion-dollar corporations.
- The hiring credit is structured to create an incentive for new hires, not new jobs, and for hiring in low-wage, high-turnover positions.
- Retro-vouchering, TEAs and other aspects of the program spawned a cottage industry of tax consultants who make money “advising” companies how to get tax breaks and then taking a contingency fee off the tax refund. An army of lobbyists protects the program in Sacramento.
- Every other program—education, public safety, health care, infrastructure—have all taken huge cuts in the last few years. The EZ program has continued to increase in cost to the state every year, bleeding other state programs to death.
- The EZ program has no cost cap, no sunset date and little to no transparency as to what companies claim credits and how many jobs they create. It takes a 2/3rds vote of the legislature to reduce, reform or eliminate the program.
How can we fix the system?
A bill currently being considered in the state legislature, SB 434 (Hill), would curb the worst abuses of the Enterprise Zone program and return it to its intended purpose of creating good jobs with our taxpayer dollars.
SB 434 (Hill) will enact several reforms to the EZ program that include:
- Eliminate Retroactive vouchers—credits can only be claimed within a year of hire.
- Require job creation: Employers must create net new jobs in the state to claim the hiring credit.
- Quality Job Standards: Employers must pay at least $16 an hour and meet retention standards to claim credits. Temporary agencies would be prohibited from credits.
- Cap, Sunset and Review: Cap the cost of the program, set a sunset date and require legislative review.
- Transparency: Create a public database of companies that get EZ tax breaks and how many jobs they created.
- Regulate the tax consultants: Prohibit contingency fee arrangements with tax consultants that drive up the cost of the program with excessive claims.
These reforms are critical to fixing the wayward enterprise zone program. Legislators have a clear choice this year: either stand with taxpayers or continue lining the pockets of corporate special interests like Walmart with our taxpayer dollars.