Excerpted from a viewpoint in the May 1 Los Angeles Business Journal by Jean Ross and David Carroll of the California Budget Project, a Sacramento think tank.
ore than two decades after California’s Enterprise Zone Program was created to encourage job and business growth in economically distressed areas, the program is in need of reform.
Enterprise zones have cost California more than $1.5 billion, yet neither program proponents nor state administrators can conclusively establish a link between enterprise zone tax breaks and increased employment, firm growth or economic development.
California spends hundreds of millions of dollars a year in tax breaks for businesses in the 42 zones around the state, regardless of whether these businesses create jobs or make new investments in the distressed communities that these zones are designed to help.
The sheer size of the program illustrates the need for better targeting, with eight zones in Los Angeles County alone and one including much of downtown San Francisco,some of the most expensive real estate in California. (Santa Ana has a zone.)
While often touted as a strategy for helping struggling small businesses, most of the cost of the program goes to providing tax breaks for the state’s largest corporations. In 2003, for example, companies with assets of $100 million or more claimed over 80%,$134 million,of the tax credits claimed by zone firms.
Indeed, the program has grown so large and unfocused that about one out of every eight California workers is employed in a zone. But lack of targeting isn’t the only problem. Assisted by a cottage industry of consultants, businesses claim tax credits for highly skilled workers who live in up-and-coming neighborhoods and employers seek tax credits for individuals with traffic violations under provisions aimed at aiding ex-offenders.
Our new report, “California’s Enterprise Zones Miss the Mark,” makes five key findings:
The cost of the program has increased substantially (19-fold between 1993 and 2003); the program fails to effectively target areas most in need of assistance; the “hiring tax credit” rewards businesses that do not hire workers with barriers to employment or create new jobs; the hiring tax credit is prone to abuse (a recent audit found that 61% of hiring credits approved by the Oakland zone were for companies located in other zones); and eligibility criteria are overly broad.
The report offers solutions, including reducing the number of zones, reassessing zone eligibility every five years, and eliminating zones that are no longer economically distressed. In addition, the hiring tax credit needs to be reformed and made more accountable.
With 23 of the state’s zones set to expire this year and next, lawmakers have an opportunity to make needed changes.
Without these changes, the Enterprise Zone Program will fail to live up to what it promises California’s business owners: valuable incentives for businesses willing to risk locating and creating jobs in the state’s most economically distressed areas, and hiring people who most need work.
