Enterprise Zone Talking Points—SCVEDC

Background: In 1984, the California State legislature established an Enterprise Zone (EZ) program to “stimulate business and industrial growth” in selected areas and to “help attract business and industry to the state, to help retain and expand existing business and industry, and to create increased job opportunities for all Californians.”  The state has designated 42 separate EZs, each with a fifteen-year life, in which businesses that invest resources– such as hiring job seekers in designated categories and purchasing machinery or equipment—can obtain tax benefits over a five-year period, with a fifteen- year net operating loss carryover option.  Santa Clarita has enjoyed EZ status since 2007.  An initiative by the Santa Clarita Valley Economic Development Corporation, in conjunction with LA County and the City of Santa Clarita, to expand the benefits to nearby unincorporated areas beginning in 2011 was approved by the state in December 2010.

Issue/Objective: To help close the state’s budget gap and to place responsibility of local development into the hands of local governments, Governor Brown is proposing to eliminate all EZ benefits, claiming a $924 million savings over two years.  The SCVEDC objective is to save the EZ benefits for the SCV and, failing that, to propose alternatives short of loss of all benefits.

Relevant Facts: Studies have conflicting reports on the effectiveness of EZs.  A 2009 report by the Public Policy Institute of California (often referenced by state officials) determined the zones have no effect on business creation or job growth.  A 2010 University of Maryland study concluded the opposite—that EZs reduce unemployment while increasing wages.  A 2009 study by the University of Southern California similarly showed positive results for EZs, claiming they improved the unemployment rate by 3.4%, decreased the poverty rate by over 8%, and increased average income by $3100 annually.  In California, a 2006 California Department of Housing and Community Development report confirmed that California Enterprise Zones have outperformed the rest of the state in a variety of key areas: unemployment rates decreased by 1.2%, salary levels grew by 3.5%, poverty decreased by 7.35% and household incomes grew 7.1% faster.

Since July, 2007, the Santa Clarita EZ has aided 252 businesses, with 3,135 EZ hirings and over 560 new positions created.  The existing EZ has been recognized by the California Department of Housing and Community Development as one of the best managed and most productive in the state.

Talking Points:

The proposed budget savings are illusory because they fail to account for the state’s gains by the program

–        In 2010 21,000 of over 118,000 jobs created or retained with support from the EZ program were filled by individuals previously on some sort of public assistance (CalWorks, MediCal, unemployment, food stamps etc.)  Transitioning  such people to employment cutsoverall costs.

• State CalWORKS claims the state pays $37,000 per year to support an individual on public assistance, which is about three times the EZ tax credit in year one.
• According to a 2009 report by the University of Southern California, the state saves approximately $5,000 per year for each tax credit, but gains on average $20,000 per year in unemployment insurance payments and an additional $3,000 per year in personal income and sales tax revenue.

–       In the absence of EZ credits, businesses are likely to cut back on hiring or leave California altogether.

–       The program isn’t just to foster business growth, but also to employ people who most desperately need work.  Hiring preferences for those with criminal records, for example, reduces their temptation for crime thereby reducing the load on our penal system.

–       Some are preparing to challenge elimination of EZ benefits on the grounds it would violate well founded protections of the U.S. and California constitutions.

• The state’s already vulnerable bond rating would face more downward pressure once Wall Street understands that $1 billion of a gap closing measures may be constitutionally invalid.

–        Eliminating EZ benefits would punish companies that have opened or expanded as a result of the program.

–       Business, especially those who were lured by the promise of extended tax credits to invest in their companies, will lose faith in California incentive promises and will be disadvantaged by such action; outsiders will avoid California.

–       It’s not just the participating EZ businesses and workers who benefit–their entire community enjoys increased economic activity and higher revenues.

• The fundamental principle of economic stimulus through EZ incentives is a sound one.  Real issue is job creation; don’t eliminate Enterprise Zones– reform them.

–        Allow each EZ to expire at the end of its promised 15-year period and don’t replace them

• Would meet Governor’s objective of shifting development responsibilities to local governments
• Would allow local governments ample time to prepare, i.e., establish policies and  raise revenue

–       Place a moratorium on or stretch out the five-year tax incentive period

–       Implement a periodic audit to verify that EZs are operating effectively; support the successful investments and eliminate losers

–       Consider cost free regulatory reforms as an offset to compensate businesses for the lost or reduced EZ benefits.

• Place a moratorium on CEQA requirements, AB 375 and the like
• Review all pending legislation to assess the impact on economic development and eliminate those placing undue constraints on business
• Evaluate economic well being on a par with environmental protection