(April 15, 2009) A California Chamber of Commerce-opposed bill that in effect guts the California enterprise zone (EZ) program is expected to be heard in an Assembly policy committee on April 29. The bill creates new conditions and requirements that will drastically reduce the number of businesses, particularly small businesses, that will be able to participate in the program.

Contact Laurie Lively at laurie.lively@calchamber.com as soon as possible if you would like your company to be added to the opposition coalition letter.

AB 1139 (J. Perez; D-Los Angeles) mandates, as a condition of participating in the EZ program, businesses to provide health care coverage and full-time employment. AB 1139 also eliminates one of the primary ways that employees qualify for a hiring credit under the program, which is residency in a low-income, low-employment neighborhood, known as a “targeted employment area.” In addition, the bill establishes impractical deadlines and regulations that severely limit the program’s effectiveness and would make participation in the program burdensome and costly for businesses.

The reductions proposed by AB 1139 would be on top of severe reductions already imposed on the EZ program in the October 2008 Budget. AB 1452 (Committee on Budget, Chapter 763, Statutes of 2008) placed a two-year limit on the ability of businesses to use all business tax credits, including enterprise zone credits, capping those credits at one-half of the taxpayer’s tax liability. Although AB 1139 would further significantly reduce the tax credits available under the EZ program, it has been designated as needing only a majority vote of the Legislature to be enacted.

California EZ Program

The California EZ program was established by legislation enacted with bipartisan support in 1984 and offers a variety of tax credits and incentives to encourage businesses to locate, invest and create jobs in economically distressed communities within the state. The program is one of the only remaining statewide tax incentives that local areas can use to encourage businesses to stay, locate or expand within California. California’s EZ program is vital to California’s economy and economic recovery.

Benefits of EZ

Both EZ companies and employees may be eligible for benefits under the program, including:

• Hiring credits: Companies can earn state tax credits for each qualified employee hired over a five-year period.
• Worker credits: Employees can qualify for a one-time individual employee credit of up to $525.
• Equipment credits: Subchapter C corporations can earn sales tax credits on purchases of qualified machinery and machinery parts, including manufacturing, processing, research and development, and pollution control equipment used exclusively in an EZ.
• Tax deduction: Lenders to EZ companies may receive an income tax deduction for the net interest income earned on EZ loans.
• Preference points: EZ companies can earn preference points on state contracts.

Effective Program

Several studies have established the EZ program’s effectiveness, including an August 2006 study commissioned by the California Housing and Community Development Department which showed that, compared to other parts of the state, California EZs on average experienced: poverty rates 7.35 percent lower; household incomes 7.1 percent higher; salary income 3.5 percent higher; and median rents 2.3 percent higher.

Another 2006 study from the University of California, Davis, conducted by Dr. Ted Bradshaw, described California’s EZ program as “probably the most successful in the nation” — adding nearly 300,000 jobs to California from 1992-2002. The study confirmed that employment in the zones grew at almost double the rate of the rest of the state, and that tax collections generated by enterprise zones exceeded their cost. Noting that Alabama offered Mercedes $253 million in incentives to locate one plant in its state resulting in 1,500 new jobs, California’s EZ program costs the state only slightly more,  “yet it is a key part in a massive statewide job expansion involving tens of thousands of jobs per year.”

Most recently, a national study, revised in March 2009, which was conducted by Drs. John C. Ham, Ayşe İmrohoroğlu, and Charles Swenson with the University of Southern California concluded that state and federal enterprise zone programs “have positive, statistically significant, impacts on local labor markets in terms of the unemployment rate, the poverty rate, the fraction with wage and salary income, and employment.”

Action Needed

AB 1139 will likely be considered by the Assembly Jobs, Economic Development and the Economy Committee on April 29.

The CalChamber urges members of the business community to ask Assembly Jobs, Economic Development and the Economy members to oppose AB 1139.

In addition, contact Laurie Lively at laurie.lively@calchamber.com as soon as possible if you would like your company to be added to the opposition coalition letter.

Staff Contact: Kyla Christoffersen