Who's Getting All Those Tax Breaks?
SACRAMENTO (CN) - Gov. Jerry Brown urged lawmakers to overhaul California's 27-year-old business incentive program, which he says has cost taxpayers $4.8 billion and is shrouded in secrecy.
Established in 1986, the enterprise zone program gives corporations incentives to do business and hire people in blighted and economically challenged areas.
California handed out $750 million in tax breaks to enterprise zone participants last year, a figure that tax officials say will rise to more than $1 billion by 2016.
California has 40 enterprise districts, in which 35,000 businesses have reaped rewards.
But which businesses got the incentives, how much the credits are worth, and why the businesses qualified remain mysteries because of confidentiality requirements in state tax law.
According to Franchise Tax Board figures from 2010, 65 percent of tax credits for enterprise zones went to corporations with more than $1 billion in assets.
Companies with $100 million to $1 billion in assets got 15 percent of the credits, and small businesses, with less than $10 million in assets, got only 6 percent of the pie.
How companies are chosen for participation in an enterprise zone is also a mystery.
Brown criticized the program as inefficient and "loose" in his May budget revision. Last week, in a demand that lawmakers get to work on his new plan, the governor had stronger words about the old system.
"California's 30-year-old enterprise zone program is not enterprising, it's wasteful," Brown said. "It's inefficient and not giving taxpayers the biggest bang for their buck. There's a better way and it will help encourage manufacturing in California."
Brown's plan focuses on research and development, which have been excluded so far. He calls for a sales tax exemption on new equipment purchases in manufacturing and biotechnology sectors, which he estimates will cost the state $400 million a year.
Brown's business development team criticized enterprise zones for encouraging low-wage jobs by handing out incentives to fast food restaurants and Wal-Mart, which acknowledged it has taken advantage of the enterprise zone program.
Brown said the program sets the bar too low by giving businesses tax credits for employees who earn $12 an hour or less.
"Enterprise zones are not producing the kind of economic growth that we want," said Kish Rajan, the director of the Governor's Office of Business and Economic Development, known as GO-Biz.
Brown's plan also would incentivize hiring, up to $56,000 per employee making between $12 and $28 per hour. While he wants to continue focusing on impoverished areas, his plan would require businesses to hire the long-term unemployed, veterans and people who claim the federal earned income tax credit - at a cost of $100 million annually.
A final prong of Brown's plan seeks to keep businesses from leaving California, a growing problem exacerbated by highly public headhunting visits by Texas Gov. Rick Perry and the "You're Out of Business" ad campaign run by Nevada's version of GO Biz.
Brown wants to offer $100 to $200 million a year to companies that hire or retain employees or make capital investments in their California locations.
Brown faces an uphill battle with local governments and business groups, and with members of his own party, whose constituents depend on enterprise zones to improve their neighborhoods.
Outgoing Los Angeles mayor, and fellow Democrat, Antonio Villaraigosa has made his city a haven of special enterprise districts, with LA County receiving 37 percent of tax credits handed out in 2010.
"State enterprise zones are one of the few tools we have to create economic opportunity in the areas that need it most," Villaraigosa's senior press secretary Vicki Curry told the LA Times last week.
The California Association of Enterprise Zones said the program is vital for local economies and saved hundreds of thousands of jobs during California's economic downturn. But the association's data comes from self-reported figures, and a 2009 report by the Public Policy Institute of California noted that the state requires little evaluation from the zones - inviting "suspect results."
"Our main finding is that, on average, enterprise zones have no effect on business creation or job growth," the report stated. "Our findings cast a skeptical eye on California's enterprise zone program. For a cash-strapped state, it is too costly a program to simply continue with 'business as usual' without clearer evidence of the program's benefits or a well-defined plan to make the program more effective."
What lawmakers will do with Brown's proposal remains unclear, especially after seven state senators and Assembly members from the powerful Latino Legislative Caucus wrote the governor this month demanding that he shelve his plans to eliminate the program.
"We are hearing from our constituencies, leaders, employees and businesses alike that the elimination of the program as we know it will potentially devastate our communities," they wrote. "Businesses will be forced to lay off employees and/or go out of business, increasing poverty and unemployment in communities with already high rates."
Other legislators have called for transparency and better results from the system. State Sen. Jerry Hill, D-San Mateo, introduced SB 434 to try to limit enterprise zone benefits, increase oversight and improve public disclosure.
His bill, languishing in the Appropriations Committee, would also put an end to the cottage industry of consultants who make living by finding tax exemptions for businesses through the enterprise zone program. Violators would be fined $5,000 or 100 percent of the contingency fee received, whichever is greater.
"Without transparency, we and the taxpayer are in the dark," Hill said. "They don't want us to see what benefits businesses received and how much money it's costing us."
Brown touts an impressive list of supporters for his scheme. They include high tech players such as IBM and AMD, drug makers, the aerospace industry, and a number of unions and trade associations.