Battle Heats up over Future of Enterprise Zones

VWR International's new warehouse, located at 8711 W Riggin Ave in Visalia. Photo by: Jordon Dean
VWR International’s new warehouse, located at 8711 W Riggin Ave in Visalia. Photo by: Jordon Dean

The battle over the future of California’s 42 enterprise zones is heating up both up and down the state, causing Tulare County elected officials and business leaders a bit of concern over the future of the county’s own Sequoia Valley Enterprise Zone.

Tulare County Supervisor Allen Ishida calls the effort to eliminate the enterprise zones, “just another attempt by the state of California to raise money for Sacramento at the expense of the cities and counties.” He added, “They sure like to spend our money.”

Governor Jerry Brown is leading the effort to muster support for eliminating the enterprise zone program altogether and replacing it with a plan that would spend $400 million on a sales tax credit to promote investment in manufacturing and biotech, $200 million for a jobs program for the poor and unemployed, and $100 million to reward businesses that expand in California. Funding for Brown’s plan would come from the estimated $750 million that the state will spend this year on the enterprise zone program.

State Democratic Party leader and former State Senate Pro Tem John Burton announced his own proposal for a 2014 ballot measure calling for the elimination of the enterprise zones.

Opponents of the 27-year-old enterprise zone program, which offers a variety of various tax credits to businesses that expand or relocate in areas, or “zones,” that have been identified as economically disadvantaged, say that the program has become rife with cronyism and inefficiencies, and a form of corporate welfare. The zones, they say, have failed to produce any new job growth but often encourage businesses to relocate from one area of the state to another resulting in no net gain of jobs.

Proponents of the zone program, which include the state Republican Party, business groups and local governments from throughout the state, say that the demise of local redevelopment agencies has left the enterprise zones as the only remaining effective tool for promoting economic growth and prosperity in blighted and economically depressed communities throughout California suffering from high unemployment rates.

Tulare County’s Sequoia Valley Enterprise Zone encompasses all of the county’s eight cities and 13 unincorporated communities. The zone designation was officially announced in January 2012, but was retroactively backdated to October 6, 2010. Each of the state’s zones has a sunset clause, and the Sequoia Valley Zone’s official end date is slated for October 6, 2025.

The Sequoia Valley Zone is administered by the Tulare County Economic Development Corporation (EDC). EDC President Paul Saldana said it’s almost impossible to know just how significant of a role the tax breaks offered through the enterprise zone are to a company that is planning a relocation or even an expansion of existing companies within the zone, but “we’ve had companies tell us that the incentives offered in the zone have definitely played a role in their decision-making process. So we know that the zones do work for us.”

Saldana points to a continuing lack of awareness among small business owners who already reside within the zone as hampering the potential impact of the local zone. “Many people still have no idea that this program and the benefits that it has to offer apply to them as well,” he pointed out.

The tax credits offered under the program are:

  • A $37,000 credit spread over five years for each qualified employee hired
  • Credits on sales and use tax paid for the purchase of qualified machinery and parts
  • Accelerated expense deductions
  • Preference points on state contract bids
  • Five-year development fee deferral with no interest
  • 21-day permit fast tracking

To qualify for the tax credit, employees must meet one of 13 criteria, including current enrollment in a public assistance program, veterans, long-term unemployed, convicts released from jail or prison, or disabled workers.

Since the inception of the Sequoia Valley Enterprise Zone, Visalia has seen a number of large industrial and retail companies come to town – companies such as WalMart, Dick’s Sporting Goods and medical supplies distributor VWF, to name just a few. Citing tax laws and privacy concerns, enterprise zone administrators are generally refusing to divulge which companies have claimed the credits. Critics of the program say that the money is going to the large companies that need it the least.

According to figures released by the Franchise Tax Board, in 2009, companies worth at least $1 billion received 68 percent of the credits issued for that year. That number dropped a bit in 2010 when 65 percent of the credits went to companies in that bracket, with another 15 percent going to companies with a net worth of $100 million to $1 billion, while 6 percent of the credits went to small businesses with a net worth of less than $10 million dollars. Over 500,000 tax credits have been issued under the program since 2009, according to the state Department of Housing and Community Development, the agency tasked with overseeing the program.

A 2009 report by the Public Policy Institute of California noted that “enterprise zones have no statistically significant effect on either business creation or employment growth rates.” Opponents say that just about every independent study not paid for by zone supporters has reached the same conclusion.

Many proponents of the zones readily admit to flaws and needed changes in the program. In a June 15 letter to the Sacramento Bee, Craig Johnson, president of the California Association of Enterprise Zones, said his group supports “a number of thoughtful improvements to the program.”

The two sides are forming, but curiously enough, not along the usual political party line divisions usually evident on any major issue. Democratic mayors of the cities of Los Angeles, San Diego, Sacramento, San Jose, Long Beach, Oakland and Santa Ana joined with Republican mayors from Anaheim and Fresno in a letter asking Brown to reconsider his position on the issue.

As for Brown, he faces an uphill battle in convincing legislators to back his plan as almost every legislator has an enterprise zone in his or her district and is being intensely lobbied by supporters of the zones.

State Senator Jerry Hill, D-San Mateo, has authored a bill, Senate Bill 434, which would make significant changes in the program, placing a cap on the program’s cost to the state while restricting an employers ability to claim retroactive credits. The bill would also require that employees for whom the vouchers are claimed must be paid a minimum wage of $16 per hour.

Porterville Mayor Virginia Gurrola, a staunch supporter of the enterprise zone program and the city of Porterville’s representative on the EDC board of directors, traveled to Sacramento to attend the Senate hearings to discuss the possible future for the zone program.

“To eliminate the zones would deal a tremendous blow to our communities,” she said. “The benefits offered by the zones have enabled us to retain and assist in the expansion of many small local businesses in our area.”

With a flurry of political arm twisting and last minute vote gathering, on a third vote
the state Assembly passed on Thursday a plan endorsed by Governor Jerry Brown intended to
extensively overhaul the Enterprise Tax Program which the governor had labeled as “wasteful
and ineffective.”

AB93, which will target and severely limit the types of businesses and employees that
qualify for hiring tax credits in the enterprise zones, eliminate the state sales tax on machinery
and equipment used in manufacturing and research and development and focus hiring incentives
on those who are struggling to overcome barriers to employment was passed by the state
Senate on Tuesday after a similar flurry of arm twisting and multiple votes needed to gather
the two-thirds majority required for passage of the bill.

The bill has been sent to the governor’s desk for his signature and would become
effective January 1, 2014. Financing for the new programs is estimated to cost about $600
annually and will come from the approximately $750 million California will spend this year
to support the Enterprise Zone Program which will cease to operate at the end of the year.
However, businesses within the enterprise zones, the boundaries of which will continue to be
recognized, will still receive tax credits and benefits for qualified employees hired before Jan.
1, 2014 who are still within their first 60 months of employment.

Democrats rushed to bring AB93 for a vote before losing their legislative super majority
over the weekend when Assemblyman Bob Blumenfield resigned his seat to join the Los
Angeles City Council. As a result of the last minute maneuvering and multiple revisions, the
bill has left unaddressed many issues intended for clarification through future amendments
and trailers to the bill.

“There’s still a lot of blanks left to fill in and we’ll continue to work with businesses
under the existing plan at least through the end of the year,” said Paul Saldana, president of
the Tulare County Economic Redevelopment Corporation, whose duty it is to administer the
local Sequoia Valley Enterprise Zone. “Many of the details will continue to trickle out to us
in the form of trailer bills that will come later.”

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