Enterprise Zone Reform at a Critical Juncture

Deliberations over the future of the Enterprise Zone (EZ) Program — California’s controversial economic development program — are entering a pivotal stage. Assembly Bill 93, which would substantially reform the program, passed out of the Senate Committee on Budget and Fiscal Review yesterday and is scheduled to be heard on the Senate floor this afternoon.

Earlier this month, we released a report detailing the escalating costs and serious shortcomings of the EZ Program. This report included a set of policy recommendations for improving the EZ Program and making it more cost-effective, with a focus on how EZ hiring tax credits are awarded. AB 93 would move California in the right direction on enterprise zones and economic development by improving the tax credit in ways that could eliminate the most severe program inefficiencies.

Specifically, AB 93 would restructure the hiring tax credit in five crucial ways:

  • Discontinuing retroactive hiring credits, whereby credits are awarded for hires made in past years.
  • Requiring businesses to create new jobs — not just make new hires— as a condition of claiming hiring credits.
  • Eliminating residency in a Targeted Employment Area as a qualifying criterion for the tax credit and specifically targeting the tax credit for three categories of individuals: those that have been previously unemployed for six months, recipients of the Earned Income Tax Credit, and veterans.
  • Changing the credit formula to remain the same over a five-year period, instead of decreasing over time — thereby removing the incentive and reward for employers that “churn” their workforces.
  • Ensuring that companies that take the credit pay employees a living wage by increasing the amount of qualified wages from up to$12 per hour to between $12 and $28 per hour for employees.

AB 93 also would address the EZ Program’s current inability to target areas of the state that are most in need of job growth, new businesses, and assistance with economic development. While the current EZ designations would remain intact, the new hiring tax credit would also be available in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty rate. Further, census tracts with low unemployment would be removed from the eligible areas, ensuring that the hiring tax credit truly is targeted to businesses located in the state’s most economically distressed areas.

In addition to making major improvements in how the EZ hiring credits are targeted and awarded, AB 93 would create a manufacturing equipment sales tax exemption. This sales and use tax exemption would eliminate the California portion of sales tax for basic manufacturing and biotech equipment purchases, and will be offeredstatewide — rather than within certain geographic areas. Currently, California is among only a very few states that do not offer this type of exemption. AB 93 also would establish the California Competes Tax Credit Committee, administered by the Governor’s Office, with the purpose of negotiating business tax credits in exchange for investments and employment expansion in California. While we have voiced skepticism in the past concerning the efficacy of state tax credits in creating jobs and growing the economy, AB 93’s strong provisions in two key areas of the program — transparency and performance evaluation — would enable program administrators, policymakers, and the public to track these credits’ impact and their return on investment.

The reforms contained in AB 93 represent major improvements to California’s EZ Program and are designed to address the worst abuses and inefficiencies within the program. These reforms are a significant step forward for the state in fostering positive economic development and long-term fiscal health. Stay tuned as AB 93 is taken up today in the Senate.


This article originally appeared on California Budget Bites