As deliberations over the 2013-14 state budget continue, one key issue under discussion is the future of California's Enterprise Zone (EZ) Program. This program was created nearly 30 years ago to promote business development and job creation in economically distressed areas, but independent studies have questioned the effectiveness of EZ tax breaks in achieving their goals — even as program costs have skyrocketed.
A new California Budget Project report on the EZ Program examines the growing cost to the state of the EZ tax breaks, looks at who receives these breaks, and discusses current proposals to reform the EZ Program, including those contained in Governor Brown's May Revision of his proposed 2013-14 budget. Dollar for Dollar: California's Enterprise Zone Program Falls Short shows that:
- The annual cost of EZ tax credits and deductions has grown to more than $700 million and — without program changes — is expected to reach $1 billion by 2016. Between 1986 and 2010, the average cost per zone grew from approximately $48,000 to $17.2 million.
- The high cost of the EZ Program is primarily due to its hiring tax credit, which cost the state $414 million in 2010 — nearly 60 percent of the total cost of the EZ tax breaks. Yet because companies can claim these credits without actually creating new jobs, the hiring tax credit has generally been ineffective in promoting job growth.
- The EZ Program's tax breaks primarily benefit very large corporations. Corporations with assets of at least $1 billion claimed more than two-thirds of the total dollar value of EZ tax credits in 2010, the most recent year for which data are available.
This new report includes a set of policy recommendations for improving the EZ Program and making it more cost-effective, with a focus on two areas that are especially important targets for reform: the hiring tax credit and the designation of enterprise zones. Look for updates and commentary on California Budget Bites as the debate over EZs and other key budget issues moves forward in the coming weeks.