California launches successor to enterprise zone program

02/24/2014 12:00 AM

02/23/2014 8:13 PM

Elk Grove has never had an enterprise zone, one of 40 economically struggling areas around California that offer special tax credits for businesses. It also never has had a redevelopment project, a local program meant to fight blight by subsidizing new development.

But the city and hundreds of other local governments and businesses across California will be eligible for various hiring credits, sales-tax exemptions, and tax credits meant to attract or retain employers that constitute a new initiative championed by the Brown administration that began taking shape last month.

“It gives us access to some things that we never had before in terms of the state putting some resources on the table in order to work with companies,” said Randy Starbuck, the economic development director for Elk Grove. “We’re cautiously optimistic but the jury is still out.”

For most of his first term, Gov. Jerry Brown led efforts in the Capitol to scrap enterprise zones and redevelopment areas, two programs that many local officials viewed as important job-creating tools. Now the administration is pushing an economic development program of its own.

Supporters of the new Economic Development Initiative call it a major improvement over the enterprise zone program. Unlike enterprise zones, the portfolio of tax perks worth up to $750 million annually is not limited to particular parts of the state. And proponents say the program will encourage the creation of higher-paying jobs.

Others question the program’s impact. The initiative’s tax credits are scheduled to phase out starting in 2021 unless lawmakers decide to extend them. It’s also unknown how businesses will respond to the incentives and if every part of the state, including its struggling interior, will benefit equally.

“If you were in one of those targeted areas, the enterprise zone tax credits were far more generous than anything in the EDI,” said Chris Micheli, a lobbyist who has worked on the enterprise zone program.

The economic initiative was part of last summer’s legislation that phases out the zones. Created in the mid-1980s, the zones offer various tax credits meant to generate jobs in areas with high unemployment. In 2010, more than $721 million in corporate and personal income tax incentives was claimed by zone businesses. The program, though, became a target of lawmakers skeptical of its cost, amid allegations that it merely shuffled low-wage positions around the state.

“This state is going to thrive not by the lowest-paid jobs, but by those that require a lot of intellectual addition, content, skill, people working together,” Brown said.

Employee hiring credits under the new approach took effect Jan. 1, with Brown’s January budget proposal setting aside $45 million for them through June 2015. The Franchise Tax Board declined to say last week how many credit applications it has received so far.

Under the program, businesses are eligible for 35 percent credits on hourly wages above $12. The businesses have to be in one of more than 1,000 census tracts with the highest poverty and unemployment rates, or in a part of an existing enterprise zone that is not high-wealth or low-unemployment.

Starbuck recently learned that Elk Grove has a qualifying census tract in the neighborhood between Laguna Community Park and Highway 99. “You can see they’re trying to motivate the quality of jobs, which is good,” he said.

Yet it’s unclear if there is a market to pay workers salaries that would meet the wage requirement. If someone worked 40 hours a week at $12 an hour, with two weeks paid vacation, the annual salary of almost $25,000 would exceed the median earnings in more than four-fifths of the census tracts eligible for the hiring credit, according to the most recent census information.

“The problem with (the program) is it’s really applicable to high-wage jobs,” Micheli said.

The “California Competes” part of Brown’s plan, which will provide an estimated $180 million through June 2015 in tax credits to businesses either threatening to leave California or interested in moving here, could begin as early as next month. The Brown administration recently finalized emergency regulations to carry out the program, and officials say they will start taking applications in March or April.

“This program must go into effect immediately to help minimize the migration of business to other states and to encourage growth and expansion in this state,” Panorea Avdis, the chief deputy director of the Governor’s Office of Business and Economic Development, known as GO-Biz, wrote in a memo justifying the accelerated regulation process.

A new California Competes Tax Credit Committee will consider companies’ requests for tax credits. Those will be weighed against the types of jobs created, potential future growth and other criteria.

Businesses have reacted cautiously to the proposal. Christina Marie, a producer with Cow Town Film Productions, said she had put together a business plan to open a production facility in Sacramento based on tax credits from the city’s enterprise zone. “The overall dollar benefit is less,” Marie said of California Competes, adding that she is still reviewing whether the program will pencil out for her company.

In recent months, businesses have raised concerns that confidential information in their California Competes applications would become public. This month’s final regulations allow businesses to declare certain information proprietary or otherwise confidential. But all California Competes contracts considered by the tax credit committee will be public, GO-Biz said.

The most expensive part of the governor’s initiative – exempting the purchase of manufacturing and biotech equipment from the state’s 4.18 percent portion of the sales tax – would cost an estimated $486 million through June 2015, according to Brown’s budget proposal. It will take effect July 1.

Eve Bukowski of the California Healthcare Institute, which represents biotech and medical equipment companies, called the exemption “an incredible incentive.” “The beauty of this is it specifically reaches out to this industry,” said Bukowski, the group’s vice president of state governmental affairs.

At present, the biotech industry is centered in the San Diego and San Francisco areas, and coastal counties also have more than two-thirds of the manufacturing jobs, census figures show. Starbuck and others said they hope the sales-tax breaks and other parts of the new program will help inland areas attract those industries, as well.

“The biggest hurdle right now is that people don’t understand how it works,” said Diane Richards, economic development coordinator in West Sacramento, which has an enterprise zone. “I think we’re expecting there will be more programs and benefits to the companies we’re attracting and we’re hoping to attract.”

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