Personal Finance

June 3, 2013

State tax credit beneficiaries in Sacramento County include Fortune 500 firms, casino

A rare glimpse into an embattled California tax credit program shows that Fortune 500 companies – and one casino – are its biggest beneficiaries in Sacramento County.

A rare glimpse into an embattled California tax credit program shows that Fortune 500 companies – and one casino – are its biggest beneficiaries in Sacramento County.

The state enterprise zone program offers businesses up to $37,440 in tax credits per employee as an incentive to hire workers in economically depressed areas. But the credits have come under fire from Gov. Jerry Brown and labor groups who claim they are ineffective and direct money away from more desperate state needs.

Many enterprise zone administrators, relying on advice from a state attorney, have refused to disclose which businesses use the tax credit program, citing taxpayer confidentiality. But a Sacramento joint powers agency and West Sacramento last week provided data showing which companies claim enterprise zone vouchers in their areas.

An assortment of fast-food restaurants, manufacturers and retailers are on the lists. So are two strip clubs in Rancho Cordova, which have claimed a combined 24 vouchers dating back to 2010. Opponents have seized on that fact to assail the program.

"That's just an inappropriate use of money," said state Sen. Lois Wolk, D-Davis, chair of the Senate Governance and Finance Committee, which considers tax legislation. "Our schools need money, our strip clubs do not."

Brown unsuccessfully tried to kill enterprise zones in 2011, ultimately choosing instead to focus his political capital on eliminating redevelopment agencies, another business-friendly program. But earlier this month, he again sought to scrap enterprise zones when he unveiled his May budget revision.

Under Brown's proposal, the state would eliminate its 40 enterprise zones and use the money instead for a sales tax exemption for manufacturing and biotech research firms. He would maintain hiring credits but focus them on the long-term unemployed, veterans and people receiving public aid.

But the Democratic governor faces an uphill battle, as enterprise zones are located in nearly every legislator's district and thus come with local support.

"By modernizing the state's job-creation incentives, we can get a lot more bang for the buck than we've seen," said H.D. Palmer, deputy director for external affairs at the California Department of Finance.

The nonpartisan Legislative Analyst's Office estimates the program will cost state taxpayers $750 million this fiscal year, a number that has grown exponentially since its creation by the Legislature in 1986. Analysts project the cost to top $1 billion in the next few years.

Craig Johnson, president of the California Association of Enterprise Zones, said he welcomes reform that would "strengthen and enhance" the program, but scrapping it altogether would be a "mistake."

"We've seen successes of the program in some of the most economically distressed areas of the state," he said.

About 500,000 tax vouchers have been issued since 2009, according to the state Department of Housing and Community Development, the agency that oversees the program.

In Sacramento County alone, shipping giant FedEx has obtained 1,382 tax vouchers since 2010, by far the largest recipient, according to documents obtained by The Bee. AutoZone, a national auto parts retailer, ranked second with 159.

FedEx listed several office addresses and has a distribution center on Elder Creek Road in Sacramento. In a written statement, FedEx said the program "serves an important purpose in helping bring business and jobs into areas of California."

Shipping competitor United Parcel Service has its own distribution center in West Sacramento's enterprise zone and claims tax credits there. But West Sacramento did not provide the total number of vouchers companies obtained in its enterprise zone, which includes most of the city save for its newer Southport neighborhood.

Enterprise zone foes have questioned why large corporations are getting the tax credits. In 2009, companies worth at least $1 billion received 68 percent of those credits, according to the Franchise Tax Board.

"Wal-Mart is going to be located here anyway, whether there's a tax credit or not," said Lenny Goldberg of the California Tax Reform Association, whose group receives labor union support.

Senate Republican leader Bob Huff of Diamond Bar hailed the program as "one of the few economic development tools" available to local governments after the demise of redevelopment funds.

"Just because a company is big doesn't mean it can't get the tax credits," Huff said. "If we want to have jobs here, we have to create an environment that rewards business, not punish it."

Sandwiched between Fortune 500 companies in Sacramento's top five was Capitol Casino, a North 16th Street card room that claimed 148 vouchers. A sampling of vouchers issued this year went toward a cook, servers and card dealers whose incomes were listed at between $8 and $10.50 an hour.

Capitol Casino officials did not respond to repeated requests for comment.

In Rancho Cordova, strip clubs Gold Club Centerfolds and Deja Vu Showgirls used 24 credits to hire waitresses, disc jockeys and security guards.

"Five companies came and told us they could get us money, guaranteed," said Mark Boyles, owner of Gold Club Centerfolds. "We got a little extra boost, but it probably didn't make much of a difference."

The state program is administered by local governments and special enterprise zone agencies, which process and issue the vouchers.

But Terri Carpenter, spokeswoman for the Sacramento Employment and Training Agency that administers the program in Sacramento County, said her agency doesn't determine who can receive the vouchers.

"If they are eligible, we process it. We follow the letter of the law," Carpenter said.

Though SETA and West Sacramento responded to The Bee's request for information, administrators for the Yuba-Sutter and San Joaquin enterprise zones declined to disclose their voucher lists, citing program rules and taxpayer privacy laws.

California Association of Enterprise Zones spokesman Nick Garcia said most administrators will not provide such information.

Eric Johnson, spokesman for the state Department of Housing and Community Development, said local administrators are free to reveal enterprise zone applications but are not compelled to provide that information.

A worker must meet one of 13 criteria, such as residency in a targeted employment area, to qualify the company for the tax voucher. Though some of the targeted areas are impoverished neighborhoods, others are drawn broadly to include middle-class and wealthy blocks. Disabled workers and veterans also qualify for the program.

Aside from new hires, the enterprise zone program allows employers to retroactively claim credits for former and current employees. Critics contend that has given rise to a cottage industry of tax consultants who solicit businesses, promising to unearth unused tax credits from the past.

A 2009 report by the Public Policy Institute of California questioned the effectiveness of the measure, noting that "enterprise zones have no statistically significant effect on either business creation or employment growth rates."

Still, enterprise zone officials say the program works and gives opportunities to workers who struggle most to find a job.

"The whole intent is to help people who have barriers to employment," said Fran Aguilera, San Joaquin County Enterprise Zone administrator. "The business where they work is immaterial. You have a guy come out of prison – do you think he's going to work on Wall Street?"

Brown's proposal is not yet contained in a bill, but the Senate Governance and Finance Committee on May 24 expressed its support for his plan in a 9-4 vote. A two-house budget committee will consider formalizing his proposal this week, according to Palmer of the state Department of Finance.

A second proposal spearheaded by state Sen. Jerry Hill, D-San Mateo, drastically reforms the current program but stops short of scrapping it completely.

Hill's SB 434 would cap the cost of the program and restrict the ability to obtain retroactive credits. Employers would have to claim the credit within a year, instead of the current four-year window. In addition, employees must be paid $16 an hour or more for the company to obtain the voucher.

Hill and state Sen. Anthony Cannella, R-Ceres, have planned a news conference today in front of Deja Vu Showgirls.

"The whole system is an abuse," Hill said. "We want to find a reasonable solution by modifying it, not eliminating it."

Call The Bee's Richard Chang, (916) 321-1018. Follow him on Twitter @RichardYChang.

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