The Existing Enterprise Zones are Scheduled to Sunset in the Next Few YearsDecember 22, 2005Commercial Investment Committee Legislative Committee Taxation CommitteeThe following is for study only andhas NOT been approved by the Legislative Committee, Commercial Investment Committee, Taxation Committee, Executive Committees or the Board of Directors.Issue: Should C.A.R. support legislation that would extend the period of time that an area can be designated an enterprise zone?Action: Required.Options: 1. Do nothing. 2. Investigate further. 3. Support legislation. 4. Other.Status/Summary: In September, the Commercial Investment Committee proposed and the Board of Directors approved a motion that “C.A.R. support a legislative extension of the 2006 sunset on existing Enterprise Zones.” Enterprise zones are economically distressed areas designated by the state. The state grants a varietyof incentives to businesses located within these areas which are intended to create job opportunities to low-income individuals. Eighteen of the existing enterprise zones are scheduled to sunset in 2006 with another thirteen expiring in 2007 and 2008; the remainder will end between 2009 and 2012. AB 1766 (Dymally) would allow existing enterprise zones to receive two additional five-year extensions, beyond the original 15-year designation, not to exceed a total of 25 years.DiscussionEnterprisezones are economically distressed areas selected by the state. The state grants a variety of incentives to businesses located within these areas intended to create job opportunities to low-income individuals. According to Government Code §7071, enterprise zones are intended to “stimulate business and industrial growth in the depressed areas of the State” and to “help attract business and industry to the state, to help retain and expand existing state business and industry, and to create increased job opportunities for all Californians.”The original legislation authorizing the establishment of the enterprise zones provided for the establishment of 10 such zones, however, the total number of authorized enterprise zones has increased to 42. This legislation specified that an area could be designated an enterprise zone for 15 years, however, subsequent legislation allowed for a five-year extension for those zones established prior to 1990. At the end of 2006, 18 enterprise zones will reach term with an additional 13 zones terminating in 2007 and 2008; the remaining 11 will sunset between 2009 and 2012.Businesses located in an enterprise zone receive a variety of incentives. These include:
Tax Credits for Qualified Hires: Employers receive tax credits equaling 50 percent of an employee’s wages in the first year of employment which declines by 10 percent per year until the 5th year of employment. Employers can claim the credit up to 150 percent of the minimum wage.
Net Operating Loss: Businesses may carryover business losses for up to 15 years.
Sales Tax Credit: Businesses are eligible to receive a sales tax credit on the first $1 million on machinery or parts purchased.
Business Expense Deduction: Businesses can claim up to 40 percent of property costs as a business expense instead of as a capital expense.
Net Interest Deduction: A financial lender can claim a deduction on the net interest received from loans made to businesses in the zone.
In addition, local governments assist businesses located in the zones in a number of ways, including: providing low-interest loans, expediting permitting and regulatory processes, funding infrastructure improvements, and providing job training for employees.The tax expenditures funding the enterprise zone program are substantial. The Franchise Tax Board reports that in 2003, $262 million in enterprise zone tax credits were claimed through corporate and personal income tax returns. In that same year, $553 million in aggregate tax credits was carried over; the FTB estimates that liability to the state has increased to approximately $650 million.According to briefing materials prepared by staff tothe Assembly Jobs, Economic Development and the Economy Committee for a hearing held in December on enterprise zones, “Determining the effectiveness of individual enterprise zones … produces varied results. Some zones have produced higher employment numbers measured against comparable demographic and census areas without hiring incentives. Other zones have produced lower employment numbers versus relatively similar areas without incentives.” The Legislative Analyst’s Office, in materials prepared for the same legislative hearing, stated that “the weight of research results suggest that any response [to enterprise tax incentives] is likely small in general and may result in revenue losses that are significantrelative to the benefits received.”Two bills were introduced this session to allow enterprise zones to extend the duration of their existence; however, these attempts were not successful. Subsequently, interested parties arrived at a compromise that would allow the extensions to occur in exchange for changes to the enterprise zone program. This compromise is contained in Assembly Bill 1766 (Dymally).AB 1766 would allow existing enterprise zones to receive two additional five-year extensions, beyond the original 15-year designation, not to exceed a total of 25 years. In addition, the measure would impose more stringent enterprise zone selection criteria and increase the tax benefits of operating within an enterprise zone such as extending the Net Operating Loss carryover period from 15 to 17 years, and increasing the Business Expense Deduction from 40 to 60 percent. It appears that the bill is intended to identify the areas of greatest economic need in the state while increasing the tax incentives provided by the state. These changes will increase the likelihood of increased economic development due to the establishment of an enterprise zone.AB 1766 is currently pending on the Senate Floor.