Cut Waste, Fraud and Abuse in Enterprise Zone Tax Giveaways
To reform the Enterprise Zone program to ensure it creates high-quality jobs while also reining in wasteful General Fund spending and limiting the
ability of consultants to profit off taxpayer dollars.
The best independent research finds that California’s Enterprise Zone (EZ) program fails at creating new jobs and economic activity. Despite the damning
evidence, the EZ tax break program has enjoyed unchecked growth of 35 percent annually—costing the state $3.6 billion since it started in 1986.
There are 42 Enterprise Zones in California that are designated for 15-year periods. Several of those Zones have expanded significantly, covering larger
areas of the state. Los Angeles and San Francisco expanded their zones to include downtown financial districts. Stanislaus County expanded three times
to 67,000 acres. Businesses in Enterprise Zones reap substantial
special tax breaks, including:
- Hiring Credits – up to $37,440 or more for each qualified employee hired;
- Up to 100% Net Operating Loss (NOL) carry-forward. NOL may be carried forward 15 years;
- Special tax breaks on sales tax for machinery and machinery parts;
- Banks that lend to Zone businesses get a net interest deduction for those loans; and
- Unused tax credits can be applied to future tax years, stretching out the special tax break other businesses do not get.
Californians have endured years of deep and painful budget cuts to schools, public safety and other vital services. But the pain of California’s budget crisis has not been shared equally. Major corporations, consultants and lobbyists have raked in billions of dollars from the special tax breaks in the EZ program.
EZs have been spared any cuts whatsoever despite copious evidence that they are ineffective and fail to create jobs. The Public Policy Institute of California’s
2009 study found that Enterprise Zones have “no statistically significant effect on either employment levels or employment growth rates.” In 2011, the non-partisan Legislative Analyst’s Office recommended eliminating the program because it is “expensive and not shown to be effective.”
EZs have spawned a cottage industry of consultants that make their money by trolling Enterprise Zones for businesses that have not yet claimed their tax handouts. They tell businesses how to claim an EZ tax credit retroactively for employees they hired over the last four years, even if that employee has left the job. Consultants then take a hefty percentage of the tax savings. All funded by
our taxpayer dollars.
To make matters worse, companies do not have to create a single new job to get a tax break in an EZ. EZ credits are given for new hires, not new jobs, so companies are rewarded for high-turnover, low-skill jobs. The structure of the credit incentivizes churn rather than stable employment and the creation of job ladders.
The EZ program creates an additional incentive for low-wage jobs that pay so little workers still rely on public programs like food stamps. Since the EZ credit is only given up to a cap of 150% of the minimum wage, employers do not have to pay a living wage to get the credit. The EZ offers no reward for higher wage jobs.
Since tax breaks are only available within the Zone, communities are pitted against each other to attract roving businesses. The impact can be devastating on communities and a huge boon to unscrupulous employers that shift jobs around the state, while penalizing responsible employers that pay workers a decent wage with benefits.
A clear example of the failure of the EZ program is VWR, a medical supply facility. The Teamsters Union has represented VWR employees in Brisbane for over 50 years. VWR announced in 2011 that they were closing their Brisbane location and
moving to Visalia, located in a Targeted Tax Area, part of the EZ program.
VWR is touting the hundreds of “new” jobs they are bringing to the area where they will be eligible for hiring credits and all the other tax benefits of an
Enterprise Zone. VWR leaves a trail of destruction in their wake. Our tax dollars are subsidizing VWR to destroy good union jobs, ravage the tax base of
Brisbane and set up a non-union, low-wage business in another part of the state.
In 2010, Governor Brown proposed eliminating the EZ program for a budget savings of $924 million over two years. Immediately an army of high-paid
corporate lobbyists and consultants descended on the capital to protect their cash cow. They killed the elimination proposal, resulting in decreased
funding for universities and safety net programs that people rely on in difficult recessionary times.
Reform is urgently needed to stanch the hemorrhaging of millions of public dollars annually into a special tax break. The Enterprise Zone program is a failed tax giveaway that continues to grow in cost and size, while funding for schools, infrastructure and public safety is slashed.
California Labor proposes a number of reforms to the Enterprise Zone program to make it more effective at creating jobs, cutting costs and stopping waste, fraud and abuse.
Specifically, this bill will:
- Eliminate Retroactive Hiring Tax Credits: Require that employers claim hiring tax credits at the time of hire and prohibit amending tax returns to claim tax breaks retroactively.
- Focus the Targeted Employment Area: Ensure that an incentive is created to hire workers living in truly economically distressed areas and update those areas regularly.
- Require Job Creation: Allow hiring credits only for net new jobs, not new hires. Prohibit companies from claiming credits for moving jobs from one part of the state to another.
- Create Good Jobs: Require that employers pay good wages before they can get EZ tax breaks. Reform the credit to reward worker retention.
- Eliminate the Net Interest Deduction for Banks: Big banks should not get taxpayer money for making loans.
- Prohibit Tax Breaks for Temporary Jobs: Prohibit temporary employment agencies from claiming the EZ hiring credit.
~ California Labor Federation (Sponsor)
~ American Federation of State, County and Municipal Employees
~ California Federation of Teachers
~ California-Nevada Conference of Operating Engineers
~ California Nurses Association
~ California Professional Firefighters
~ California School Employees Association
~ California Teachers Association
~ International Association of Machinists
~ International Brotherhood of Teamsters
~ Service Employees International Union, Local 1000
~ Service Employees International Union State Council
~ State Building and Construction Trades Council of California
~ UNITE HERE!
~ United Auto Workers, Local 2865
~ United Food and Commercial Workers
Sara Flocks, California Labor Federation - (510) 332-1996