Today, the Governor’s Go “Away” Biz think tank offered up a version of its new and improved tax credit.  The Governor proposes to eliminate the current Enterprise Zone program and replace it with a program so chock full of limitations and strings attached that surely the only person smiling today is Rick Perry.  Here is a link to the proposed new credit.  Here is a link to the short version of what the Go-”Away” Biz credit actually provides.

The Sacramento Bee is reporting that the Democrats have gained a two thirds majority in both legislative houses.  Consequently, they can raise taxes without any Republican opposition.  What this means for the EZs is yet to be seen.  There are some bright spots.  First, many Democratic legislators have EZs in their districts and they have come out in favor of continuing the program.  Second, given that Prop 30 passed, it is yet to be seen how aggressively the democrats will pursue further tax hikes, particularly employment related credits, in a still sensitive economy.  Stay tuned….

Santa Clarita Valley officials said Wednesday that they’re skeptical of Gov. Jerry Brown’s latest budget proposals that plan to scale back a program that gives tax breaks to local businesses.

“The governor certainly wants to find Republican votes, but he’s going to have to do more than what’s come out of the May revisions,” Smyth said. “Enterprise zones should be left alone.”

California’s budget problems dominate today’s political arena.   Without question, the biggest systemic problem draining the budget is one that most politicians are afraid to even approach.  Of course it’s the pension system.  No one seems willing to call out the patent iniquity in the public versus private workforce.  Jerry Brown on Friday did his part to quell the opposition to true pension reform by removing someone who championed for reform.

As reported today by Californians for Jobs and Safe Communities, Assemblyman Cameron Smyth has called the Governor’s proposal to eliminate the Enterprise Zones exactly what it is – a $1b tax increase.   While the Governor has been trying to claim the high road, he’s skirting the real issues, i.e. that he is raising taxes on businesses and not taking it to the voters.

At the February 7, Assembly hearing, someone asked the LAO representatives why the Governor refuses to take his $1 billion tax increase to the voters.  The response was that because the tax increase doesn’t affect all the voters and it therefore doesn’t need to go to the voters.  Without commenting on the wisdom (or legality) of that response, I suggest that the reason why Brown doesn’t want voters to decide on whether the EZ program continues is because of what Max Shenker reported about the public’s opinion on EZs:

Asked if they favored or opposed continuation of this program, 66 percent of survey respondents indicated they favored continuation while only 26 percent opposed, with the remaining eight percent saying “don’t know” or “not sure.” A look at the demographics shows broad support that runs across gender, party and ideology lines, and irrespective of geography and ethnicity.

With less support in the public, perhaps Brown felt he had a better chance by letting the unions try to convince legislators to eliminate the EZ.  So far, his plan is not working with many legislators publicly lining up behind the program.  Brown needs a two third majority to prevail, which from what I’ve heard at the Capital, he isn’t anywhere near.

George Runner, member of the BOE wrote this today:

When Jerry Brown was Mayor of Oakland, he proudly welcomed Cybergold, an internet start-up company that moved to Oakland in large part because of “the tax incentives of the Enterprise Zone.”   It was September 28, 1999.

“Cybergold’s talented workforce adds to the energy and excitement of downtown Oakland,” said Mayor Brown at an event celebrating Cybergold’s recent arrival. “Cybergold’s presence here is an unmistakable signal to other Internet start-ups that Oakland is wired and ready to go.”
Read it here.

I guess that was then and this is now, but Mayor Brown was able to build a thriving downtown Oakland because of the EZ.  Now he claims they are of no benefit to the state and should be summarily cast aside. Hmmm.

The LA Times editorial board actually wrote last week that California’s businesses are not overtaxed.    Some might disagree with that proposition.  Loren Kaye, President of the California Foundation for Commerce and Education brings some pretty convincing facts to prove that California’s businesses are considerably overtaxed and at a disadvantage right out of the gate because of oppressive taxation and poor leadership.

The fundamental problem with the Times article, and much of the left-of-center criticism of California business taxation – is that they posit a world where public policy is a passive pawn in the hands of manipulative corporations, in the words of Controller John Chiang, “A lot of the tax credits are given to larger business…”

No, not “given.” Companies invest in California, buy equipment and buildings, hire workers, are successful in producing and selling their product or service, make a profit – in California – pay taxes, and earn a credit if they have made investments according to the policies underlying the credit. This is an active, dynamic and competitive economy, influenced by state policy and the interest in businesses in investing here.

Read the entire article here.

What are the incentives?
The following incentives are available through the State of California, from which the following summary was obtained:

Hiring Tax Credits
EZ businesses can earn up to $31,574 in State tax credits for each qualified or voucher employee hired over a five-year period.  Refer to The Alliance for information about eligibility criteria to determine whether an employee qualifies for this credit.

Sales & Use Tax Credits
EZ businesses may receive the sales or use tax credit for the purchase of manufacturing or processing machinery, data processing and other equipment used in the EZ.  Individuals, partnerships, subchapter S corporations, and limited liability companies can claim a credit on the first $1,000,000 of qualifying purchases per year, while corporations can claim credit on the first $20,000,000 of purchases per year.

Business Expense Deduction
Up front expensing of certain depreciable property can be claimed.

Preference Points
EZ businesses can earn preference points on state contracts.

Operating Loss Carryover
Up to 100% of the Net Operating Loss may be carried forward for up to 15 years.

Net Interest Deduction
Lenders to EZ businesses may receive a net interest deduction.

Unused Tax Credits
Unused tax credits can be applied to reduce future tax liability.

A business located in the Watsonville Enterprise Zone (see map) can take advantage of tremendous tax credits offered by the State of California. Below are some of the tax credits, for more information go to Economic Development Areas (EDA).

Hiring Tax Credit

Businesses may reduce state taxes by up to $37,440 per qualified employee over a five-year period. Qualified employees are new employees who are hired to work at least 50% of their time within the Enterprise Zone and meet ONE of the following criteria:

• Resident of the Targeted Employment Area (see TEA map) or
• Participant or eligible for services from the Santa Cruz County Career Works program (Calworks/WIA) or
• Dislocated and/or unemployed or
• Seasonal worker or
• Public assistance recipient or
• Work Opportunity Tax Credit eligible or
• Veteran or
• Native American

The Redevelopment and Housing Department determines eligible employees and issues the vouchers allowing businesses to take advantage of the tax credit. The City of Watsonville offers workshops for businesses currently participating in the EZ program and also for those businesses wanting more information on how to participate. Please contact Jacqueline Ventura to obtain applications for vouchers or to attend the next informational workshop at: 831-768-3095 or jventura@ci.watsonville.ca.us

Sales and Use Tax Credit

Businesses can substantially reduce their California income or franchise tax obligations by taking advantages of this tax credit. In any year, companies may claim a tax credit equal to the tax paid on certain machinery purchases to be used exclusively within the boundaries of the Watsonville Enterprise Zone. Individuals and partnerships may make this claim on the first $1 million of machinery purchased; corporations may claim the credit on the first $20 million of machinery purchased in any one year. For more information, contact the California Franchise Tax Board at (916) 845-3464 or http://www.ftb.ca.gov.

Business Expense Deduction

Businesses may deduct part of the cost of tangible property as a business expense in the first year it is placed in service. This includes most equipment and furnishings purchased for exclusive use in the Zone (excluding real estate). Depending on the date the property was placed in service, relative to the Enterprise Zone Final Designation, the amount deducted per property can be as much as $20,000. For more information, contact the California Franchise Tax Board at (916) 845-3464 or http://www.ftb.ca.gov.

Net Operating Loss Carryover and Net Interest Deduction for Lenders

Individuals or corporations in an Enterprise Zone may carry over up to 100% (versus 50%) of net operating losses (NOL) to future years to reduce the amount of taxable income for those years. The NOL carryover is determined by computing the business loss, which results strictly from business activity in the Enterprise Zone. (Suspended for 2002, 2003) Individuals, non-commercial lenders and commercial institutions may deduct the net interest earned on a loan to a business operating solely within the Watsonville Enterprise Zone. The net effect could be a 3 to 4% increase on return-on-investment! Net interest deductions are for the life of the Enterprise Zone.