Ever since Governor Brown proposed to eliminate the Enterprise Zone program, everyone seems to be focused on the “data” behind the program in an effort to determine the program’s value and future.  At yesterday’s Budget Subcommittee hearing, the same two reports squared off:  Professor Swenson and his USC report versus Jed Kolko and his PPIC report.

On the same day, the California Budget Project released what it claims is a new report with new data and concludes that the EZ program should be cut.  The conclusion, of course, is not surprising.  However, I did review the footnotes to see on what the CBP based its finding.  Over half of the footnotes that reference any sort of underlying data come either from the PPIC report or the CBP’s own prior report.  Now it may seem benign, but if quoting oneself can be deemed research, then Don King deserves to be king.  The CBP quotes its own report, its own research and its own findings as grounds for its new findings. 

The CBP also criticizes the program because the tax credits go to large corporations.  I’m not sure how to make the obvious point more obvious:  who do these companies hire?  I would be so bold as to say that they hire employees.  I would also repeat what Chris Micheli said:  the only way these corporations get the credit is if they hire someone who qualifies, e.g. veterans, disabled, unemployed or those who live in impoverished areas.  You only get the credit if you hire the type of people who deserve to get these jobs.  Keep in mind that a zone is designated by taking an impoverished residential community and designating the commercial area around it in order to help those residents find work.  The CBP report seems to ignore these fundamental aspects of the analysis.    

For its part, the PPIC report contains a fatal flaw that was exposed at yesterday’s hearing.  The PPIC report is based on Dun & Bradstreet data which is compiled by asking companies how many employees they have.  Kolko used this data noting the change in employment over time and concluded that there was no positive effect on employment in EZs.  However, as Professor Swenson pointed out, D&B asks employers to check a box declaring how many employees they have.  An employer can check the “1-5 employees” box if they have three employees.  If they hire two more employees, they will still check the “1-5 employees” box and hence one could conclude (and report to the legislature) that the EZ program has no positive effect on employment.  Kolko had no meaningful response to this criticism other than to say that the data searches are repeated millions of times and thus account for any margin of error (assuming I heard him right).  Dr. Swenson responded that repeating a data error two million times only confounds, not corrects the error.

Given the dueling reports, Swenson’s USC report has to be considered the more reliable of the two.  Regardless, there were two events that ruled the day at yesterday’s hearing both of which came after the academics cleared the mike.

1.  An attorney who seemed to have come prepared for this specific issue testified that the proposal to eliminate the credit carryover was indeed illegal, violating the Due Process clause and the Contracts clause of the Constitution.  He affirmed that there will be legal challenge to this part of the Governor’s proposal.  Importantly, the effect of this is to significantly reduce the amount Brown claims there is to be gained by eliminating the EZ program.  If the carryover credits cannot be legally eliminated, then the cost of the legal challenge, the uncertainty of resolution and the likely ultimate defeat of the proposal effectively eliminate any putative gains from cutting the program.  As Chris Micheli pointed out, there is also a wage add-back that taxpayers will certainly ask to be refunded if the carryover credits are eliminated.  Taxpayers pay for the credits when claimed on a current year return by adding the credits to income and thus paying more taxes in exchange for claiming the full amount of the credits and having the excess available for subsequent years.  Again, there is very little net gain even if the Governor gets his way.

2.  Statistics and econometrics models aside, the taxpayers ruled the day with their own testimony.  Cries to preserve the EZ program came from two divergent sectors that rarely coincide when it comes to public policy:  the business world and minority groups.  They were joined by representatives from small and large cities, chambers and individuals.   Everyone (except for Lenny Goldberg who said the same thing he says every year) echoed their support and reliance on the EZ program as a means to stay competitive, not against neighboring cities, but against neighboring states.  As one businessman put it, he’s getting calls weekly from other states with promises of tax breaks if he leaves California.  Many said that if the EZ program is cut, they will take other states up on their offer.  My favorite line of the night came from a businessman who said that he located in California and hired many employees because of the EZ program.  He emphasized that it would be unfair, unjust and unwise to cut the program and then concluded by telling the Committee that he gave his business card to the attorney who testified that there will be a legal challenge if the program is cut.

It was powerful hearing and a strong testament to the fact the California can only be competitive by keeping, if not expanding the EZ to lure and maintain businesses. The result would be to reduce unemployment, increase revenue and send a strong signal to businesses and other states that California is reversing its anti-business sentiment and commencing on a long term path to prosperity and independence.  One legislator (I think it was Manuel Perez) testified that Illinois enacted huge tax gains but left its Enterprise Zone program intact.   In fact, many Republican and Democratic legislators questioned why in the face of such unemployment figures would California further damage its ability to create jobs.  The representatives from the LAO could only look to the PPIC study and repeat what they were told to repeat, i.e. that we must make tough choices and the PPIC says that the program is not effective.  This is after they acknowledged that the data was outdated and that cutting the program would likely result in legal challenges.   Craig Johnson, on the other hand, stood firmly and declared to the Committee that CAEZ has the current data which proves conclusively that the EZ program creates jobs.  Professor Swenson added that on average, a qualified EZ employee costs the state roughly $5,000, whereas the cost to the state of paying unemployment benefits to the same employee if he or she can’t find work is over $20,000.  For myriad reasons, the EZ program benefits from such widespread support from minority and business leaders and the legislators on both sides of the aisle who represent these divergent groups as was evident at yesterday’s hearing.

Tags: CAEZ, california enterprise zone, california tax law, california tax news, corporate savings, Enterprise Zone, enterprise zone news, Enterprise Zone Tax Credits, Enterprise Zones, EZ tax credits, governor, hiring credits, hiring tax credit, hiring tax credits, Manuel Perez, PPIC, Swenson, Tax News, tax professionals, USC

This entry was posted on Tuesday, February 8th, 2011 at 10:36 pm and is filed under Enterprise Zones, Tax News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.