In a press conference yesterday, Mayor Antonio Villaraigosa welcomed financial software provider BlackLine Systems to the City of Los Angeles.

As part of its relocation, BlackLine will receive the benefits of the ‘State Enterprise Zone Program’ and the ‘Business Tax Holiday’ which entitles the company to a rate discount from the Los Angeles Department of Water and Power, hiring tax credits and a 3-year exemption from the gross receipts tax, respectively.

“Blackline Systems’ move to Los Angeles highlights the larger trend of businesses moving to our city to take advantage of our competitive business policies such as the State Enterprise Zone Program and the Business Tax Holiday,” said Mayor Villaraigosa.

Read the full arrticle.

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.

A long time supporter of the EZ program, Assemblyman Perez, head of the JEDE committee had this to say at a press conference Friday:

“California has to get serious about making this state a more business friendly place,” said Pérez. “Eliminating the Enterprise Zone program is not going to help the California economy or California communities. Let’s seize this opportunity to improve the program so that it is more transparent and accountable to the public, and more closely linked to our community and workforce development objectives.”

Read the entire piece here.

At the press conference, Ernie Ball, owner of Ernie Ball, Inc. had some harsh words for the governor’s proposal to eliminate the EZ:

The CEO of Ernie Ball Inc., an internationally-known guitar string making plant that’s been in California 49 years, on Friday likened the governor’s threat to abolish Enterprise Zones to a call to Dr. Kevorkian.

“This is the last straw in California” that will break a businesses’ back, Sterling Ball said, as he threw his support to reform legislation that’s been introduced by state Assemblyman V. Manuel Pérez to keep the California Enterprise Zone Program in place.

“California has to get serious about making this state a more business-friendly place,” Pérez said during a rally at Ernie Ball Inc., which settled into the Coachella Valley Enterprise Zone in 2004.

Pérez said 2,000 jobs were created and retained in this enterprise zone, alone.

“The governor’s proposal is a step backward,” he said, before calling attention to reform legislation he’s introduced to improve the state economic development tool.

“Government does not create jobs,” Pérez said. “People like Ernie Ball do.”

Ernie Ball Inc. gives 300 people — 80 percent of whom came in as laborers from the farm fields — a “living wage’,” solid insurance plans and perks, said Ball.

Ball said he spent $8 million of his family’s money to move the company to the Coachella Valley, and has enjoyed 7 percent growth since. “We’ve never had a layoff,” and never taken out a bank loan, he said, of the company that supplies guitar strings to 5,500 music stores in the nation and 100 foreign countries.

“If you pull the Enterprise Zone, there will not be one more job added here,” Ball said.

Read it here.

The attached Fact Sheet highlights how many jobs have been created by the EZ program.  These are numbers that seem to be missing from the debate and certainly from the PPIC analysis.  For example, the EZ program put into the workforce 18,317 Californians who were previously on public assistance.

Here’s what Bill Allen had to say today about the Governor’s proposal to eliminate the EZ program:

If anything, the Governor should strengthen his commitment to the Enterprise Zone Program in these difficult economic times as a key mechanism to revitalize economically-challenged areas by providing incentives that create high-wage jobs and investment in these communities. By responsibly doing so, he would not only strengthen local economies, but strengthen the state’s long-term economic foundation as well.

Too many of our state and local residents desperately need jobs. Until such time when this is no longer the case, there will always be a critical role for Enterprise Zones. This is one program our elected officials cannot afford to eliminate.

Read the entire Fox & Hounds editorial here.

This from Steve Sims, Taxpayer Advocate in theFTB’s February Tax News:

The Board of Equalization recently ruled in the Appeal of NASSCO Holdings, Inc 2010-SBE-001, November 17, 2010, that a corporate taxpayer may use Enterprise Zone credits and/or the Manufacturing Investment Credit (MIC) to reduce corporate alternative minimum tax (AMT). Since then, I have received many questions on how the FTB is going to implement this ruling. We will be revising Form 100 Schedule P in February 2011. In addition, the NASSCO decision applies only to corporate taxpayers, and does not apply to personal income taxpayers, due in part to differences in how the corporate and personal income tax statutes are drafted. Consequently, personal income taxpayers may not claim the credits at issue in NASSCO in the manner that a corporation could.

The most frequent questions I have heard on this issue are “Can I file an amended return?” and “How will this affect my credit carryover?” Unfortunately, we have yet to determine answers to these questions. Stay tuned however as we are working to get the answers to these questions and more as soon as possible. We will update you in a future Tax News article and possibly a Tax News Flash as information becomes available. In addition, you can go to ftb.ca.gov and search for nassco for additional information.

Steve Sims, EA

Our Weekly published an article outlining how the Enterprise Zone program has helped provide employment in areas that house high percentages of minorities.  Taking away the EZ program would disproportionately affect African Americans.

Enterprise zones have been instrumental in revitalizing inner city areas, said [Assemblymember Isadore] Hall. To target them strikes at the very heart of many minority areas, he said.

Read the full article.

Trying to beat the Governor to the punch, Assemblyman Perez intends to propose legislation aimed at making the EZ program more accountable and efficient.  Read the entire Tribune Weekly Chronicle article.

George Runner, member of the BOE wrote this today:

The Board came out in favor of the Governor’s budget on many fronts, including its stark honesty.  However, the Board is against driving businesses out of California by eliminating the Enterprise Zones.

Another area in which Brown’s spending plan shows ignorance of beneficial municipal-business partnerships is that of enterprise zones.
“Because the primary benefit of these zones is to shift economic activity from one geographic region within California to another geographic region within California, they are not of statewide interest,” Brown states in his budget proposal.
For many companies, the incentives offered through enterprise zones such as Santa Clarita’s are the only thing keeping them in California, and thus generating jobs.
As state Senate candidate Sharon Runner noted in a recent Signal Editorial Board meeting, what California really needs to get out of its fiscal hole is more jobs — jobs to generate tax revenue to keep state and local governments running.
But for the sake of argument, let’s pretend for a moment that Brown’s claim is true, and the “primary” benefits of enterprise zones is to shift jobs from one area to another. What’s the alternative?
In Santa Clarita, 50 percent of our work force travels out of town to jobs in L.A. What are the impacts of this daily migration on the state, and on the work force? Clogged freeways, long commute times, more and more resulting air pollution, frustrated workers.
These problems will only get worse unless we in the Santa Clarita Valley solve our jobs deficit. We simply are not adding enough jobs fast enough to close the gap.
The Enterprise Zone program can help us do that.

Read the full article here.