According to the LA Times on Saturday, Brown’s May budget revise leaves the EZs intact:

The governor would use an unexpected multibillion-dollar influx of tax receipts to fill the gap left in his budget by the shorter period of income tax increases. He would also use the new money to keep in place “enterprise zone” tax credits for businesses that hire workers from blighted areas. Brown originally proposed eliminating those tax credits to save the state $924 million.

Just waiting for the official word today at 11.

The Democratic leadership responded to the Five Point Plan with this Letter.  Steinberg discusses the Enterprise Zone as follows:

You noted the need to fix redevelopment and enterprise zone programs, but you urge the Legislature to preserve their job generation capacity.  We agree.  We should point out, however, that both redevelopment and enterprise zone programs are major sources of the state’s fiscal problem (through additional state costs for schools and loss of state tax revenue).  Two respected non-partisan institutions, the Legislative Analyst and the Public Policy Institute of California, have raised serious questions about whether redevelopment and enterprise zones actually help with job creation and retention.

From the Sacramento Bee just now:

Assembly Republicans issued their own budget proposal a few days ahead of the Governor’s May revised budget.  There is no mention of Enterprise Zones in the Republican proposal.

Read the full article.

The Senate Republicans made public their list of 53 demands in exchange for their vote to allow Jerry Brown to put the tax extensions on the June ballot.  Preservation of the EZ is on the list.  Assembly speaker John Perez said that the parties are now “farther apart” than they were before the list.

As reported at www.jobsandsafecommunities.com:

California Republican Party Opposes Governor’s Proposal to Eliminate Enterprise Zones

Says Legislature should make job creation a top priority and abandon the governor’s ill-conceived attempt to raise taxes

(Sacramento, CA)—At the urging of Board of Equalization member George Runner, the California Republican Party this weekend passed a resolution in favor of the successful Enterprise Zone Tax Credit program.

The resolution, which received unanimous support from party members in committee on Saturday, states that Governor Brown has broken his promise to voters by attempting to eliminate one of the most successful job creation programs in California—Enterprise Zones.

“We should be looking for ways to expand this program, not eliminate it,” stated Board of Equalization member George Runner, who also authored the resolution and is a long-time Enterprise Zone supporter. “Enterprise Zones create jobs, employ our returning veterans and save taxpayers hundreds of millions of dollars each year. Brown’s proposal pushes our state closer to a permanent Welfare state by eliminating employer incentives to hire people who were previously struggling to find a job. Just a few short months after promising to create jobs in California, Governor Brown is trying to eliminate one of the most important job-creating program in our state.”

Governor Brown proposed to eliminate Enterprise Zones are part of his January budget proposal. The program’s elimination will not only jeopardize California’s fragile economic recovery, it will result in a significant tax increase on California businesses.

“The Republican Party is continuing to fight for California jobs, and the support for this resolution is another example of our commitment to economic recovery and fiscal solvency. I hope that the governor abandons this ill-fated endeavor and works with the Legislature on finding common sense solutions to our budget deficit,” concluded Runner.

The resolution reads as follows:

Resolution Opposing Governor Brown’s Ill-Conceived Attempt to Eliminate California’s Enterprise Zone Tax Credit Program

Submitted by the Honorable George Runner

For consideration at the Spring Convention of the California Republican Party

Sacramento, California

March 18-20, 2011

Whereas, California businesses are struggling with economic recovery, burdensome regulations and high state taxes in the midst of the national economic downturn keeping unemployment at record high levels.

Whereas, Governor Jerry Brown – elected in November 2010 – promised to spur job creation and make California business friendly now proposes to eliminate one of the most successful programs that actually has created jobs in more than 40 communities across the state: the Enterprise Zone Tax Credit Program. 

Whereas, California’s landmark Enterprise Zone Tax Credit Program is an economic driver that has been proven to create jobs, spur economic development and keep businesses open.

Whereas, in 2010 the program created or retained more than 118,000 jobs statewide while providing employment opportunities for more than 415 veterans returning home from serving our country.

Whereas, in 2010 the program saved California’s taxpayers an estimated $211 million by providing work instead of welfare and paychecks instead of unemployment benefits to more than 23,000 citizens.

Whereas, the California Enterprise Tax Credit Program and other proven job creators should be expanded, not eliminated.

THEREFORE BE IT RESOLVED BY THE CALIFORNIA REPUBLICAN PARTY that members of the Legislature vote to oppose the elimination of the California Enterprise Zone Tax Credit Program and look for further ways to expand tax credit programs to spur economic growth.

Today, Assemblyman Don Wagner came out in favor of maintaining the Enterprise Zone program – and he doesn’t have on in his district.

By repealing the tax credits that fuel enterprise zones, California’s many employers who took the state at its word, located and grew their businesses in such zones, and have helped improve some of our struggling communities will instead find their tax bills climbing dramatically. This will leave them with less in their budgets for payroll, benefits, capital improvements and hiring.

At a time when California has the nation’s second highest unemployment rate, we will see more people collecting unemployment insurance rather than paying taxes. Additionally, businesses that set up shop in enterprise zones, will suffer from decreased productivity or have to shut down, thereby further reducing state and local revenues.

Read the full article.

No, it’s not the events in Wisconsin (although that should serve as a wake up call).  Rather it’s the legal memo detailing why repeal of the EZ is illegal.  Essentially, repeal of the EZ violates the Contracts and Due Process clause of the California and U.S. Constitutions.  The memo’s conclusions are that repeal:

• Constitutes “bait and switch” taxation
• Violates the U.S. and state Constitutions
• Would subject the state to refund claims that nullify the proposed budget savings
• Invites legal action to enjoin repeal
• Subjects local governments to taxpayer lawsuits; and
• Endangers California’s bond rating which could be downgraded

The memo is well researched and convincing.  I hope Brown’s camp is enjoying reading it as well.

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.

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.