The Governor’s May budget revision significantly reduces the credit available to businesses.    Essentially, the credit will be reduced to $5,000 per employee.  Below is the section that discusses Enterprise Zones.

Reform Enterprise Zones — The purpose of enterprise zones is to encourage economic activity for particular geographic regions. However, there are two significant failings in the way the current tax incentives are structured. First, the Enterprise Zone hiring credit encourages the hiring of employees. It does not encourage the creation of new jobs. A business that lays off five employees and hires one at $50,000 per year, gets the same credit as a business that expands its number of employees and hires an employee at $50,000 per year. In fact, if the employee in the first case meets one of the vouchering criteria — they live in the area — and the employee in the second case meets none of the vouchering criteria, the firm in the first case will receive a credit while the employer in the second case will not. Enterprise Zone programs should reward employers for creating new jobs. Second, employers can benefit from Enterprise Zone credits even when it is demonstrable that the existence of the credit had nothing to do with the fact that they have hired a new employee. This is evident by the existence of a phenomenon referred to as “retro-vouchering”. “Retro-vouchering” typically occurs when a private tax consultant makes contact with a business located in the zone and offers that business their services, on a contingency-fee basis, to determine if any of the employees hired by this firm within the last several years qualifies to be vouchered for the hiring credit. When this happens, clearly the hiring firm did not act based on the Enterprise Zone hiring credit as they were not even aware of the credit when they did the hiring.

Instead of repealing state tax benefits for Enterprise Zones, the May Revision proposes to reform Enterprise Zone hiring credits so that credits are only available to firms which actually increase their level of employment. Taxpayers would be eligible for a $5,000 credit for each incremental full-time equivalent employee that they hire. These credits would only be allowed if claimed on the taxpayer’s original return. Additionally, the May Revision proposal would not allow any new vouchers to be granted for tax years prior to 2011 when the application for that voucher was made more than 30 days after the date that the employee first begins employment. Additionally, to ensure that credits are creating incentives for relatively profitable, tax-paying businesses, the Enterprise Zone credits will be limited to a five-year carry-forward period.

Tags: california enterprise zone, california tax law, enterprise zone news, Enterprise Zone Tax Credits, Enterprise Zones, governor, hiring tax credit, hiring tax credits, Tax News

This entry was posted on Monday, May 16th, 2011 at 11:31 am 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.