Insight

Enterprise zone replacement incentives take effect Jan. 1

November 27, 2013


By KATHERINE CONNER, The Daily Transcript

Enterprise zone tax credits for businesses in designated blighted areas will end Dec. 31. Three replacement incentives will take effect Jan. 1.

Questions about both the wind down and rollout of these programs persist as the new offerings are in the draft stage.

The enterprise zone tax credits — an array of tax breaks, hiring incentives and a loan interest reduction — were enacted in 1984 with the hope of increasing employment and company growth in 42 economically depressed areas throughout the state.

Criticism that the reported $700 million in lost tax revenue in one year alone was not worth the payoff, or going to the neediest businesses, led Gov. Jerry Brown to sign AB 93 in July 2013, effectively ending the program and its benefits.

In place of the five monetary incentives, three new credits from the Governor’s Economic Development Initiative under the Governor’s Office of Business and Economic Development will aim to accomplish much the same goal in January.

“First and foremost, these are about modernizing our economic development packages,” said Sid Voorakkara, GO-Biz’s San Diego representative. “We wanted to have more flexible tools for the state to partner with businesses as a way to spur growth and create more jobs.

“There are three different components. .... And really when you look at all three together, it really enhances and expands the economic opportunities we can provide throughout the state.”

Not everyone is quite as optimistic; some local administrators of the incentives say the new version won’t be as effective as its predecessor.

“These incentives, some of them are new and so that’s good, we applaud the state when they do something new, but some are more restrictive than what we had before, which is a detriment,” said Cindy Gompper-Graves, president and CEO of the South County Economic Development Council.

“As an entire package, California still needs to be much more competitive at looking to get companies to invest in and expand in the state. It’s a start, don’t get me wrong, but we’re not there yet as a state.”

The new incentives include a New Employment Credit, a Manufacturing Sales and Use Tax Exemption, and a California Competes Tax Credit.

The New Employment Credit is similar to the hiring credit under the enterprise zone program, but covers fewer employees, results in less of a refund, and comes with a net employee increase requirement that will disqualify many smaller businesses.

“The hiring credit is significantly different than the current hiring program from a couple of standpoints,” said Kevin Sullivan, the San Diego Regional Enterprise Zone (SDREZ) manager.

There are 13 categories of employees that can qualify the company for a credit of 50 percent of the employee’s wages the first year, 40 percent the second year and so on down to 10 percent in the fifth year.

Under the new rules, those 13 qualifiers are whittled down to five, and employers receive the difference between the employee’s wage and the floor of $12, or 150 percent of minimum wage, up to $28. Employers can pay above the $28 limit, but will receive credit only up to that amount, with a cap of $56,000.

The five new qualifying categories are persons unemployed for six months, veterans within one year of separation, earned income tax credit recipients, ex-offenders and recipients of CalWorks or general assistance.

The new incentive will, however, cover companies in a larger geographic area, encompassing not only all former enterprise zones, but areas with the 25 percent highest poverty and unemployment rates as designated by census tracts, as well as Local Agency Military Base Recovery Areas (LAMBRAS).
Sullivan said an even bigger change to the New Employment Credit concept comes from the net employee gain clause.

“The other big difference is the current hiring credit doesn’t require you to demonstrate that you’re creating a new job with the tax credit,” Sullivan said.

“The state’s replacement requires businesses to demonstrate that the employee is resulting in a net increase in jobs. That’s difficult, because a lot of smaller to midsize companies have someone leave that they need to replace — that’s job retention, not job creation. So it will put a significant limit to the types of businesses that can take advantage of the replacement credit.”

While the existing enterprise zone hiring credit will expire Dec. 31, qualified companies that make covered hires before that date will still be able to file vouchers for the credit through the end of 2014, although Sullivan suggests companies file as soon as possible.

The other incentive with a bit of rollover is the existing Sales and Use Tax Exemption, which also expires Dec. 31, but applies to purchases made by that date. The wind-down rules allow companies to file for the exemption through the end of 2014.

Replacing it starting July 1, 2014 will be the Sales and Use Tax Exemption, which takes an industry, as opposed to geographic, approach.

It will exempt businesses buying manufacturing equipment inlcuding food processing, manufacturing research and development, biotech manufacturing, biotech research and development and necessary tenant improvement sectors from the state’s 4.19 percent sales and use tax, though companies must still pay local taxes. Companies need not be in any sort of zone to qualify as long as they fit the sector and purchase qualifications.

Sullivan said he’s been informing businesses about the gap between Jan. 1 and July 1. Purchases made in that timeframe are not covered under either plan. His advice: Either buy now or wait until July to take advantage of one of the tax breaks.

Gompper-Graves said the inclusion of food-processing plants in the new plan was a welcome change because there is a sizable cluster of such companies in South San Diego County.

The third and final new incentive under GEDI is the California Competes Tax Credit. With the specifics still in draft form, it’s not yet clear what criteria will be used to award these funds to companies, though the credit will be statewide with no geographic limitations.

“We’re looking at hiring, investment and capital, offering opportunities to be more flexible, to have a conversation about growth and expansion,” Voorakkara said. “It’ll be an opportunity for individual case-by-case conversations with businesses to assess how they’re impacting our region.”

A total of $30 million has been allocated to this fund for its first fiscal year, $150 million for the next year, and up to $200 million for the three years after that.

A quarter of all California Competes funding is designated for small businesses grossing less than $2 million a year, which Voorakkara said necessitates involvement and partnership with local Economic Development Corporations and government entities. The program also stipulates that no single business can receive more than 20 percent of the total available funds.

In addition to the loss of the sales and use-tax exemption and new-hire credit in the former enterprise zone, Sullivan said the lesser-known Net Interest Deduction incentive will be missed by businesses.

“It basically allowed banks to make loans to businesses in enterprise zones without having to report the interest they would make on the loan, which was deductible,” Sullivan said. “Businesses could then negotiate better loans with banks because they’re not reporting that money they’re making on the loan. It was very successful and is going away.”

With the three new programs coming online in little more than a month, Voorakkara said GO-Biz will be working through the final language and details of the program in December, and will have more information in the coming weeks.

Sullivan and Gompper-Graves will be eagerly awaiting it.

“We’re being spoon-fed information from the state,” Sullivan said. “Our GO-Biz rep here, Sid, is doing a good job pulling that information from Sacramento, but it’s a work in progress.”