On May 22, 2013, the California State Assembly’s Budget Subcommittee #4 held a hearing that explored Governor Jerry Brown’s latest economic tax incentive proposals as they relate to the State’s current enterprise zone program. In my previous post on this subject, based solely on the language published in the Governor’s May 2013 budget revision, I concluded that significant “revisions” were the target. The recent hearing makes it abundantly clear, however, that the words “elimination” and “replacement” better describe Governor Brown’s proposal.

Thank you to Max Shenker of TCC (Tax Credit Company) for posting a video of the hearing on Vimeo.

During the hearing, a representative from the Department of Finance offered the Governor’s perspective and responded to questions. After listening through all 69 minutes of the Subcommittee’s discussion and public comments on this issue, I can make the following observations.

The Governor’s proposal would create a new statewide tax incentive program with three prongs:

1. A revamped hiring credit available to businesses who show a net increase in jobs and hire the long-term unemployed, unemployed veterans, and individuals receiving the federal earned income tax credit. In place of the administrative enterprise zone, the revamped hiring credit would be available to businesses within any census tract with demographics demonstrating a certain level of economic distress (to be defined by the program). 
2. A new sales tax exemption for manufacturing industries. Unlike the State’s now abandoned Manufacturing Investment Credit (MIC), which offered an income tax credit based on the amount of sales tax paid on manufacturing and production equipment, this replacement would exempt manufactures from paying the State’s portion of the California sales tax (4%).
3. A tax credit fund administered by the Governor’s Office of Business and Economic Development (aka GO-Biz) that would authorize the agency to offer negotiated tax benefits to businesses moving into or expanding within the State of California.

If you are familiar with California’s current enterprise zone hiring credit, it should be clear to you that this revamped hiring credit would be profoundly different.  Most employers currently benefiting will no longer be eligible for a hiring benefit — if simply because they are not regularly showing a net increase in jobs.

There was no discussion about the how much tax benefit the revamped hiring credit would offer.  Nor was there any discussion about how qualifying employees would be identified, documented, or certified.

Businesses holding existing tax credits could continue to carryover and utilize them for another 5 years.

Other EZ Benefits Not Mentioned
There was no mention of the current enterprise zone program’s other benefits: the Net Interest Deduction, EZ Business Deduction, Net Operating Loss Carryover, or bid preferences for vendors bidding on state fulfillment contracts. It is not clear to me if these would also be eliminated or modified.

Agency Players
The current enterprise zone program is administered by the California Department of Housing and Community Development (HCD). With the proposed changes, HCD could be removed from the picture. The revamped hiring credit would be administered by the Franchise Tax Board. The Sales Tax Exemption would fall to the Board of Equalization.  And, as stated above, the negotiated tax credit fund would be managed by Go-Biz.