Details from the CA Governor’s May Budget Revision, released yesterday, are now hitting the news. What we thought was potentially good news for the state’s enterprise zone program (based on Friday’s leak), is not what we are hoping for.  As you consider this news, do not simply assume Governor Jerry Brown’s proposals will be adopted. 

We’ve already seen legislators supporting the enterprise zone program from both sides of the political aisle.  Governor Brown’s proposals, on the other hand, are draconian and unlikely to sway many into supporting his anti-enterprise zone views.

The Governor’s office is proposing radical and unworkable changes to the enterprise zone program – very much unlike the meaningful reforms proposed by Democrat Assemblyman V. Manuel Pérez.

The following quotes are directly from the budget summary released by Governor Jerry Brown’s office.

“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.”

Response: Frequently, firms struggling to operate in economical depressed area of the state can neither hire full-time employees nor increase their level of employment. This is especially true of the smallest businesses.

While most business owners want to expand, too many are struggling to survive. Even while they struggle, however, they provide jobs for grateful employees who otherwise would join the ranks of the unemployed. The populations within some of California’s enterprise zones are currently experiencing unemployment rates of more than 20%.

“These credits would only be allowed if claimed on the taxpayer’s original return.”

Response: In other words, an employer cannot file an amended return to claim credits that were missed. This unfairly discriminates against business owners who may not have the immediate time or means to win this race against the clock — to comply with all the program’s procedures and stipulations before their tax return is due.

“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.”

Response: This proposal is completely unworkable and probably exposes an ignorance of enterprise-zone program realities. Unless other regulation and documentation standards are also revised, in most cases it is NOT possible to submit a complete application within 30 days of hire.

Even someone who knows the program very well – and knows the secrets to obtaining hard-to-get documentation – will be pressed to complete an employee application in 30 days. In most cases, it is impossible unless an employee is able to provide what is needed from his or her own personal files  (and this is rare).

“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.”

Response: Limiting to a 5-year carry forward period plainly contradicts the previously stated goal of reforming the program so “that [hiring] credits are only available to firms which actually increase their level of employment.”

Expanding businesses – the ones that increase the size of their workforce – frequently experience losses during the short-term as they invest in their workforce and other assets. Then, as the investments begin the pay off, those operating losses also carry forward and offset the company’s tax liability during its initial year(s) of profitability.

The Governor’s proposal contradicts itself by encouraging expansion with a hiring tax credit but then limiting its use to a five-year period – during which the company is least profitable and least in need of tax savings.