Tax Reform Association Recommendations

Lenny Goldberg's California Tax Reform Association has published a report entitled Tax "Policy for the 21st Century: Resolving California's Long-Term Structural Deficit." The report is long (over 10,000 words) and details a slew of suggestions for changing California’s tax policies.

Along with Jean Ross of the California Budget Project, Lenny Goldberg has been a consistent critic of the Enterprise Zone program. In this report we find a good summary of the problems that Mr. Goldberg perceives in the program:

Overhaul the State’s Enterprise Zone Program.

The state's $170 million a year Enterprise Zone program is billed as job creation program for economically depressed areas. However, CTRA has taken a closer examination of the program, and finds that large amounts of the benefits are going to areas which are in thriving, expensive areas of the state, thereby costing taxpayers tens of millions with few real benefits. The primary reason for this is that a substantial percentage of the revenue losses come from thriving local economies in three areas: downtown San Francisco, most of the city of Oakland, and downtown Long Beach.

In fact, the subsidies provided to these thriving areas only harm the ostensible benefits which are supposed to flow only to economically depressed areas. For example, San Francisco's enterprise zone includes high-end hotels, some of the highest-priced land in the state, and the area in and around SBC Park. Long Beach'’s enterprise zone includes much of downtown, the marina and the Port of Long Beach, a well-developed and prosperous local economy. And Oakland's enterprise zone includes the port and airport, downtown, and areas that include homes which have recently sold for over $1 million.

The two main responses to these points are: A) the selection of the geography of the zone is based on the economic factors of both the areas and adjacent areas. Particularly in urban areas there may exist residential areas with low income census statistics adjacent to high-cost business areas. As a rule, enterprise zones are not designated for residential geography since the mechanics of the program are a function of businesses operating within the zone. Therefore we should not be surprised or alarmed to find an enterprise zone with good businesses in expensive areas (there are very few inexpensive areas anywhere in California, by the way) providing employment opportunities to adjacent blighted areas.

B) Things change over time. Many of the areas that Mr. Goldberg complains about being enterprise zones were not nearly so nice at the time they received their original designations. Is it unreasonable to entertain the possibility that at least part of the reason why downtown San Francisco, Oakland and Long Beach are doing so well today has something to do with the last decade or more of enterprise zones there?

Loopholes in the program also allow companies to claim tax credits for hiring workers with six-figure incomes who currently have a job as well as for employees no longer working at the site. And banks and other lenders which lend to these high-end businesses receive credits for the income they receive on their loans, which are prudent loans hardly in need of state subsidy.

I don't think there is, in fact, a loophole. Contrary to numerous suggestions, the enterprise zone program is not a social welfare program. The tax code itself states the goals of the program and enabling a firm to hire a six-figure employee who was otherwise facing obstacles to employment is entirely consistent with those goals.

The state needs to reexamine each of the 39 enterprise zones throughout California to ensure that the zone boundaries only include truly economically depressed areas. Areas that are no longer in need of tax incentives should be removed from the enterprise zone. Eligibility criteria for the payroll credit needs to be rewritten to ensure that businesses receive credits for only truly qualified individuals and controls need to be put into place to safeguard the program from abuse.
Proposal: End Enterprise Zone status for high-value areas that claim a significant share of enterprise zone credits, and eliminate or modify the bank and hiring credit programs.

Revenue Estimate: $50-$100 million annually.

This final suggestion is, I believe, remarkably short sighted and potentially destructive. What is essentially being recommended is that if an enterprise zone demonstrates success and effectiveness, the state must step in and disrupt the program. In any case the zones are designated for finite periods. The designation period represents a promise to a community and taxpayers that the area will receive the targeted incentives for a specified period. By yanking the designation at the first sign of prosperity the state would be reneging its promises thus effectively eliminating any incentive for business investment in the first place.

I have heard Mr. Goldberg make this suggestion at several hearings and it never ceases to surprise me.