Enterprise Zone Underutilized?

A recent article in the Imperial Valley Business Journal claims that the relatively new Enterprise Zone there is not being fully utilized. The article goes so far as to even express concern that the zone could be undesignated due to its lack of activity:

Eligible Brawley businesses are failing to take advantage of tax breaks intended to boost employment and attract businesses to the area. In the years to come, that could mean this city will lose its designation as an enterprise zone and that could ultimately affect the city’s ability to attract new businesses given the cost of doing business in California is well above the national average.

And

[Alison] Ricker said she thinks state officials, expected to conduct an audit, may place the zone on probation for having such low numbers. Although the state could take away the zone’s designation at any time, Ricker said she does not think that will happen anytime soon.

I think it’s pretty clear that a suspension of the zone is not in the offing, but the concern certainly raises some interesting issues. The 42 Enterprise Zones are extremely diverse and it would be unreasonable to compare the performance of a zone in rural Imperial County to zones in the urban centers of Los Angeles or San Francisco.

The article theorizes about the causes of the lack of participation. The primary culprits seem to be apathy or lack of interest:

“Brawley businesses aren’t truly sold on this,” said Richard Preciado, managing partner for Hutchinson and Bloodgood, an accounting firm…. eligible companies just aren’t interested, he said, comparing the situation to avoiding exercise. “We know it’s good for us but we just don’t it,” he said.

And

During the March 24 Annual Taste of Culture event in Brawley, only two to three business owners visited the information booth IVEZ maintained at the event, Ricker said.

However, I think a more fundamental reason is hinted at within the anecdote the article cites:

Although Brawley-based Fiesta American Foods is within the zone, it’s been breaking even for the past four or five years and so it cannot apply for the tax credits. Companies must be making a profit and paying taxes in order to be eligible. “It doesn’t do me any good. What I need is more financing,” said Raymond Armenta, the company’s president.

In other words, it costs time, money and resources for a company to administer and participate in the Enterprise Zone program. If a company is not profitable, and many are not for a variety of reasons, then they cannot make use of a tax credit since they are not making the profit to create a tax liability in the first place. A business owner in such a position will generally be working hard to make the business profitable. Spending that limited time and resources on securing a tax credit for theoretical potential future use simply doesn’t make good business sense. It is highly likely that a large portion of the businesses in the Imperial Valley EZ fall into this category.

The Legislature seems to have had difficulty grasping this concept as well. Over the years there has often been a hew and cry over businesses seeking refunds for tax credits calculated retroactively. But in light of the above scenario, this kind of business behavior makes a lot of sense and should be an indicator of economic growth in the Enterprise Zone.