California has created 42 zones in the state where businesses are eligible for special tax breaks. The idea behind Enterprise Zones is to create jobs in distressed areas by giving tax breaks to businesses located in the zones. If things work as planned, businesses within the zones will grow and hire more employees, and attract more businesses to support them. New businesses would choose to locate in the Enterprise Zone to receive the tax breaks and then grow to create more jobs.
A recent California Public Policy Institute study , Do California's Enterprise Zones Create Jobs? http://www.ppic.org/main/publication.asp?i=742 , found no effect on job creation in Enterpise Zones. A previous report by the Legislative Analyst's Office (LAO) http://www.lao.ca.gov/handouts/Econ/2005/CA_Enterprise_Zones_120505.pdf also found little positive economic impact from the zones. There are 42 of the zones, one in Santa Ana, but how the tax breaks work and the impact of the zones are not well understood by the public. This two part series looks at how Enterprise Zones work and the actual benefits resulting from the zones.
What is an Enterprise Zone?
Enterprise zones are four types of Economic Development Areas used by California. http://www.hcd.ca.gov/fa/cdbg/ez/#EZ The theory behind creating these area is this:
- Businesses are not attracted to economically distressed areas and leave the area.
- If the government gives tax breaks to business, businesses will be drawn to an area with lower taxes.
- The lower taxes will free up money within the business that would normally go to taxes to be used to hire more people and expand the business.
- A few successful businesses located in an area will attract other businesses, and the area will grow.
- Even though taxes are reduced by the incentives of the Enterprise Zone, the number of growing businesses located in the zone will make up for any loss of tax money by the sheer volume of business generated in the zone.
What are the tax credits businesses can receive in Enterprise Zones?
- Hiring Credit - A business can earn $31,544 or more in state tax credits for each qualified employee hired.
- Up to 100% Net Operating Loss (NOL) carry-forward. NOL may be carried forward for 15 years.
- Corporations can earn sales tax credits on puchases of $20 million per year of qualified machinery and machinery part.
- Certain depreciable property can be expensed up-front instead of being depreciated over a number of years. Lenders to Enterprise Zone businesses may receive a net interest deduction.
- Unused tax credits can be applied to future tax years, allowing the benefit of the initial investment to be stretched out.
- Enterprise Zone companies can earn preference points on state contracts.
How much does this cost each year?
In addition to any program and administration costs, in 2006 the California Franchise Tax Board estimated that $333 million in tax revenue was forgone as a result of the program. Losing this amount of money is close to one and one-half times the annual budget of the Irvine Unified School District. In the realm of the state budget, it is considered a small amount of money, but it is still a loss of tax revenues.
What is economic theory behind Enterprise Zones?
Money paid in taxes is a waste called a "deadweight loss" by conservative economists. They call taxes by this name because the money is taken from the business and they perceive the business gets nothing in return. The conservative economists do not count the roads used by the business, water used by the business, schools that generate employees and customers or police and fire protection to keep the business safe as benefits. These conservative economists simply view any money taken from the business in the form of taxes as a deadweight loss. Anything done to reduce taxes is good. Enterprise zones reduce taxes. Therefore, Enterprise Zones are good. Whether or not any benefits are produced is immaterial, only tax reduction counts.
Does Orange County have an Enterprise Zone? Where are some of the other zones?
Santa Ana is the local Enterprise Zone. Other zones in the area include Long Beach, Los Angeles, Altadena/Pasadena, Barrio Logan in San Diego, and Ysidro/Otay Mesa in San Diego.
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