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Solimar Research

Threat to Enterprise Zones Compounds Cities' Anxieties

Feb 14, 2011

Gov. Jerry Brown's proposed state budget will do more than merely plug a $24 billion deficit. According to some, it will also lead to shuttered factories, recidivism among ex-convicts, and the flight of companies and jobs to rival states such as Arizona, Nevada, and Texas. Faltering clothing manufacturer American Apparel could be pushed closer to the brink of bankruptcy. 

At least if Brown's proposal to do away with Enterprise Zones is adopted along with the proposed elimination of the redevelopment program.

Despite the program's geographically oriented name, California's Enterprise Zones are not technically designed to foster urban renewal. They are, rather, employment programs that use a variety of incentives -- mainly state tax credits -- to encourage employers to hire workers in designated areas. Much like California's far more widespread system of redevelopment, cities and counties have embraced Enterprise Zones as crucial components of their local economic development plans. 

City officials say that the loss of both would be a devastating one-two punch, depriving them of major tools to promote local development. Because redevelopment is operated on a locality-by-locality basis, Enterprise Zones are considered the state's largest economic development program. 

Though redevelopment, with nearly 400 active agencies and a sophisticated lobbying infrastructure, has been fighting a vocal battle since the governor's Jan. 11 budget announcement, backers of Enterprise Zones are only now rallying to save the program, even in the face of studies suggesting that they are ineffective. At least one piece of legislation has been introduced to reform Enterprise Zones, and localities are launching a lobbying effort in Sacramento. 

"It just seems wrongheaded to me," said Craig Johnson, Enterprise Zone manager for the City of Long Beach and president of the California Association of Enterprise Zones. "This is not a program to be thrown on the scrap heap but a program to be taken advantage of and utilized." Johnson said that the program helped to create or retain up to 10,000 jobs in 2010 alone. 

The governor's budget proposal did not mince words regarding Enterprise Zones. Cutting the program would, according to the proposed budget, save $381 million in 2010-11 and $581 million in 2011-12. But beyond that saving, the budget implies that it would also be getting rid of a program that has been ineffectual and even mildly detrimental to the state's economy. The draft budget states that Enterprise Zones shift "economic activity from one geographic region within California to another geographic region within California." 

The budget proposal even implies that the program is less than a zero-sum game because most jobs created under the program would have been created anyway. Therefore, the allocation of tax credits to those jobs results in an estimated $60,000 net loss to state coffers per job. 

Administered by the Department of Housing and Community Development, the Enterprise Zone program is limited, by statute, to 42 zones throughout the state at any given time. Zones have a lifespan of 15 years. The budget also targets similar, but much less widespread, programs including Targeted Tax Areas, Manufacturing Enhancement Areas, and Local Agency Military Base Recovery Areas. There are no limitations on the physical size of Enterprise Zones, but at least 50 percent of zone residents must make less than median income in their respective counties.  

The state estimates that these areas encompass 1.5 million workers, only a fraction of whom are actually involved in the Enterprise Zone tax credit program. 

The budget cites a 2009 study by the Public Policy Institute of California, claiming that Enterprise Zones failed to create a net gain in jobs. 

"Our main finding…was that Employment Growth in enterprise zones was no faster than growth in very similar comparison areas," said Jed Kolko, co-author of "Do California's Enterprise Zones Create Jobs?" "We concluded that, for what we believe to be the program's primary goal, enterprise zones on average had no effect."

Kolko said that many companies were not even employing intended workers, because targeted workers were defined so broadly that many jobs went to workers who were not at risk or under-employed in the first place. As well, the tax credits apply to certain capital expenses, so businesses could invest in machinery without hiring additional employees. Therefore, while companies may have benefited from the tax credits, the program did not create intended employment gains. 

Watchdog groups such as the California Budget Project have reviewed existing literature on Enterprise Zones and reached similar conclusions. 

"Contrary to public perceptions, this is a program that benefits the largest, wealthiest corporations in California, not small business," said Jean Ross, executive director of the group California Budget Project. Ross added that companies might choose to locate in an Enterprise Zone as opposed to another part of a given metro area. 

Based on the research of PPIC and others, the governor's budget concludes that Enterprise Zones are "not of statewide interest" but rather are "local economic development run through the tax system." 

Backers of Enterprise Zones say that--especially on this point--the governor could not be more mistaken. 

"I would disagree with the assertion that there isn't a net benefit," said Assemblymember Cameron Smyth (R-Santa Clarita), whose district was just awarded a new Enterprise Zone. "If we don't have Enterprise Zones it's just going to reshuffle those dollars outside of California."  

"Our neighbors are aggressively pursuing California companies," said Johnson. "Our response should not be a collective shrug."

Officials from both sides of the political aisle say that Enterprise Zones offer a poignant foil that illustrates the unfriendliness of California's business environment. They cite states such as Nevada, Arizona, and Texas that actively lure businesses away from the state with the promise of lower taxes and lower costs of doing business. Enterprise Zones, backers say, are one of the only tools the state has to enable the state to compete with those plum offers from California's neighbors. 

"California has not had a overall plan, strategy when it comes to the issue of keeping and growing jobs, as opposed to other states," said George Runner, a Republican member of the Board of Equalization (2nd District). "Enterprise Zones have become the tool for local governments to do that competition when they know that there's this giant sucking sound from other states." 

"We keep hearing from businesses that there needs to be reform when it comes to tax structures and regulation…that the state of CA can become more business-friendly," said Assemblymmeber Manuel Pérez (D-Indio). "To some degree, I agree with them." 

Runner has even proposed effectively doing away with Enterprise Zones by extending their benefits to the entire state. 

In sharp contrast with the literature, local administrators of Enterprise Zones bring up seemingly endless examples of companies that were considering relocating out of state and were persuaded to stay by Enterprise Zone incentives. Johnson cited a Bayer pharmaceuticals factory that set up in Berkeley; South Gate Community Development Director Steve Lefever of the City of South Gate said that his region's Enterprise Zone attracted an American Apparel factory. 

The macroeconomic argument for saving Enterprise Zones is the same as that for saving redevelopment: they both generate economic activity which, in turn, generates tax revenues and incalculable positive local externalities. 

"It's helped us retain and grow some of the jobs here," said Rick Farley, City of Oroville  Enterprise Zone and Business Assistance Coordinator. "Historically this area has been very reliant on natural resources—logging, mining--as the lumber mills have closed we've been working to attract other types of businesses."

The mantra for Enterprise Zones is "reform, don't eliminate." Taking an early lead in that effort is Assemblymember Pérez, who last week introduced a package of Enterprise Zone reform bills: AB 231, AB 232, and AB1X 11. These bills would, respectively, promote greater oversight and reporting, tighten the defintion of Targeted Employment Areas, and promoted improved linkages with workforce and community development agencies. 

Johnson of the California Association of Enterprise Zones said that his organization fully supports reform to make the program more accountable and effective. He said that proposals such as salary caps or more fine-grained designation of eligible workers might be entertained.  

"One thing that the California Association of Enterprise Zones has acknowledged all along is that there's no such thing as a perfect program," said Johnson. 

Contacts & Resources

California Department of Housing and Economic Development Enterprise Zone Program 

Map of Statewide Enterprise Zones [pdf]

Craig Johnson, President, California Association of Enterprise Zones

Jed Kolko, Associate Director and Research Fellow, Public Policy Institute of California, (415) 291-4400

Manuel Pérez, Assemblymember, 80th District (Indio), (916) 319-2080 

Jean Ross, Executive Director, California Budget Project, (916) 444-0500

Cameron Smyth, Assemblymember, 38th District (Santa Clarita), (661) 286-1565