Study: CA Enterprise Zones Don’t Help Small and Minority-Owned Businesses

Study: CA Enterprise Zones Don’t Help Small and Minority-Owned Businesses

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EDITOR’S NOTE: As part of his plan to close California’s $25 billion-plus budget gap, Gov. Jerry Brown has proposed eliminating the state’s enterprise zone program, which provides tax breaks to companies in more than 40 distressed areas, with the goal of creating jobs and fostering small businesses. Brown’s plan, which would save $924 milllion over two fiscal years, has been hugely controversial. But a new report from the nonpartisan California Budget Project (CBP), which has been critical of many of Brown’s other proposed cuts, agrees that enterprise zones should go.

To find out why, NAM’s Nina Martin spoke with CBP’s deputy director, Alissa Anderson.


What are the most important findings of your new report?

Our report synthesizes the most up-to-date data and research on enterprise zones. The takeaway message is that California’s enterprise zone program places a growing strain on the state budget, but has failed to achieve its goals.

How much do enterprise zones cost taxpayers?

They’ve cost the state $3.6 billion since the program began in 1984, and those costs have increased an average of about 35 percent per year. By comparison, state spending overall has risen only about 6 percent per year.

Yet despite the cost, the state isn’t getting any return on its money. One very good study by the Public Policy Institute of California (PPIC) compared job growth within enterprise zones to areas just outside enterprise zones, and they found no difference at all. What that means is that enterprise zones don’t generate jobs.

Job growth is a huge issue, given California’s 12.5 percent unemployment rate. Enterprise zones give tax credits for hiring—why aren’t these hiring credits leading to new jobs?

In theory, a tax credit for hiring should encourage businesses to create jobs. But there’s a major catch: Companies don’t have to create jobs in order to get the enterprise zone hiring credits. So let’s say 10 workers in a business quit, and the company replaces them with 10 new employees. It can receive hiring credits even though on net, no new jobs have been created. Businesses can perpetually claim hiring credits for eligible workers who refill positions that open up just due to normal turnover, without creating a single new job.

What about this scenario: A business with a home office in an enterprise zone decides to do its manufacturing in China. Then it loses some people in the home office. If the business replaces those employees, it can still claim the hiring credit, even though most of its new jobs are actually thousands of miles away?

Yes, even if the real job growth is happening in China, a company in an enterprise zone can still claim a tax credit for simply replacing staff here in the U.S.

Another problem is that businesses can claim the hiring credit retroactively for up to four years—even if those workers no longer work for their company. Let’s say they just now find out about the hiring credit. They say, oh, I hired some people four years ago. They can claim the credit even if those people have since quit.

The real clincher is that businesses themselves report that the hiring credit doesn’t tend to influence their behavior. I thought that was very telling.

What about small businesses? Don’t they benefit from enterprise zone tax credits?


The data show that very large corporations are the primary beneficiaries of enterprise zones. Over the past 25 years, 70 percent of the tax breaks have gone to corporations with $1 billion or more in total assets, even though those businesses represent less than one-half of one percent of California’s corporate taxpayers.

Wow.

Yeah, it’s a stunning finding. Meanwhile, corporations with assets of under $1 million claimed just 1.6 percent of enterprise zone tax credits. So what that means is that small businesses are not major beneficiaries of the program.

What about minority-owned businesses? Do they benefit?

While there is no data specifically on businesses run by people of color, I suspect that minority-owned businesses tend to be small businesses. So to the extent that small businesses aren’t benefiting from the enterprise zone law, it suggests that minority-run businesses probably aren’t major beneficiaries, either.

How much resistance has there been to eliminating enterprise zones?

Clearly it’s an emotional issue. There’s a lot of fear about doing anything that leads to more job losses.  About 70 people turned out to provide testimony in Sacramento [last] week. Many of these people came out to tell stories about job creation in their communities, and many of these stories are compelling.

But anecdotal evidence of job creation doesn’t constitute data. It’s easy for people to say, “Oh, that company came to my community and created 50 jobs.” What those people are not able to see is that the same businesses moved from a neighboring community where they laid off 50 people. When it comes to net job creation, the data says it’s a wash. On net, no new jobs are being creating by enterprise zones.

The bottom line is this: The data show that enterprise zones don’t create jobs, so that suggests that if you eliminate the program, you’re not going to lose jobs. The Office of the Legislative Analyst agrees with our analysis. That’s why they’re recommending that the Legislature adopt the governor’s proposal.

What impact do enterprise zones have on funds for public schools?

Education funding as mandated by Proposition 98—which sets the minimum amount that the state has to provide to schools—is based on general fund revenues. So if you eliminate enterprise zones, that will increase the general fund, which means an increase in the minimum amount the state has to provide for education. Usually about 40 to 50 percent of new revenues must go to schools.

So while it’s not a direct relationship, eliminating enterprise zones could send more money to public education—and that could ultimately benefit communities of color and low-income people.

The California Budget Project has been critical of many of Governor Brown’s other suggested budget cuts, which would have a disproportionate impact on minorities and the poor. What kinds of cuts are we looking at if the enterprise zone program isn’t eliminated?

We’re concerned about where the state is going to find another $924 million to cut. Deep cuts are already on the table. Are we looking at deeper cuts to the Cal-WORKS program? Deeper cuts to Medi-Cal? Those could end up hurting low-income people of color even more.

As the Legislative Analyst testified last week, the elimination of enterprise zones is one of the few proposals supported by a well-developed body of research. [For the Legislative Analyst's just-released list of likely cuts if voters don't approve a $12 billion temporary tax extension, go here.] That’s why we believe it needs to be part of a balanced approach to closing the state’s $25 billion budget gap.