Thank you to guest blogger Dr. Darrene Hackler, who explains California’s decision to overhaul its Enterprise Zone program and why it matters to economic developers across the country.

Last week’s 2013-14 budget deal in California continued the state’s review of local economic development efforts by restructuring the widely-used Enterprise Zone (EZ) program on the grounds that it has failed to produce the intended outcome of creating jobs in distressed areas.

This move comes on the heels of the state elimination of local Redevelopment Agencies in 2011 because their use of tax increment financing (TIF) was determined to be questionable and overly broad, benefits went to many locations beyond those in need, and funds were redirected from schools and other local government activities.  California, led by Governor Brown, is clearly rethinking the tools that are used for local economic development and, in particular, how much the state is willing to be on the hook for the bill in terms of tax credits and transfer of resources. 

Evidence and data on EZs

In general, research has found that the state’s EZ program fails to generate job growth or promote business development.

For example, the 2009 Kolko & Neuark report for the Public Policy Institute of California surveyed the research and found that EZs have no effect on business creation or job growth, and although the direct impact of EZs on unemployment and poverty are not able to be assessed, they argued that without an effect on business creation or job growth, EZs are unlikely to reduce either unemployment or poverty.

The California Budget Project (CBP), an independent think tank, found in a 2006 report and 2013 update that the state’s current EZs: 

  • fail to effectively target areas most in need of assistance, with distressed areas (high poverty and unemployment) accounting for a relatively small share of the program’s application and costs
  • do not hire individuals living on income support programs
  • provide hiring tax credits to non-EZ businesses since the credit can be given based on a hire’s home address in the EZ whether or not they are employed in the EZ
  • provide hiring tax credits for employment “churn,” or for hires that represent refilling positions that change due to normal employment turnover, instead of new jobs

Yet another critique came from the California Legislative Analyst Office, which pronounced EZs as largely ineffective in creating new jobs and highlighted structural problems.  Foremost was the use of retroactive hiring credits that may have resulted in giving credits for hires no longer employed at the EZ business.  The California Association of Enterprise Zones estimates that 20-30% of hiring voucher applications are submitted at least two years after the date of the hire.  

But, the heart of the EZ critique in California is the fact that it is not a fiscally sound economic development program.  California’s annual revenue loss from the program grew nineteen-fold between 1993 and 2003, from $15.6 million to $299.3 million.  More recent data from the California Franchise Tax Board indicate that the current EZ program has cost the state a total of $4.8 billion in lost revenue since its inception and primarily benefited less than half of one percent of the state’s corporations.  

The reports described above represent valuable, high-quality analyses of the EZ program, but, unfortunately, the political debate has also been framed by lurid reporting on one side and overly optimistic, ribbon-cutting photo ops on the other.  

There are two takeaways here.  First, economic developers need quality analyses and legitimate data to guide their efforts, even if the public relations battle gives these analyses short shrift.  Second, economic development groups also need to be prepared to respond and then adapt when evidence suggests their programs are not working.  We turn to this theme next week to review how California is revamping its programs.

 

Next, Part 2: The effort to restructure the EZ program

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