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.

Part 1 summarized research findings that the state’s EZ program has failed to generate job growth or promote business development.  Part 2 describes California’s attempts at reform.

The new legislation strives to reduce inefficiencies in the state’s economic development programs while preserving incentives.  

  • The legislation addresses some of the most blatant “worst practices,” like retroactive credits and lack of zones in the most distressed areas, and refocusing on creation of actual “new hires” (via a hiring tax credit, or HTC).
  • To apply for the HTC, EZ employers must pay a living wage, which is a sour pill to swallow for much of the Central Valley where unemployment is high but wages are relatively low and revolve around agriculture processing. 
  • The new legislation calls for stronger reporting and performance metrics so that we can better answer the question about the effectiveness of EZs by 2021, when the restructured credits expire.

Savings from the old EZ tax credits will be used in two other ways.  First, a manufacturing equipment sales and use tax exemption will be administered by the Governor’s Office of Business and Economic Development (GO-BIZ), with the purpose of negotiating business tax credits in exchange for investments and employment expansion in California.  The budget will be subject to the total value of the hiring tax credits and the sales and use tax exemption claimed each year. The supposed distribution of these funds will focus on the strategic importance of the business taxpayer’s project or business to the state, region, or locality, as well as the opportunity for future growth and expansion in the state.  Second, the savings will go to a statewide incentive fund to attract business, also controlled by GO-BIZ.

So, what does this mean to the broader economic development field?

Figuring out how to help high-distress areas remains an important part of economic development, and we are still searching for answers to turn around these left-behind places.

Also, the new program’s intent infers that we must do more to standardize and measure efforts.  We here at Smart Incentives believe there is a vast need to do just that.  We need better methods of measuring inputs and outcomes, as well as precise time horizons for which different metrics can be appropriately captured.  Too often we fail to use a long-term lens, but 1-2 year time horizons are not long enough to see the economic impact.

Obtaining a successful outcome in California may depend on the ability to monitor and measure program activities and results well before the program is up for renewal – in 2021.