PD Editorial: State pays a big price, gets little in return
Published: Wednesday, February 20, 2013 at 7:00 p.m.
Last Modified: Wednesday, February 20, 2013 at 3:39 p.m.
Here’s one way to assess whether a government program offers lucrative benefits: It has its own trade association.
Consider the California Association of Enterprise Zones. Its raison d’etre? Defending enterprise zones.
Why do enterprise zones need defending? After almost three decades, there’s scant evidence that they work.
Yet the tax breaks they confer remain firmly entrenched, costing the state hundreds of millions of dollars a year that could be used for highways, education or other services.
If you haven’t heard of enterprise zones, here’s a little background: They were created by the state Legislature in 1986 as a tool to promote economic development in blighted areas. They’re a state-level cousin of redevelopment, the oft-abused local economic development tool that legislators eliminated at Gov. Jerry Brown’s behest in 2011.
Brown wanted to eliminate enterprise zones, too. But he met stiff resistance, and by all appearances he is retreating. The governor’s latest proposal would tighten the rules for the program and its largesse instead of tightening a noose for it.
In theory, enterprise zones were supposed to promote business and create job opportunities in economically disadvantaged areas. Employers can collect tax credits of up to $37,440 for each person they hire to work in an enterprise zone.
Ten zones were designated when the law was passed in 1986; now there are 42. The tax credit costs the state $600 million a year, according to the nonpartisan legislative analyst.
Advocates say that reflects hundreds of thousands of new jobs. But independent research shows little or no correlation between the tax breaks and economic development in the state’s enterprise zones.
For example, a 2009 report published by the Public Policy Institute of California concluded that “on average, enterprise zones have no effect on business creation or job growth.” The legislative analyst and the California Budget Project echo that finding. Only a study financed in part by the association found otherwise.
One reason is that the tax credits are for new hires, not new jobs. That’s an incentive for high turnover, not for expanding a business. The fact that tax credits often go unclaimed for years undermines arguments that they were the catalyst for hiring. Employers often learn about these credits from their accountants or lobbyists, further undercutting claims that enterprise zones create jobs.
Moreover, and this echoes a major flaw of redevelopment, it isn’t always easy to spot the blight in enterprise zones. Does anyone truly believe that it requires special tax incentives to attract businesses to San Francisco’s flourishing waterfront and South of Market districts?
Brown made passing reference to enterprise zones and the tax credit in his State of the State address last month. “They aren’t working,” he said.
He’s right, and the solution is obvious: The state should abolish this wasteful program.
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