Key Facts About the Governor’s Proposed Budget, Part 4: Costs of Ineffective Enterprise Zones Point to Choices in the Budget

This is the latest in a CBP chart series highlighting some of the most important aspects of Governor Brown’s 2013-14 budget proposal and the context for it. This post examines the state’s Enterprise Zone Program in light of a principle that we like to apply to state budget choices: Budgets are about values and priorities.

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Facing a steep drop in tax revenues due to the Great Recession, state policymakers in recent years made deep reductions across a range of public systems and services. These cuts included ending dental care for low-income adults in Medi-Cal, reducing CalWORKs cash assistance for low-income families with children, and eliminating more than 110,000 child care and preschool slots. Policymakers also significantly scaled back the Child and Dependent Care Expenses (CDC) Credit, which provides a state tax credit of up to $1,050 per year to help working families defray the cost of child care, often one of the largest expenditures in a household budget.

Yet amid all of the painful reductions, a costly state program that is widely considered to be ineffective emerged unscathed and, in fact, doubled in size: the Enterprise Zone (EZ) Program. The EZ Program provides multiple tax breaks to corporations to promote business development and job creation in economically distressed areas. The two largest EZ tax breaks are the hiring credit and the sales and use tax credit, which cost the state $734 million in foregone tax revenues in 2011 — up by 4 percent from 2010 and twice the $366 million price tag of these credits in 2006, the year before the recession began. By contrast, the cost of the much smaller CDC credit plunged by more than 70 percent between 2010 and 2011, from $134 million to just $38.5 million, after the Legislature reduced families’ eligibility for the credit. As a result, the number of working families who received help paying for child and dependent care dropped by more than half, from 450,000 in 2010 to about 200,000 in 2011.

The EZ Program has survived – and thrived – during hard budget times despite substantial evidence that the program does not work. A rigorous study by the Public Policy Institute of California (PPIC), for example, found that “on average, enterprise zones have no effect on business creation or job growth.” This finding, according to the PPIC, “clearly calls into question whether the state should continue to grant enterprise zone tax incentives.” In fact, the Legislative Analyst’s Office (LAO) has recommended for years that the state eliminate or restructure the EZ Program. According to the LAO, most research shows that EZs and similar programs “have little if any impact on the creation of new employment.” Governor Brown two years ago proposed to eliminate all EZ tax incentives, arguing that “because the primary benefit of these zones is to shift economic activity” from one part of the state to another, “they are not of statewide interest,” particularly at a time when “all spending must be scrutinized.” This proposal, however, went nowhere in the Legislature.

The Governor’s proposed 2013-14 budget places a renewed focus on the EZ Program, but this time with a far narrower approach. He proposes regulatory reforms that would modestly reduce the cost of EZs by $50 million in 2013-14 — dollars that would flow to the state rather than boost the bottom lines of the very large corporations that claim most EZ tax breaks. The Governor also intends to pursue “further Enterprise Zone reform through legislation.” While these efforts are welcome, it remains unclear why California should continue to provide any state support for an expensive program that provides no statewide benefit — particularly at a time when so many vital public services have been hollowed out by state budget cuts. Eliminating EZs, as the Governor proposed two years ago, would boost state revenues by more than $700 million per year — funds that could be used to restore the CDC credit, increase the number of child care slots for working families, and invest in other public systems and services that prepare California for the future and help lay the groundwork for broadly shared prosperity.

— Scott Graves