California Governor Jerry Brown is proposing significant changes in his revised budget proposal for the 2013-2014 fiscal year to the California Enterprise Zone (EZ) Program.1 These changes may severely impact the amount of hiring credit taxpayers currently participating in the EZ program may generate in the future, as well as for those considering expanded operations within the EZ in the near future.

Current Status of EZ Program

The EZ Program allows taxpayers located within a designated EZ to claim a sales tax deduction on "qualified equipment" used exclusively in the EZ and a hiring credit for the hiring of "qualified employees" who meet any one of several requirements, including veteran status, ex-offender status, or residents of Targeted Employment Areas (TEAs).2 Taxpayers that hire qualified employees may generate a credit of up to $37,440, over a period of five years, per an employee.3 Taxpayers may carry forward any unused credit.

Revised Budget Proposal

The Governor's revised budget proposal recommends a "modernization" of the state's job creation and economic development incentives, designed to encourage the creation of new jobs rather than rewarding intrastate job movement from EZ to EZ, and bolstering the effectiveness of the New Jobs Hiring Credit. While the changes are designed to be revenue-neutral, it is clear that many businesses with existing operations within EZs could be adversely affected.

Some of the modifications include the elimination of EZs and a reduction in categories for which an employee may qualify for the hiring credit. The funds saved from these changes will be deployed into a new sales tax exemption, hiring credit, and investment incentive regime. The existing sales tax credit for businesses located in EZs will be expanded to a statewide sales tax exemption on manufacturing or biotech research and development equipment purchases. In addition, some of the funding will be used to create the California Competes Credit, which will give businesses the opportunity to compete for available tax credits based on specified criteria including the number of jobs created or retained, and capital investment in the state.

The hiring credit, which will experience the most significant changes, will no longer apply to businesses located in an existing EZ but instead to businesses operating in census tracts with the 25 percent highest share of both unemployment and poverty in the state. The hiring credit will now be limited to the hiring of only select individuals: long-term unemployed, unemployed veterans, and individuals receiving the federal earned income tax credit. In addition, the hiring credit will be restricted to taxpayers that can show an annual net increase in jobs.

Commentary

Though the changes to the EZ Program have not been finalized, the revised budget gives some indication that the EZs and qualified employee categories may change soon, potentially decreasing the amount of hiring credit that can be generated in the future, and essentially changing the way in which businesses will need to consider where to invest their resources in the state. Businesses should consider the impact the revised budget may have, specifically those who qualify for the EZ Program, but have not generated credit with an EZ study. Even if businesses are not able to utilize credits this year, a study could capture all available EZ Program credit so that the credit can be carried forward as opposed to lost. Although changes to the EZ Program are uncertain, it is advisable for businesses to plan ahead and take advantage of the credit generation opportunities the current EZ Program offers. Further, businesses currently considering new investment in an economically challenged part of the state should be aware that significant changes may be on the horizon, potentially impacting where the new investments should be located.

Footnotes

1 Governor's Budget May Revision – 2013 – 2014, Job Creation and Economic Development Proposal, 68 (May 14, 2013) available at http://www.ebudget.ca.gov/2013-14/Revised/BudgetSummary/BSS/BSS.html.

2 CAL. REV. AND TAX. CODE § 23622.7(b)(4)(A).

3 CAL. REV. AND TAX. CODE § 23622.7. See also Enterprise Zone Program, Department of Housing and Community Development at http://www.hcd.ca.gov/fa/ez/ezoverview.html.

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