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CalChamber-Backed Enterprise Zones Continue Strong

(November 13, 2006) A California Chamber - supported program to help stimulate business activity in economically depressed areas of the state entered a new phase this month as Governor Arnold Schwarzenegger conditionally designated 23 enterprise zones statewide.

The pending new enterprise zones touch almost every major region of California and will replace 23 out of a total of 42 zones set out in statute that are expiring within the year. Each zone designation is in effect for 15 years.

The enterprise zone program was established by CalChamber - supported legislation signed in 1984 and offers a variety of tax credits and incentives to encourage business activity in economically distressed areas of the state. California's enterprise zone program is designed not only to breathe economic life into depressed areas, but also to help California compete for jobs with other states and other countries. The program is one of the only remaining statewide tax incentives that local areas can use to encourage businesses to stay, locate or expand within California.

Businesses within enterprise zones are eligible for tax credits and benefits, including:

  • Up to $31,234 or more in state tax credits for each qualified employee hired.
  • Sales tax credits on purchases of $20 million per year of qualified machinery and machinery parts.
  • Up-front expensing of certain depreciable property.
  • Lenders to enterprise zone businesses may receive a net interest deduction.
  • Unused tax credits can be applied to future tax years, stretching out the benefit of the initial investment.
  • Enterprise zone companies can earn preference points on state contracts.
  • Up to 100 percent net operating loss (NOL) carry-forward. NOL may be carried forward 15 years.

Supporting Job Creation

With more than half the State’s existing enterprise zones set to expire within the year, these coveted spots became available for new zone designations. Many of the zones with looming expirations thought they had made substantial progress but needed more time to bring revitalization to full fruition in their areas. Expiring zones that wish to continue must apply and undergo a competitive selection process for a new designation along with depressed areas seeking zone designation for the first time. The state Department of Housing and Community Development (HCD) is responsible for making designations, a process which first involves a conditional designation from HCD and then a final designation. The steps between a conditional designation and a final designation can take many months to complete, involving such lengthy processes as an environmental impact report.

Earlier this year, the CalChamber and other job-growth advocates realized the typical process timeframe would result in a significant problem for businesses in reapplying zones that were about to expire. Even if a reapplying zone received a conditional designation before it expired, a final designation could take many months longer. This meant some zones would expire — terminate — before final designation could take place. There was no provision in the law to ensure that zone operations and program benefits to businesses would not unravel during this pending designation gap.

The CalChamber led a business coalition to promote bipartisan enactment of AB 1550 (Arambula; D-Fresno), signed by Governor Schwarzenegger this year, which solved this problem by ensuring these zones could continue to fully operate and provide program benefits to businesses during this gap period. The measure also included provisions to improve state monitoring and oversight of the program. The business community applauded the leadership of Assembly members Juan Arambula (D-Fresno)and Betty Karnette (D-Long Beach), Senator Alan Lowenthal (D-Long Beach), and Governor Schwarzenegger in taking steps to strengthen and improve the enterprise zone program with the measure.

Another challenge facing the enterprise zone program earlier this year was legislation aimed at reducing the program. The CalChamber led a coalition of employer groups that opposed these program cuts. The coalition spearheaded the defeat of two bills, SB 1008 (Ducheny; D-San Diego and Machado; D-Linden) and AB 1766 (Dymally; D-Compton). These nearly identical “job killer” bills sought to reduce the program by making it more difficult for businesses to qualify for the credit and placing unreasonable restrictions on banks who lend to these businesses. Neither proposal ever made it out of the Legislature, thanks to strong opposition from the business community.

Next Steps

The next step in the process of final designations of enterprise zones will be for zones that received a conditional designation by HCD to comply with the conditional designation letter issued to them. The letter outlines conditions the zones must meet to be granted final designation. For example, the zones must prepare an environmental impact report and sign a memorandum of understanding with HCD that includes performance measures and benchmarks.

The conditional designations include six in Los Angeles County, three in Fresno/Merced counties, two in Kern County, three in the Inland Empire/Imperial Valley, three in the San Francisco Bay Area, three in Northern California, two in the Sacramento and Yuba/Sutter counties and one in San Diego County.

For more information, please contact Jarrett Stewart at jstewart@kuhler.com.
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