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Guest Article
by Warren Jensen, Project Manager, Center for Economic Development, CSU, Chico
(Reprinted with permission)
Who Benefits From the Governor’s Proposed Economic Development Tax Programs?
[June 11, 2013] California Governor Brown’s May budget revision proposes to reshape the state’s economic development tax programs. According to the Governor’s Office of Business and Economic Development, these revisions are intended to “bolster California’s business environment and reintegrate people into the workforce by building upon the framework of existing targeted programs.” Whether the revisions will fulfill their intended purpose will be the subject of debate over at least the next couple of months.
 
Of particular concern to the state’s economic development practitioners are the impacts of replacing the state’s Enterprise Zone program, a proposal that is currently on the table, with the new system. The primary difference is that Enterprise Zone benefits are limited to businesses located in a designated Enterprise Zone, while the new program will not be as limited.
 
Limiting benefits to Enterprise Zones is well and good because zone applications must prove to the state in a competitive application process that they have the right combination of low-income areas in need of assistance and local government support for economic development. In other words, Enterprise Zones exist for a reason: they have an economic development need and the local support to provide that need. Despite this, the state has been investigating ways to alter their economic development incentive programs because they have not been able to specifically quantify the economic development impact of Enterprise Zones.
 
In 2009, the Public Policy Institute of California (PPIC) released the results of a study where they conclude that “Enterprise Zones have no overall effect on job growth.” While there is nothing wrong with what the PPIC did, and they remain a highly credible research organization we are pleased to recommend, the state sponsors of this study asked the PPIC to answer the wrong question. The study answered the question “how does job growth in communities with Enterprise Zones compare with state job growth?” instead of asking the fundamental question at hand, which should be “what would job growth have been without the Enterprise Zone compared with what we see now?” By failing to ask the right question, state officials think they received an evaluation of the effects of the Enterprise Zone, when in fact, they did not. Indeed, if there was no difference between job growth in the state compared to Enterprise Zone communities, which are only designated in disadvantaged areas, that may actually speak to the real effectiveness of Enterprise Zones to keep these otherwise disadvantaged communities afloat. Other than the PPIC study, no real evaluation of the economic development impact of Enterprise Zones has been performed, to date.
 
One thing we can do now is evaluate the differences between the Governor’s proposed plan and show the parts of the state that will most benefit from the program. Readers can compare these areas to current Enterprise Zone locations. This month’s map looks at a couple of scenarios for areas where businesses located in these areas will qualify for an expanded hiring tax credit. Under the new program, the areas eligible for the hiring tax credit are the highest 25 percent of Census Tracts in terms of both unemployment and poverty. That is the preliminary criteria published by the Governor’s Office of Business and Economic Development. While that sounds cut-and-dry, it isn’t, because there are some Census Tracts with no households to measure poverty or unemployment (including prison Census Tract, fill-in areas, boundary corrections, and waterbound portions of counties).
 
The question will be: which tracts will be included in that “highest 25 percent of Census Tracts?” This map provides two possible scenarios:
  1. If tracts w/o households or population are not considered in the calculation, this would expand the number of populated tracts that would rise to the top 25 percent.  
  2. If tracts w/o households or population are indeed considered in the calculation, and if these tracts (which may have business districts) are considered eligible (i.e., if 0 people in poverty out of 0 persons for whom poverty status is determined means a poverty rate of 100%)  
In the map, green areas represent Census Tracts where businesses would qualify for hiring credits under either scenario. Orange areas would qualify under the first scenario above and pink areas would qualify only under scenario two. Here is the breakdown in terms of numbers of tracts
  • Not eligible for the hiring credit: 6,950 Tracts
  • Eligible only under scenario 1, above: 42 Tracts
  • Eligible only under scenario 2, above: 58 Tracts (note: 10 of these tracts have no land area – they are entirely waterbound)
  • Eligible under both scenarios: 996 Tracts
Many of the eligible tracts are located in urban areas, where Census Tracts tend to be small and hard to see in the state view. CED included a close-up view of the northern Bay Area to highlight some of the urban Census Tracts where businesses would be eligible for the hiring credit.
 
In urban areas, Census Tracts with lower incomes tend to also be business districts. Or alternatively, business districts tend to be areas where lower-income residents live. Therefore, a larger percentage of urban businesses may be eligible for the credit, without having to relocate, than in rural areas.
 
So, which type of California county, large metro, small metro, or non-metro (rural) benefits the most from the change? It turns out to be small metros (metro areas with less than 1 million people). In small metros, more than 25 percent of all employees, by CED’s calculating using InfoUSA business data, are at businesses that quality for the hiring credit. In large metros, which tend to have more high-end residential in downtown areas, only about 9 percent of employees work at businesses eligible for the credit. In non-metro rural counties, it’s about 13 percent of employees. Still, if you have an Enterprise Zone and just about all of your businesses qualify for the current hiring credit, that’s a big decrease. However, areas without Enterprise Zones may benefit a little, depending upon location.
 
CED will continue to analyze the impact of the new state incentive program as details are hashed out and released, so please stay tuned. If you have any questions about the impact in your area, please don’t hesitate to contact us.

The Center for Economic Development at CSU, Chico helps communities and businesses in planning, community development, employment generation, natural resource management, workforce development, alternative energy advancement. They can be found at www.cedcal.com or 530.898.4598.

 
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