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The End of EZ Money in California?

Posted: 06/15/11 12:03 PM ET

On May 16, 2011 California Governor Jerry Brown released a revised state budget to address what he called the state's "Wall of Debt."

One of the Governor's more controversial proposals was to reform California's Enterprise Zones (EZs) program, which was created in 1986 to stimulate economic activity and create jobs for the economically disadvantaged. Budget wonks call such credits "tax expenditures," because the state has to forgo revenue to pay for them. The California Franchise Tax Board has estimated the EZ program cost California $333 million in lost tax revenues in 2005. $197 million of that total was from hiring and sales or use tax credits claimed on corporate tax returns.

The Governor's latest budget criticizes the EZs for "significant failings." Brown says the EZ program encourages the hiring of employees -- but "it does not encourage the creation of new jobs." The Governor also slams the program for rewarding employers "even when it is demonstrable that the existence of the (hiring) credit had nothing to do with the fact that they hired a new employee."

Governor Brown initially proposed last winter a wholesale repeal of the EZ program, but his kinder May proposal made tax credits available only to firms that actually increased their level of employment, and eliminated the practice of retroactive granting of hiring credits for workers who were hired years ago.

The Governor's decision to cut a break for the EZs was credited to a political calculus designed to entice a handful of Republican lawmakers to support an extension of the state's vehicle license fees and sales taxes. But the Republicans would have nothing of it. "The governor certainly wants to find Republican votes, but he's going to have to do more than what's come out of the May revisions," said Assemblyman Cameron Smyth (R-Santa Clarita). "Enterprise zones should be left alone." Santa Clarita is home to one of the state's 42 Enterprise Zones. In Kings County, California, an economic development specialist gave this blunt response to Brown's reform plan: "If you eliminate the goose that lays the golden egg, you've killed the economy."

But are Enterprise Zones killing the goose? The Enterprise Zone's performance has drawn its share of critics beyond Governor Brown. A 2009 report from the Public Policy Institute of California suggests that "after more than 20 years, the program's effects are still unclear... Our main finding is that, on average, enterprise zones have no effect on business creation or job growth." The PPIC report infuriated EZ supporters when it concluded, "For a cash-strapped state, it is too costly a program to simply continue with 'business as usual' without clearer evidence of the program's benefits or a well-defined plan to make the program more effective."

One of the companies that has become a familiar face inside California Enterprise Zones is Wal-Mart. The world's largest retailer has 1.4 million U.S. employees -- including 70,115 in California. At least three huge distribution centers have been approved by local officials inside Enterprise Zones, but two of them -- Barstow and Merced -- have been held up for years by opposition from local citizens' groups.

A Sprawl-Busters phone survey this week with 14 EZ managers in California turned up at least 19 Wal-Marts built inside the Enterprise Zones in places like Antelope Valley, Imperial Valley, Kings County, Long Beach, Oakland, Richmond, Salinas Valley, Santa Clarita, Shasta, West Sacramento and Yuba. The voucher manager in the city of Palmdale told me that there are 5 Wal-Mart's inside the Antelope Valley Enterprise Zone alone.

The exact value of the "hiring tax credits" Wal-Mart has received from California is "highly confidential" one EZ manager told me. A spokesman for the California Department of Housing and Community Development, which oversees the EZ program, was unable to disclose the total number of Wal-Marts in Enterprise Zones, saying "We don't collect business specific information." Under the California Administrative Code vouchers granted in EZ zones are confidential, but the figures are accessible to the zone staff, the zone governing body, the California Franchise Tax Board, and the state Department of Housing. But here's an example: An eligible Wal-Mart worker making $12 an hour for 35 hours a week translates into a "hiring credit" worth roughly $11,000 -- half his salary -- in the first year. That's $1.1 million per 100 qualified workers. The credit continues for 5 years at stepped-down levels -- but the total tax break for Wal-Marts in California EZs could be in the millions.

For two decades, Wal-Mart has been sucking down public revenues through such tax breaks, adding to the Golden State's Wall of Debt, and claiming lucrative hiring credits that are of dubious economic value. In 2011, Wal-Mart had net sales of $419 billion, and certainly did not need to rely on public welfare for any of its locations in California. According to one media source in 2009 Enterprise Zones received "nearly $500 million in tax breaks, benefiting companies like Wal-Mart, which locate their distribution centers in economically distressed areas."

Jerry Brown's threat to take away these corporate subsidies provoked the bureaucracy that depends on this welfare to create a new lobbying entity called Californians for Jobs and Safe Communities (CJSC), which was founded by the California Association of Enterprise Zones. This group hired former staffers from Governor Arnold Schwarzenegger's campaigns to serve as their PR consultants.

California should learn from its own painful history. In February of 2005, the Institute on Taxation and Economic Policy released a report which showed that the corporate income tax in California, as a percentage of gross state product, had fallen by 34% between 1989 and 2003. The report warned that states should "stop providing foolish state corporate tax subsidies. When you find yourself in a hole, the first thing you need to do is stop digging. States need to stop giving away corporate taxes in the name of economic development. Chasing after businesses by fighting over who can give the largest tax concessions is a zero-sum game."

In that same year, Cathedral City, California watched helplessly as its 'old' Wal-Mart closed, and a new super Wal-Mart held a ribbon-cutting in the neighboring community of Palm Springs. Cathedral City made a 10-year sales tax investment in Wal-Mart, giving the retailer an escalating sales tax rebate that reached as high as $800,000 a year. Just when Wal-Mart would have begun paying its full share of sales taxes back to the city, the corporation shuttered its store, pulled up stakes, and moved one town over, leaving Cathedral City with a big hole in its budget. "Wal-Mart loves to tell you they're a good corporate neighbor, they take care of the community; and that's just wrong, they're not," Cathedral City's former Mayor Pro-tem Greg Pettis told The Desert Sun newspaper. "They come into a community and (we) anticipate we're going to make some long-term money and in essence we reimburse them for the sales tax they generate. They haven't done anything for this community."

California can't afford Enterprise Zone welfare, and companies like Wal-Mart don't need financial help from taxpayers. Very soon, the California Assembly will have to make a choice: between Wal-Mart or a Wall of Debt.

Al Norman is the founder of Sprawl-Busters which has helped local coalitions fight big box sprawl since 1993. He is the author of The Case Against Wal-Mart.