Brown budget targets Enterprise Zone tax incentives

In his budget proposal, Gov. Jerry Brown calls for eliminating California's Enterprise Zone program, which provides tax incentives to encourage companies to move to and stay in economically distressed communities and hire hard-to-employ people such as welfare recipients, ex-offenders and people with disabilities.

Companies that locate in one of the state's 42 designated Enterprise Zones can get a state income tax credit worth up to $37,400 over five years for each qualified employee. They can also get a credit on their income tax return for sales tax paid on up to $20 million a year in qualified equipment purchases.

If a company can't use all of the credits amassed in one year because it doesn't owe enough state income tax, it can carry them forward indefinitely to offset taxes in future years. It can also amend up to four years of back tax returns to claim these credits retroactively.

There are lots of criticisms of the program, which was started in the mid-1980s. One is that some Enterprise Zones are not exactly blighted. San Francisco's has grown to include virtually all of downtown north and south of Market Street, including the tony Financial District and hip areas such as Hayes Valley.

Another is that companies can get the hiring credit for employees simply because they live in certain targeted employment areas - regardless of their salary or education. A company could hire a 25-year-old software engineer living in the Mission or Lower Pacific Heights and get the credit, says Rich Gunn, a partner with San Francisco accounting firm Burr Pilger & Mayer.

The biggest criticism is that tax incentives are supposed to change behavior, but because these can be claimed retroactively, they often reward companies for things they have already done.

The credits "are extremely valuable. There are businesses who make very, very good use of the cash funds they get from the state. But as an incentive, it doesn't work. People don't know about it when they make hiring or location decisions. They often find out about it long after the fact," Gunn says.

Claim process outsourced

The program is so complex - and under-marketed in some areas - that many companies don't know they are eligible for Enterprise Zone credits until a smart accountant brings it up or they get a cold call from a company offering to help them claim the credits retroactively in exchange for a percentage of the tax savings. These firms typically take 10 to 35 percent of the tax savings but sometimes work for an hourly fee.

Claiming the credits "is very tedious. You outsource it just like you do with workers' comp or payroll," says Joseph Abdallah, a principal with PSG Tax Credits Group of Roseville (Placer County), which helps clients claim Enterprise Zone and other federal and state tax credits.

Abdallah says many clients didn't know they qualified for Enterprise Zone credits before his firm told them. "Government and city officials have a difficult time getting it out to the business community," and when they do, "it's often not in a very convincing manner," he says. But "once we educate (clients), their hiring practices change immediately" to take advantage of the credit.

Samir Gulati, a director with Alliantgroup in Irvine, says about half of his clients were already claiming Enterprise Zone credits before his company came in to help maximize them. The other half weren't. However, in the past few years, "I have seen a big uptick in the number of companies who have heard about the incentives and are proactively moving into an Enterprise Zone," he says.

Gulati and others say that some companies are considering moves to states with no income tax, such as Nevada, but decide to stay in California because Enterprise Zone credits wipe out all or most of their state income tax.

"I think you will see more job loss if the program goes away," says Abdallah.

Studies differ