Nearly $1.5 billion has been doled out to boost poor zones. But has it?

By E.J. Schultz / Bee Capitol Bureau

Despite giving out more than $1.5 billion in tax breaks over two decades, California's enterprise zone program is failing to live up to its mission of lifting up the state's poorest regions, according to a new report.

The 22-year-old program gives tax breaks to companies that hire disadvantaged workers and invest in needy areas, including five zones in the central San Joaquin Valley. But the program has grown so big that truly distressed areas no longer gain a competitive edge, according to the report issued Monday by the California Budget Project.

"We can't really say what benefit the state and local areas have gotten from a billion-and-a-half-dollar tax break," said Jean Ross, executive director of the organization, which researches and analyzes issues affecting low- and middle-income Californians.

The study comes as state lawmakers consider making changes to the program. An Assembly committee led by Juan Arambula, D-Fresno, recently issued a report making 46 recommendations, including several that would allow companies to only claim tax credits for hiring a neighborhood's neediest residents.

Some of the suggestions might get inserted into SB 1008, sponsored by Sen. Denise Ducheny, D-San Diego, and Sen. Mike Machodo, D-Linden. The bill was scheduled to be heard today by the Assembly Committee on Jobs, Economic Development and the Economy, but the hearing was postponed to give more time for negotiations.

The California Budget Project recommends the state "substantially" reduce the number of enterprise zones to target only the neediest areas.

Originally targeting 10 regions, the program now extends tax breaks to 42 regions. Included in the San Francisco zone are such neighborhoods as South of Market and Nob Hill that are now more posh than poor. The result, Ross said, is that companies are no longer steered to the areas that need them most.

"If you can locate in San Francisco across from [AT&T] Park, why go to Calexico?" she said.

The central San Joaquin Valley zones are in Fresno, Kings County, Madera, Merced/Atwater, Lindsay and Porterville -- regions that by most measurements would be considered among the neediest in the state. Tulare County has a similar zone known as a "targeted tax area."

Valley officials are generally supportive of the enterprise zone program, citing it as a valuable tool to help lure and keep businesses. Officials said they rarely compete with other more affluent zones.

Even so, the Valley zones could benefit if the total number of zones were cut, Ross said. That, she said, is because instead of being one of 42 choices, the zones could be one of 15.

Meanwhile, she said, the state could save money by cutting back the program. The annual tax revenue lost by the state due to the zones grew from $15.6 million in 1993 to $299 million in 2003, according to the study.

The report also echoed other long-voiced criticisms, including the way the hiring tax credit is handed out. The credit allows companies to claim up to a $34,000 tax credit for each disadvantaged employee hired.

But the qualification criteria are too broad, according to the report. For instance, companies can claim credits for employees living in "targeted employment areas." The problem is that the areas haven't been updated in years, meaning some areas are no longer impoverished.

Fresno's enterprise zone covers a large part of the city's core, mostly running from Belmont Avenue south to North Avenue. But companies operating in the zone can claim tax credits for employees living on some streets in the city's wealthier north side.

Statewide, nearly two-thirds of the hiring credit vouchers approved were based on the targeted employment area qualification, according to the study. By contrast, only 2.7% of the credit vouchers were for workers who qualified as being participants in or eligible for income support programs, the study found.

Companies in larger urban areas are claiming most of the credits. San Francisco accounted for nearly $14 million of the approximately $137 million in credits used in 2003, according to the study. Use in the central San Joaquin Valley zones ranged from Fresno's $5.9 million to Lindsay's $235,510.

One problem, Valley officials say, is that small companies often can't use the tax credits because their income tax liability is too low.

A bill sponsored by Arambula seeks to make the program more useful to small businesses by allowing them to apply the credit to sales taxes. AB 2502 will be heard today by the Assembly Committee on Jobs, Economic Development and the Economy.

The reporter can be reached at eschultz@fresnobee.com or (916) 326-5541.