Reporting

April 13, 2014 by Colin Parent

California Competes boosts transparency in state incentive programs

San Francisco skyline
(Photo Credit: Frano Folini/Flickr)

Recently, the Jerry Brown administration rolled out its California Competes incentive program, one of three new tools to attract and grow businesses in California. The deadline for businesses to apply for the program is Monday, April 14.

Not only will these tools help business grown in California, but they replace a flawed and often abused program called the State Enterprise Zone.

Why did Jerry Brown get rid of the Enterprise Zone program? Well, it didn’t work. And it was expensive.

In 2009, the nonpartisan Public Policy Institute of California released an influential report comparing areas in California with Enterprise Zones, to areas with similar employment and economic circumstances without Zones. The study found that Enterprise Zones had no overall effect on job growth.

Not only did Enterprise Zones fail to create jobs, they also saddled the State of California with an ever-growing price tag. The California Budget Project showed that Enterprise Zones cost the state $721 million in 2010, and that the costs grew an average of 34 percent each year since the program began. Had Governor Brown not acted, the program was expected to surpass $1 billion in costs by 2016.

In 2013, Brown launched a double-pronged attack on the Enterprise Zone program. The first was a series of new rules, aimed at eliminating abuses in the program like retroactive vouchering. Second, was a legislative proposal to replace the program with a new set of tools to grow and attract businesses.

While serving in the Brown administration for about two years, I was the primary author of the Governor’s Enterprise Zone reform regulations. The new rules were aimed chiefly at eliminating a practice called retroactive vouchering.

The Enterprise Zone program attempted to encourage employment by issuing tax credits to companies that hired employees meeting certain criteria. However, between 20-30 percent of all vouchers applications were made more than two years after an employer’s decision to hire. Companies could receive tax breaks years after a hire had already left their employment. For these sizeable numbers of retroactive applications, the availability of Enterprise Zone credits were not related to decisions to hire.

Facing the elimination of more lucrative and wasteful tax breaks through administrative action, Enterprise Zone supporters were more willing to accept the Governor’s legislative offer (AB 93 and SB 90) to replace the program with economic incentives of equal size, and better calculated to simulate economic growth.

The Governor’s new programs include a state-wide tax exemption for the purchase of manufacturing equipment. Companies don’t have to be located in Enterprise Zones to make use of the benefit.

A retooled hiring credit will persist, but without the abusive ability to file applications retroactively. Credits are now available for hiring into good-paying jobs, and in expanded areas to include those with the highest unemployment and rates of poverty.

Perhaps the most game-changing component of the Governor’s economic development plan is the California Competes fund.

Similar to the Texas Enterprise Fund, California Competes can provide incentive dollars to companies who are considering locating or expanding within the state.

At a recent forum in San Diego hosted by the Governor’s Office of Business Development, administration officials outlined proposed (now final) regulations for the program. Some in attendance expressed concern that the application process would be too burdensome, and require firms to provide too much information about how they would use their public incentives.

Granted, interacting with government programs is often difficult, and the Brown administration has an obligation to ensure the application process is as efficient as possible. However, the idea that applications for public dollars should not be subject to some public scrutiny seems contrary to the goals of effective economic development. 

Transparency for California Competes is not intended to be a burden to companies, but rather, to ensure that the applications with the most promise to bring jobs and economic development receive limited incentive awards.

The Texas Enterprise fund lacks similar transparency controls, which generated significant controversy over its use, and which may jeopardize its future.

California’s Enterprise Zones were themselves criticized for failing to disclose which companies benefitted from the program. And when news investigations discovered that strip clubs were able to claim Enterprise Zone credits, the media circus only added ammunition to Governor Brown’s call to eliminate the program. 

For California’s economic development incentives to succeed, we need confidence in their administration. The business community, and the public, need to know that incentive awards are based on potential for economic growth for California, not political relationships.

Governor Brown is holding his own administration accountable by building transparency in California Competes.  Hopefully this ensures both the success and the duration of California’s business incentives. 


Colin Parent is Former Director of External Affairs, CA Dept. of Housing and Community Development.

Categories: Regulations, Small Business

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