In July Merced County expanded what many call the county’s best economic development tool — its enterprise zone — to almost every inch of the county. The nearly two-decades-old enterprise zone (EZ), or group of zones, gives businesses which locate here and hire local employees tax credits as an incentive.
The program, many argue, is one of the county’s few tools to woo new business to Merced County and foster economic growth. The conventional argument is that giving businesses tax breaks and incentives is one of the only ways to attract companies to economically depressed counties like Merced.
But in recent years, several nonpartisan and politically tinged groups alike have questioned just how useful EZs have been -- or can be.
Luring new business is one of Merced County’s only hopes when it comes to pulling itself out of the economic doldrums it has languished in for decades.
But several statewide studies and a growing number of doubters have questioned the ability of enterprise zones to do what they were designed to do: create new jobs.
Local administrators of the zone disagree, arguing they create new jobs and even keep jobs from leaving the county. While EZs may have indeed kept jobs in Merced, the numbers over the last decade don’t seem to back up the idea that they’ve come through with the promise of new job creation in exchange for tax dollars.
In the last three years, according to Merced County’s Department of Workforce Investment (DWI), which oversees the voucher program, only 87 of the more than 300 companies in the county’s zone indicated they hired new employees because of the voucher system. Local officials say the main benefit of EZs has been job retention — but they have no hard numbers to show that those jobs wouldn’t be here anyway.
The state's 42 enterprise zones were created in 1986 to foster economic growth in distressed areas.
One of the main incentives of enterprise zones is the hiring credit program, which is partly overseen by the Department of Housing and Community Development.
The program works like this: the state gives businesses in enterprise zones a five-year tax credit for every newly hired and eligible employee. That credit can offset taxes in the future. The state gives tax credit vouchers valued at 50 percent of each new employee's pay -- up to $12 an hour. Every year the incentive value is reduced by 10 percent. The voucher system is just one of several incentives for businesses in enterprise zones, including tax incentives that offset losses and the cost of equipment, among other attractions.
The value in lost tax revenue of the employee vouchers is large. A recent study by the Public Policy Institute of California (PPIC) noted that statewide in 2005 the value of the voucher tax incentives equaled $330 million in California. That's up from about $100 million in 2001. In the last five years statewide, 366,443 vouchers were handed out.
Merced County's first enterprise zone was created in 1992, said Dave Heyer, the DWI's administrator of the county's zone. The first zone expired in 2006 and was renewed by the state that same year. In July 2010 the zones, which had included parts of Merced, Atwater and Livingston, were expanded and united to encompass almost the whole county.
Since 2006, said Heyer, businesses in the county's zones have applied for hiring credits worth more than $100 million. But that number isn't a fair estimate of the immediate cost to taxpayers, he said, since many businesses don't use them in the same year they apply for them. For instance, according to the Franchise Tax Board, more than $4 million in vouchers and incentives were actually used in Merced County in 2008.
Numbers aside, Heyer said the zones are one of the few tools the county has to entice new businesses and to keep jobs here. Since 2006 companies in the enterprise zone have applied for and been given roughly 5,400 vouchers, said Heyer. Those credits, he said, have helped keep jobs in the county. He said 87 companies told him the program directly accounted for hiring more than 900 new employees over the last three years.
Doubters say the program siphons needed funds from the state budget and hasn't yet proven that it creates new jobs.
The California Tax Reform Association, a liberal-leaning group, advocates canceling new enterprise zones and killing the program altogether. "A definitive economic study has demonstrated this program to be useless in creating jobs. Other reports have shown major fraud and abuse of an outdated statute which can be manipulated by taxpayers," noted the association. "Repealing the entire program would raise $400 million."
A recent study by the nonpartisan PPIC revealed similar results. "Our main finding is that enterprise zones have no statistically significant effect on either employment levels or employment growth rates," the study stated.
The California Legislative Analysts Office (LAO) -- the nonpartisan body that analyzes fiscal and policy issues for the Legislature, came to a similar conclusion in 2003. "EZ incentives have little if any impact on the creation of new economic activity or employment," the LAO study noted. The study also pointed out that most of the tax incentives go to big business, which often have large tax burdens. "The data suggest that, in the aggregate, most of the benefits of the credit accrue to large business concerns."
Jay Preg, a pro-market professor of economics and finance at Claremont Graduate University, said there have been a number of studies on the subject -- and they fall all over the map.
While Preg isn't convinced enterprise zones are cure-alls, he did say there's evidence they can aid an area economically. The problem with enterprise zones is that it's tough to tell if, as the saying goes, they are a cure or whether the patient healed himself. "Once you take the medicine, you can't tell."
In any event, added Preg, now isn't a good time to experiment with dismantling any system that creates jobs, no matter how debated it is.
Reporter Jonah Owen Lamb can be reached at (209) 385-2484 or firstname.lastname@example.org.