Thanks to a special state tax credit, Alba and Francisco Pineda developed a thriving furniture manufacturing business in economically distressed South Los Angeles instead of getting swamped by low-cost furniture from Asia.

For the last four years, the Pinedas have received tax credits worth tens of thousands of dollars for hiring more than two dozen local workers and investing in equipment at a recently expanded facility near their original plant.

"It's too expensive to hire new workers here without the tax credits. They have helped us stay afloat as imports from China have impacted the rest of the industry," said Alba Pineda, co-owner of Cisco Bros. Furniture.

But now, those enterprise zone tax credits the state's primary economic development tool are under attack in Sacramento as a drive to reform the 20-year-old program gathers steam.

That drive could jeopardize the renewal of 18 enterprise zones throughout the state that expire later this year, including the one where Cisco Bros. is located. It also could kill an attempt by Long Beach city officials to offer tax incentives to keep Boeing Co.'s aerospace operations and 6,500 jobs in that city.

"You look at what has happened to manufacturing in Los Angeles County and then realize that the enterprise zone is the only state program we've got here to support manufacturing and the good middle-class jobs that it brings," said Robert Swayze, manager of economic development for the City of Long Beach.

The program gives companies within defined and economically depressed areas tax credits for investing in plant and equipment and hiring disadvantaged workers who live in the zones. The zones are administered by the local governments. Los Angeles County has eight of the state's 42 enterprise zones, including five run entirely or in part by the City of Los Angeles, one in Long Beach, one in Altadena/Pasadena and one for the cities of Lancaster and Palmdale.

But while the program is popular with businesses and local economic development officials, critics say it has spun out of control as tax breaks often go to companies that don't really need them. They say many of the zones no longer target areas of severe economic depression and cite cases in which companies shop around for tax credits or hire people who don't face substantial barriers to getting a job.

Indeed, the incentives are strong. Companies located in the zone can receive a one-time, $31,500 tax credit stretched over five years for each employee they hire who lives within the zone.

Over the last several months, a state Assembly committee has held exhaustive hearings on reforming the enterprise zone system. Last month, the committee issued a report calling for "better targeting of distressed areas and serving the needs of disadvantaged persons."

Among the recommendations to emerge: requiring future enterprise zone designations to be restricted to impoverished communities that already have their own economic development programs in place; restricting employment tax credit vouchers to people who come from low-income households and eliminating the use of vouchers for employees who have already been hired.

The recommendations also call for better monitoring of the program to ensure that companies are not gaming the system.

"The existing program does not have appropriate management and monitoring requirements for oversight. It also doesn't measure whether the state's objectives are being met, and there's also no reasonable way to quantify whether the state is getting a reasonable return on its investment," said Toni Symonds, chief policy consultant to the Assembly Jobs and Economic Development Committee.

Symonds said many of these proposals will likely be incorporated into legislation in the next few weeks. It's not yet been determined who will carry the legislation.

"Out of control"
Last week the California Budget Project, a liberal think tank, also weighed in on the topic, issuing a report sharply critical of the enterprise zone program, saying it lacks controls and costs taxpayers more than $300 million a year.

"This program has grown too large and unfocused, and isn't reaching the communities, businesses and workers it was created to target," said Jean Ross, executive director of the California Budget Project. "The state is losing a substantial amount of revenue which could instead be going to improve our schools, fix our roads and levees, or help with other state needs."

The report recommends cutting the number of zones in half and reducing the size of others, especially those in heavily urbanized regions that include areas that are economically thriving. It also advocates restricting the employee tax credits to enterprise zone residents who are so physically or socially disadvantaged that they cannot otherwise find a job.

This met with a sharp response from Long Beach economic development manager Swayze.

"The CBP and other critics have this interpretation that enterprise zones should only be for those who have extreme difficulty in getting jobs. But this is really an economic incentive program and just about the only state one left to us," Swayze said.

If the Long Beach zone is not renewed when it expires next January, Swayze said the city would be forced to scuttle its proposal to have Boeing use enterprise zone tax credits to reduce production costs on the C-17 cargo plane that the Pentagon and Congress are considering scrapping.

Economic development officials also take issue with the Budget Project's focus on more rural areas.

"Our five enterprise zones are in our most challenged census tracts," said Michael Yuzon, director of the economic development division for the City of Los Angeles. "People coming out of those zones are the most challenged in finding jobs and employment. We've put checks and balances in place to make sure that situations don't arise in which the program is abused."

Meanwhile, the Schwarzenegger administration is already moving ahead with its own, more modest reforms. Officials have proposed regulatory changes that would, among other things, eliminate the ability of employers to apply the tax credits retroactively to workers already hired.

"There are areas of the program where the lack of clarity in the regulations has led to unforeseen consequences. Those are the areas where we are tightening," said Janet Huston, director for communications and government affairs with the state Department of Housing and Community Development.

Huston said the regulatory changes could be completed by this summer.

Some of the proposed legislative and regulatory changes are welcomed by business and economic development officials, especially measures to streamline the cumbersome application process. Among the supporters is the Los Angeles Area Chamber of Commerce.

But they also want to make the zones more economically attractive and have countered with their own legislation. SB 1008 by Sen. Denise Ducheny, D-Chula Vista, would extend the life of existing enterprise zones from the current 15 years to 25 years and allow them to include non-contiguous areas.

At a minimum, economic development officials would like a one- or two-year extension of all existing zones to allow for the implementation of the regulatory changes. They also want some time for legislators to craft reasonable measures to crack down on some of the abuses of the enterprise zone system without making wholesale changes.

Perhaps the biggest example of abuse was uncovered during an audit of the Oakland enterprise zone system. That audit found that between 2001 and 2003, 61 percent of the employee tax credits issued went to companies located outside the zone. One particularly egregious example involved a company located in the Antelope Valley enterprise zone. After officials in that zone turned down their application for employee tax credits, the company applied in Oakland and received the credits, even though it had no operations there.

The Budget Project cited a voucher application fee paid by companies seeking the tax breaks as an unhealthy incentive for zones to increase the number of vouchers granted leading to the problems found in Oakland.

Ross said that an entire cottage industry of consultants has sprung up specifically to help companies shop around for tax credits and then get a percentage of the credits as their fee. "This has fueled a tremendous amount of abuse of the system," Ross said.

Benefits cited
Local economic development consultant Larry Kosmont, who has advised some companies on obtaining enterprise zone tax credits, agreed that there has been some abuse.

"The emphasis in many of the local zone managers has been on just the numbers of jobs involved. As a result, there have been companies that have gotten very good at qualifying people who were not intended to be eligible. That to me has created a windfall for companies that have taken advantage of an interpretive loophole in the existing law," Kosmont said.

But Kosmont stopped short of advocating a reduction of enterprise zones, especially those in urban areas.

"You have places like South Gate, Huntington Park and Compton. These are communities with limited land resources and sites with lots of toxic contamination. They have also suffered a tremendous loss of manufacturing jobs. Enterprise zones in these areas are ideal places to induce investment that would go elsewhere," he said.

That view is reinforced at Rogers Poultry Co., a poultry processor in South L.A. For most of the last 10 years, the company has used enterprise zone tax credits to hire about 40 people. Chief Financial Officer Ken Hayashi said that in the 2004-05 year, the tax credits completely offset the cost of hiring new people.

"I definitely don't think we're gaming the system," Hayashi said. "We deserve the tax credits because we are hiring people locally. And we're not hiring college-educated engineers that could find work anywhere. They're exactly the type of people that this program was intended to help."

The company is now looking to relocate into a larger facility and is planning on staying in the region. "Knowing that we could stay here and continue to hire and not pay any state tax for a while definitely factored into our decision," Hayashi said.

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