For Masoud Rad, the state’s enterprise zone program has been a lifesaver, providing tax credits to boost his downtown L.A. sign and banner business over the last few rough years.
But now Rad is concerned that proposed changes to the enterprise zone program could yank away hiring tax credits he was counting on as he tries to grow his business, CR&A Custom Inc.
The changes, aimed at curbing abuse of the program and saving the state more than $300 million during the next five years, would restrict eligibility for the tax credits and when they could be claimed.
“The point of the tax credit is for businesses to reduce their tax burden so they can reinvest the money in hiring employees and equipment,” Rad said. “But these changes would make it harder, not easier, for businesses.”
Rad is one of many local business owners alarmed at recently proposed changes to the state’s enterprise zone program. The program allows employers to claim tax credits of up to $37,000 for each employee hired from within targeted low-income zones. There are 40 enterprise zones statewide, eight in Los Angeles County.
As part of his budget package in January, Gov. Jerry Brown proposed reducing the amount of time employers can claim the tax credit.
Employers would have only one year from when a worker is hired to claim the tax credit; currently employers have up to four. So if a company were to hire a worker this month but did not file its 2013 taxes until September 2014, the company would forfeit the tax credit.
The governor also proposed requiring employers to provide evidence that workers live in designated low-income areas by showing their driver’s license or another document, such as a utility bill. Now, the address is verified on tax forms.
Some other changes, including streamlining paperwork for tax credits for hiring veterans, have not generated opposition from businesses.
The proposed changes were drafted by a state agency, which is reviewing comments by supporters and opponents. After any adjustments, the changes are scheduled to take effect July 1.
Although the changes might seem simple and innocuous, many statewide and local business groups, such as the California Chamber of Commerce and the California Retailers Association, say the changes would deter companies from locating in enterprise zones and hiring lower-income workers.
In a position paper provided to the Business Journal, the Santa Clarita Valley Chamber of Commerce and the Santa Clarita Valley Economic Development Corp. said the proposed changes would significantly lower the amount of tax credits.
“Companies that would have otherwise qualified for the credit will see higher taxes,” the paper states. “These potentially higher taxes will cause some businesses to defer or eliminate employee hiring and/or expansion.”
Program repeatedly targeted
This is the latest Brown attack on the controversial enterprise zone program, which he has labeled ineffective and prone to fraud. Two years ago, he tried to get the Legislature to eliminate the 30-year-old program outright, but enterprise zone advocates blocked the attempt.
At that time, the governor cited studies claiming that the enterprise zone program was not creating net new jobs across the state and that many employers were gaming the system to maximize their tax credits. He cited the existence of firms that specialize in finding businesses already in enterprise zones that could benefit from the program and offering to claim the tax credits on their behalf going back three or four years.
“Clearly (businesses’) behavior to relocate or expand is not being driven by the existence of the enterprise zone program if they have to be told that the program exists after they have already relocated or expanded,” he stated in the 2011-2012 budget proposal.
This time, the Brown administration is focused on curbing the ability of companies to claim the tax breaks retroactively. The state Housing and Community Development Department, which administers the program and is finalizing the changes, said that 30 percent of all tax credit applications are retroactive.
“Retroactive vouchering is a significant cost to the general fund and rewards employers for past hiring decisions not incentivized by enterprise zones,” the agency said in a fact sheet.
Several local companies say these changes go too far and would deter legitimate use of the tax credits. Specifically, they say the one-year time limit for claiming the tax credits is impractical.
Steve Rodriguez, director of tax for the Marvin Group in Inglewood, the parent company of machined parts supplier Aerospace Dynamics International Inc. in Valencia, said he ordinarily files taxes for a given year in September of the following year.
“If this one-year limitation on claiming the tax credit goes into effect, we would miss out on all the tax credits unless we decide to spend more money up front and do our taxes multiple times in a year,” he said.
Rodriguez also said the proposal unfairly targets startup companies that decide to locate in enterprise zones on the premise they would receive hiring tax credits. Since startups often run losses during their first years and therefore don’t pay taxes, they couldn’t claim any of the hiring tax credits if faced with a one-year time limit.
One enterprise zone tax consultant said the one-year time limit would likely hit small businesses the hardest.
Steve Dotan, chief executive of C&I Tax Consultants on the Miracle Mile, said most of his small-business clients leave the tax credit issue for when they file all their other taxes. So, if an employee is hired in February, the tax credit often isn’t claimed and verified until they file that year’s taxes, which can be as late as September of the following year.
“Extending this to two years would be a much more reasonable limit,” Dotan said.
Sign company co-owner Rad agreed. He said the one-year time limit would effectively take away much of his ability to claim hiring tax credits in the future. “We always file our taxes later in the following year, so a change like this would be very bad for us,” he said.
Proof of residency
Cathy Browne, general manager of Crown Poly Inc., a Huntington Park plastic bag maker, said she is concerned the tougher requirements to verify the addresses of workers could cost her company some hiring tax credits.
“Some of our workers from lower-income neighborhoods take public transit and don’t have driver’s licenses,” Browne said. “And often utility or other bills are in a relative’s name, not the worker’s. I’m really hoping the state keeps this in mind as they review the regulations or we might lose the ability to claim some of the hiring tax credits.”
She also said she’s concerned the tougher regulations send the wrong message.
“The state should be promoting job creation and hiring, particularly in manufacturing and in areas with high unemployment,” she said. “This moves in the wrong direction, discouraging job creation and hiring in areas with high unemployment.”
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