Two decades ago California was recovering from the then-worst economic downturn since the Depression. We needed all the tools we could muster, including tax incentives, infrastructure spending, permit streamlining and aggressive marketing. We also needed a unified voice among our state and local political leadership.
I should know: I was privileged to be undersecretary of the new Trade and Commerce Agency – created by Governor Wilson, a Republican, and the Democratic-controlled Legislature. I’m proud to recall that the Legislature really delivered. They cut taxes for new manufacturing investment, enacted some workers’ compensation reforms, and provided the marketing and permit streamlining resources that enabled the success of our job creating “Red Teams.”
The Legislature also took the lead in creating new enterprise zones. They created zones for closed military bases and for distressed rural and urban neighborhoods. I remember Sen. Byron Sher, a lion of liberals, almost begging for an enterprise zone for East Palo Alto.
That unified commitment to effective action was our secret sauce for economic recovery.
Now we find ourselves trying to recover from the worst economic calamity in 75 years. And the biggest difference I notice from twenty years ago is the lack of urgency by elected officials in boosting California’s chances for recovery.
No better example is the debate over enterprise zones.
Think about it. California hemorrhaged more than 1.3 million jobs during the Great Recession, hitting hardest inland California and the older suburbs. While the Bay Area and San Diego finally enjoy a robust recovery, other regions are still deeply distressed.
But many in the Legislature, looking no further than booming state revenues, have declared “California is back.” And their allies in the government unions echo this, as long as the new tax increases flow into public sector programs.
Rather than adding tools to the economic development kit for these desperate communities, the elected leadership in California proposes to toss them away. Last year it was the demise of local redevelopment agencies. This year may see the end of enterprise zones.
This is shortsighted public policy, with tragic consequences for struggling communities.
The Governor has framed repeal of the enterprise zone program as an element of a new economic development initiative. The Administration proposes a sales tax exemption for equipment used in manufacturing and research; this is an important acknowledgement that California is more costly for new manufacturing investments than our competitor states. This measure would slightly reduce the tax cost of investment, a welcome advance while manufacturers face extra costs in environmental and GHG regulations, litigation expenses and utility costs. Unfortunately, the tax relief is only temporary – perhaps as short as five years – which may limit its attractiveness for companies that require regular retooling and process improvement.
But for Californians in communities or jobs that won’t benefit from a manufacturing incentive, trading off for the end of enterprise zones is a bad deal. Thousands of workers looking for a job in retail, tourism, logistics, health care, construction or other industries won’t be directly helped with a manufacturing incentive, but could find an opportunity in an enterprise zone.
To be sure, after nearly 30 years, the enterprise zone program can be improved. Processes for vouchering new hires can be tightened up, minimum employment periods lengthened, expansion of zones limited, employment areas updated to reflect actual areas of poverty, and reasonable wage caps imposed. All of these reforms can be accomplished within the overall context of robust enterprise zone activity, which is inherently a key part of local economic development. But the worst thing the Legislature can do is to roll up the hiring incentives upon which hundreds of businesses made location decisions. Why would any business trust a future incentive, such as a sales tax exemption, if this economic development tool is eliminated mid-stream?
As California struggles to create hundreds of thousands of new jobs amid some of the worst poverty in the nation, economic development incentives should not be an either-or choice. Enterprise zones, manufacturing tax incentives, and even general business incentives administered by the Governor’s economic development team, should rise or fall on their own.
The 2013 Legislature should take a leaf from their 1993 forbears: come together, face down the tax eaters, and break out every tool in the shed for job creation. We have nothing to lose but a rotten business climate.