December 2003

An Overview of California's Enterprise Zone Hiring Credit

Prepared for: Assembly Committee on Revenue and Taxation

A Review of California's Enterprise Zone Hiring Credit


The Assembly Committee on Revenue and Taxation has requested that the Legislative Analyst's Office (LAO) review the California Enterprise Zone Hiring Credit (EZC), which is available to taxpayers under the personal income tax (PIT) and the corporation tax (CT). Specifically, the Committee requested that the LAO prepare a report that provides background information on the EZC and reviews existing information related to the use and effectiveness of the tax program. In subsequent discussions with the Committee's Chair and staff, it was decided that this report would not attempt to provide original research on the effects of the EZC on individual California enterprise zones (EZs); rather, it would be restricted to a summary of what the economic research has generally found about the impacts of programs like the EZC. It was further agreed that the Committee could follow-up with additional requests if more detailed information was desired.

Pursuant to this request, this report addresses the following topics regarding the EZC:

This report also includes appendices which provide additional information regarding (1) designated EZs in California, (2) requirements of qualified employees, and (3) similar tax credits and other incentives provided by the federal government and other states to EZs.

Background on the EZC

What Is the Basic Purpose of the EZC?

Enterprise zone incentives have been introduced in various statesincluding Californiaas a means to encourage economic activity in particular depressed areas. However, California's incentive programs typically have been designed with the intent not only to improve geographic areas, but also expand the opportunities available to disadvantaged individuals in the state. In particular, the EZ hiring credit has tax incentives that benefit companies locating within a particular zone, but only if certain qualified individuals are hired and conduct a certain percentage of their work within the zone. The emphasis of the program is thus to mitigate the higher costs associated with certain areas and encourage the hiring of less skilled individuals.

What Is the EZC?

Tax Program Basics. The EZC is a tax program that allows certain taxpayers filing under the CT and (in most cases) the PIT to reduce their tax liabilities to the extent that they pay wages to certain individuals for activities that occur within a designated EZ in the state. The EZC was establishedalong with several other EZ tax incentivein 1984 and 1985 under the state's Enterprise Zone Act and Employment and Economic Incentive Act, respectively. The Employment and Economic Incentive Act was later repealed and essentially replaced by the Enterprise Zone Act of 1996. The EZC sections in the California Revenue and Taxation Code are 17053.74 for the PIT and 23622.7 for the CT. Enterprise zones and the various credits that are available for activities within these zones were established in California to stimulate development in selected economically depressed areas.

EZC Requirements. The EZC is governed by a number of different requirements regarding employer and employee program qualifications. The credit is only available to qualified taxpayers for qualified wages paid to qualified employees.

EZC Limitations. The EZC is generally reduced by the amount of other credits allowed for the same employee (for example, the construction hiring credit in the Los Angeles Revitalization Zone). The EZC is limited to the amount of tax liability computed for the business' EZ-related activities. Any unused credit may be carried forward indefinitely until fully used, although none may be carried back to offset previous tax liabilities. A portion of the EZC is "recaptured" to the extent that the qualified employee is terminated prior to the first nine months of employment. The EZC may be used to offset the regular tax liability (and effectively the Alternative Minimum Tax), but not the minimum franchise tax, or the built-in gain tax and excess net passive income tax levied on S corporations.

How Does the EZC Work?

In order to determine the amount of EZC that a business may use, income must be apportioned to the EZ, qualified wages must be calculated, and the credit is then applied to the tax liability attributable to business income from EZ activities.

Apportioning Business Income. For businesses with activities that are conducted both within and outside of EZ borders, business income is apportioned in a manner similar to the apportionment for multistate and multinational corporations. Instead of a three-factor formula involving property, payroll, and twice sales, however, the EZC apportionment formula is based only on the property and payroll factors. (Prior to 1998, the apportionment formula was more closely modeled after those used for multistate and multinational corporations but was altered to make it easier for businesses to use the credit.) The average of the EZ's share of California property and payroll is then multiplied by total California income to calculate EZ income. Figure 1 provides an example of such apportionment and the application of the credit for a business with EZ activities.



Figure 1

Apportionment of Income for a
Hypothetical California Enterprise Zone (EZ) Firm



A. California Business Activity Net Income


B. EZ Income Apportionment Factor


        Property Value in California




           California overall


               Percent in EZ


        Payroll Amount in California




           California overall


               Percent in EZ


        EZ Income Apportionment Factor


           Average of property and payroll shares


C. EZ Apportioned Income


     California net income times apportionment factor




Calculating the EZC. Figure 2 shows how the EZC is calculated, continuing with the hypothetical example in Figure 1. As shown in the top portion of Figure 2, costs associated with California business activities are subtracted from revenues associated with California business activities, resulting in California business activity net income ($8 million). This income is then apportioned to EZ-related and non-EZ-related business activities. The precredit tax liabilities are calculated for each portion of total income, and the EZC ($900,000) is then used to reduce the tax liability associated with EZ income ($177,537). Since the EZC is larger than the EZ activity liability, $722,463 of the credit is available to reduce the business' EZ associated tax liabilities in future years. In this example, then, the total tax liability of $529,663 is based only on the non-EZ income. Note that, the EZC is only available for business activities; tax liabilities associated with any other income earned by the firm (such as investment income) may not be reduced by applying the EZC.



Figure 2

California Corporation Tax Liability for a
Hypothetical California Enterprise Zone (EZ) Firm



A. Calculation of California Business Activity Net Income


        Revenues From California Business Activities


        Costs Associated With California Business Activities


        Qualified wagesa


        Nonqualified wages


        Capital expenditures


        Other costs




    California Business Activity Net Income


B. Calculation of Tax Liabilities


        EZ Activity




        Precredit corporation tax liabilityc


        EZC amountd


        Corporation tax liabilitye

        Non-EZ Activity




        Corporation tax liabilityc


      Total State Corporation Tax Liability



a  Qualified portion of wages for qualified individuals.

b  See Figure 1.

c  Calculated at 8.84 percent.

d  Assumes one-half of employee wages are in first year of employment (50 percent credit) and one-half in fifth year of employment (10 percent credit).

e  After offsetting the $177,537 tax liability, $722,463 in carryover credit remains.



How Has the EZC Been Used?

Direct Revenue Impact of EZCs

In terms of its direct revenue impact on the state, the EZC has a relatively minor effect, although its impact has grown considerably over time. Figure 3 indicates the estimated value and number of EZCs used to offset CT and PIT tax liabilities over the 13 years available. In the 2001 income year, such credits amounted to slightly over $100 million including nearly $70 million under the CT and somewhat over $30 million under the PIT. Much of the increase over the period shown is attributable to the growing number of EZ designations and, to a lesser extent, a somewhat more lenient interpretation of qualified employees. According to the Franchise Tax Board (FTB), which tracks credit usage, the average EZC awarded per claimant under the CT in recent years is about $60,000.

EZC Claims by Sector and Industry

The use of the EZC by CT taxpayers is broadly distributed by industry, as shown in Figure 4 (on following page). The largest dollar amount of credits is concentrated in the heavy industry sector, which accounts for about 25 percent of the total dollar value of all credits. Light and heavy industry together constitute almost one-half of the total amount of credits used. The trade sector represents an additional 23 percent share.



Figure 4

EZC Returns and Claims Are Distributed Broadly
Across Industriesa

2000 Income Year


of EZC Returns

Percent of Total

Value of EZC Claims

Percent of Total

Heavy industry










Light industry





Nonfinancial services





Financial services










Transportation and utilities





Agriculture and mining











a  Credit claims by firms filing CT returns, as estimated by FTB.



EZC Claims by Size of Firm

Most tax returns with EZC claims are filed by small- and medium-sized businesses, in terms of assets. As shown in Figure 5, roughly 60 percent of returns with EZC claims are filed by businesses with assets of under $5 million. In terms of the actual dollar amount of credits used, however, this is largely attributable to larger businesses with assets in excess of $1 billion. These data suggest that, in the aggregate, most of the benefits of the credit accrue to large business concerns.

Evaluation of the EZC Program

There has been a significant amount of research in the area of the impact of state tax incentives generally. We have provided information on many of these studies and commented on their general applicability to California in our 2002 report: An Overview of California's Manufacturers' Investment Credit. In general, the available studies have concluded that state taxes do matter in terms of business location and investment decisions, but the effect of tax incentives is small relative to other factors.

While this general rule holds for EZ incentives as well, there are a number of EZ features—such as the size of the zones and the overall investment climate in them—that suggest that there may be somewhat different responses to EZ incentives than to more general tax incentives. There has not been much, if any, research that addresses the issue of the impact on economic activity of hiring credits alone; however, there are a number of studies that have looked at overall tax reductions in designated EZs. Some important general conclusions of these studies are the following:

These findings from past EZ research are underscored by those of a new study published just last year that concentrated on EZ performance throughout the nation (see State Enterprise Zone Programs: Have They Worked?, A. Peters and P. Fisher2002). That study, while not without the limitations inherent in this type of research, generally gave a lackluster overall grade to state EZs in terms of accomplishing their objectives, among other things concluding that they typically have little impact overall on new investment and do relatively little to improve the job prospects of the residents of these zones. This is not to imply that such outcomes as hiring-credit benefits in some individual EZs cannot be favorable, depending on the specific circumstances. But the study does suggest that, by and large, EZs and the tax incentives they offer do not have a well-documented record of success in being effective and cost-efficient in meeting their objectives.

Overall Conclusions

The value of the EZC program is quite dependent on the goals that the Legislature wishes to achieve. Available evidence generally indicates that EZ incentives have little if any impact on the creation of new economic activity or employment. Thus, to the extent that the Legislature wished to expand the economic base of the state as a whole, the use of EZ incentives would not appear to be a particularly effective means by which to achieve this goal, since many other factors are more important with respect to investment decisions.

On the other hand, EZ incentives do appear to be effective in increasing economic activity within smaller geographic areas—such as within metropolitan regions. This is particularly the case with certain types of hiring credits and incentives that are significant enough to compensate for high business costs typically associated with EZs. In general, these local responses are not a result of newly created activity, but rather stem from the shift of activity into the EZ that otherwise would have occurred elsewhere. To the extent that the Legislature places a higher "value" on activity inside the EZ than elsewhere, EZ incentives may be—under certain conditionss—an appropriate tool to consider.

An additional aspect of EZ incentives to consider is that they will typically have only an incremental impact on overall EZ characteristics. Enterprise zones frequently suffer from numerous impediments to additional private investment, including aging or inferior infrastructure, lack of adequate public services, and a shortage of qualified labor. Given these fundamental problems—although localized benefits could occur—EZ incentives are unlikely to result in significant net positive economic impacts absent additional targeted public investment.

Additional Evaluation Options

Should the Legislature wish to specifically explore the particular circumstances under which EZs can produce favorable results, despite their general limitations, more detailed study on a case-by-case basis of individual EZs and their particular characteristics would be required. This would be a potentially time-intensive and expensive effort, involving both data collection and survey activities. In addition, while the resulting findings could improve the performance of the EZ being studied, they may not be of much help in significantly improving the performance of EZs generally because of numerous other factors affecting economic development in these areas.

Appendix A

Enterprise Zone Designation

An enterprise zone (EZ) designation is effective for 15 years and, under certain conditions, may be renewed. For the 2002 tax year, the state had 39 designated EZs as shown on the following page in Figure A-1.



Figure A-1

Enterprise Zones (Ezs) in Californiaa

2002 Tax Year

EZ Areab

Designation Date

Expiration Date


April 10, 1992

April 9, 2007

Antelope Valley

February 1, 1997

January 31, 2012

Bakersfield/Kern County

October 15, 1986

October 14, 2006


October 15, 1986

October 14, 2006

Coachella Valley

November 11, 1991

November 10, 2006


December 17, 1991

December 16, 2006


October 15, 1986

October 14, 2006


October 15, 1986

October 14, 2006

Kings County

June 22, 1993

June 21, 2008


October 6, 1995

October 5, 2010

Long Beach

January 8, 1992

January 7, 2007

Los Angeles-Central City

October 15, 1986

October 14, 2006

Los Angeles-East Side

January 11, 1988

January 10, 2003

Los Angeles-Harbor

March 4, 1989

March 3, 2004

Los Angeles-Alameda Corridor

October 15, 1986

October 14, 2006

Los Angeles-Northeast Valley

October 15, 1986

October 14, 2006


March 4,1989

March 3, 2004


December 17, 1991

December 16, 2006


September 28, 1993

September 27, 2008


November 6, 1991

November 5, 2006


January 11, 1988

January 10, 2003


October 15, 1986

October 14, 2006


November 6, 1991

November 5, 2006


March 2, 1992

March 1, 2007

Sacramento-Army Depot

April 5, 1989

April 4, 2004


April 5, 1989

April 4, 2004


October 15, 1986

October 14, 2006

San Bernardino County/Riverside County

October 15, 1986

October 14, 2006

San Diego/San Ysidro/Otay Mesa

January 28, 1992

January 27, 2007

San Diego-Barrio Logan

October 15, 1986

October 14, 2006

San Francisco

May 28, 1992

May 27, 2007

San Jose

October 15, 1986

October 14, 2006

Santa Ana

June 8, 1993

June 7, 2008


October 4, 1995

October 3, 2010

Siskiyou County

June 22, 1993

June 21, 2008


June 22, 1993

June 21, 2008


May 1, 1997

April 30, 2012

West Sacramento

January 11, 1988

January 10, 2003

Yuba County/Sutter County

October 15, 1986

October 14, 2006


a  Cities and towns, unless otherwise noted.

b  EZ includes portions of each designated jurisdiction.



Appendix B

Qualified Employees for the EZC

For Tax Years Prior to 1997

Qualified employees were required to fall under one of the following categories:

For Tax Years After 1997

Qualified employees must meet any of the following characteristics immediately preceding their employment with the taxpayer:

Appendix C

Federal and Other States' Enterprise Zone Incentives

Federal Programs

Enterprise zone (EZ) incentives have appeared in federal law several times in the past, most recently in 1993, when the federal government established the Empowerment Zone Employment Credit (EZEC). The EZEC entitles employers to claim a credit for the first $15,000 in wages paid to a resident of an empowerment zone designated by the Secretary of Housing and Urban Development and the Secretary of Agriculture. To qualify, employees must perform substantially all of their employment services within the designated zone and in the employer's trade or business. The credit percentage depends upon the particular empowerment zone and the year that the wages are paid or incurred. Effective in tax years beginning in 2001, the amount of the credit is 20 percent of qualified wages paid. The amount of the credit claimed may not be deducted as wages.

Programs in Other States

A number of other states provide EZ tax incentives, as shown in Figure C-1 (see next page). The data in the figure include all types of EZ incentive tax credits available through a state's corporation tax, and are not limited to hiring credits only. The number of zones varies widely. For example, Michigan has only one zone while Louisiana has 800. Thirteen states do not have any type of EZ designation or program.



Figure C-1

State Enterprise Zone Tax Incentives—By Type


Income/Franchise Tax


Ca, Eb






C, Dc





District of Columbia



C, Rd






C, D


C, E





















New Jersey


New Mexico


New York


North Carolina


North Dakota

C, E


C, E







Rhode Island


South Carolina



D, R










a  Credit.

b  Exemptions.

c  Deductions.

d  Rebate.




This report was prepared by Mark Ibele. The Legislative Analyst's Office (LAO) is a nonpartisan office which provides fiscal and policy information and advice to the Legislature.

LAO Publications

To request publications call (916) 445-4656.

This report and others, as well as an E-mail subscription service, are available on the LAO's Internet site at The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814.

Return to LAO Home Page