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Last Updated: 3/8/2010
Budget Issue: Enterprise Zone Program Administration
Program: Enterprise Zone Program
Finding or Recommendation: Recommend (1) increasing fees to fully cover the program’s administrative costs and (2) establishing a new fund to match revenues with the costs of the program’s administration.
Further Detail

Background. The Enterprise Zone Program provides state tax incentives to encourage business investment and promote the creation of new jobs in economically distressed areas of the state. Each enterprise zone is administered by its local jurisdiction, working with local agencies and business groups to promote economic growth through business attraction, expansion, and retention. The Department of Housing and Community Development coordinates the program statewide. The department’s responsibilities include auditing the local jurisdiction zone managers to ensure compliance with memorandums of understanding, as well as maintaining and standardizing various regulations involving tax credit vouchers.

One tool employed by enterprise zones to promote job creation is the issuance of hiring tax credit vouchers. Generally, these hiring tax credits allow taxpayers to reduce their tax liabilities to the extent that they pay wages to qualified employees who meet certain eligibility standards for activities that occur within enterprise zones. Eligible taxpayers can receive up to $37,440 in state tax credits per qualified employee over a five-year period. To partially fund the state’s costs for administering the program, businesses currently pay a $10 fee per hiring tax credit voucher application.

Governor’s Proposal. The department estimates that the cost of administering the Enterprise Zone Program in 2010-11 is $1.12 million. The budget proposes to use $610,000 in reimbursements from voucher application fee revenues and $510,000 from the General Fund for support of this program.

Analysis. In recent years, the state has received more fee revenue than budgeted for the program. For example, in 2008-09, $721,000 in fee revenue was budgeted and $916,000 was received by the state. When this occurs, the additional revenues are used to effectively reduce the required amount of General Fund support by a like amount. However, because the amount of fee revenues collected is unknown at the beginning of each fiscal year, it is difficult to budget the correct amount of required General Fund support.

Additionally, because fee revenues vary from month to month, the current practice of using fee revenues to backfill General Fund resources ensures that enough funding is available each month to support the program. However, this practice does not allow the program to build a balance from fee revenues in order to even out the program’s funding over time. Without such a balance, the state must commit General Fund resources upfront to provide support for the program through the months in which fee revenues are not enough to cover administrative costs of the program.

LAO Recommendation. We think that fee revenues, and not the General Fund, should pay for the administrative costs of the Enterprise Zone program. Accordingly, we recommend the Legislature enact legislation to:

(1) Increase the hiring tax credit fee to a level that would fund the state’s full cost of administering the program. Based on conservative estimates, the current fee would have to be raised by $4 to $6 per application. This would mean that taxpayers would pay $14 to $16 dollars for a tax credit worth up to $37,440.

(2) Establish a new fund into which fee revenues would be deposited. This will enable the department to carry a balance from month to month and even out expenditures. It also allows the state to accurately match the program’s costs with fee revenues by monitoring the fund balance over time. This will give the Legislature the ability to adjust fees in future years in relation to costs.