Creative Commons/juliejordanscott

Nordstrom is in a San Francisco enterprise zone

California’s enterprise zones suck hundreds of millions dollars out of the state treasury every year but fail “to create jobs or new businesses – key goals of the program,” according to a new report released today by the non-profit California Budget Project.

“At a time when we’re raising community college tuition, throwing 250,000 kids off welfare, and dramatically cutting funding for the University of California and California State University” it makes sense to examine the effectiveness of enterprise zones, the budget project’s director Jean Ross said in an interview.

Gov. Jerry Brown has called for the elimination of tax breaks provided through California’s enterprise zone program as he attempts to balance the state’s $25 billion budget deficit.

The state Department of Finance estimates that eliminating the state's 42 enterprise zones could generate $343 million this year and $581 million next year.

"We need to transform our state, given the ongoing fiscal crisis," the Finance Department's H.D. Palmer said.

In an e-mailed statement, Craig Johnson, the president of the California Association of Enterprise Zones, criticized the California Budget Project report and said that the additional revenues predicted by the governor’s finance department could be a mirage. 

Johnson said enterprise zones created or retained more than 118,000 jobs in California in 2010 alone.

“The Governor’s proposal to eliminate enterprise zones is not only legally questionable, but will also increase taxes, put a further burden on the jobs climate and disadvantaged communities who are already struggling during these tough times. While we understand the state is facing a difficult budget year,” Johnson wrote, "the last thing we should be doing is raising taxes, making it more difficult to hire and eliminating one of the few programs that helps people get off government assistance and on to self sustainability.”

Originally designed to spur economic development in blighted areas by providing tax incentives to companies who locate in them, enterprise zones have become ubiquitous throughout California. The  tax credits and benefits are substantial. Firms can earn $37,400 or more in state tax credits for each qualified employee hired, carry forward their operating losses for 15 years for tax purposes, earn sales tax credits on purchases of $20 million per year for qualified machinery and parts, and depreciate their equipment up front to further limit their tax liability.

But the California Budget Project found the zones are not necessarily located in the most blighted areas. For example, 12 percent of the all tax breaks were taken by companies doing business in San Francisco’s enterprise zone – an area that includes, not only the impoverished Bay View, but also the Financial District, Union Square, and Fisherman’s Wharf. 

That means Bloomingdales, Nordstrum, and the Sheraton Palace Hotel are all allowed to take special state tax breaks for hiring workers and paying sales tax.

“State corporate taxes comprise just one or two percent of a business’ costs in California, so there is no California tax break large enough to affect an international decision,” Ross said.

In recent years, some Bay Area companies have received additional tax breaks from enterprise zones and still laid off their workers.

In the Summer of 2009, local officials and the state economic development agency agreed to extend Oakland’s enterprise zone into Berkeley to keep the drug-maker Bayer from shuttering their West Berkeley factory.

Then, last September, Bayer laid off 39 workers anyway.