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Tax Credits for Strip Clubs? How Enterprise Zones Are Undermining California's Economy

A program tha provides $700 million in tax breaks for companies that set up business or move to one of 40 zones within the state needs a serious rethink.
 
 
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John Thomas and Hans Burkhardt have a lot in common. For more than 17 years each man had a good paying union job, with health and pension benefits, near San Francisco Bay. Thomas worked as a warehouseman for VWR International, a medical supply company with a warehouse in Brisbane, south of Candlestick Park. Burkhardt also worked as a warehouseman, for BlueLinx, a building products company with a facility across the bay in Newark.

The similarities don’t end there. Both Thomas and Burkhardt are now collecting unemployment, having lost their $22-an-hour jobs after their employers moved to take advantage of California’s enterprise zone plan, a controversial state program that is supposed to create jobs.

The enterprise program, established in 1984, provides $700 million in tax breaks for companies that set up business or move to one of 40 zones within the state. It is operated by the state but administered by local governments. The program gives companies tax credits of up to $37,440 per person hired in one of the zones, which are intended to create jobs and spark investment in economically distressed areas. Yet interviews and public documents reviewed by Frying Pan News reveal that some of these zones are located in relatively well-off areas, including San Francisco’s Financial District and the city’s hipster-packed SoMa neighborhood, which is home to many software and technology firms. In Southern California, enterprise zone areas encompass parts of Hollywood and the corporate center of downtown Los Angeles.

The program has been under fire for years from critics who say that it simply rewards employers for moving jobs from one location to another — and who echo the charge that several of the so-called enterprise zones aren’t really in economically distressed regions.  According to sources with knowledge of the program, other businesses that have applied for enterprise zone credits include two strip clubs, Gold Club Centerfolds and Déjà Vu Showgirls.

The two gentlemen’s clubs are located in Rancho Cordova, a largely middle-class suburb just east of the state’s capitol, Sacramento. Gold Club Centerfolds advertises itself as “Sacramento’s All Nude Adult Entertainment,” while Déjà Vu Showgirls, which is part of a national chain of clubs, offers “1000’s of Beautiful Girls and 3 Ugly Ones.” It isn’t known whether the applications were approved because, like so much of the program, the names of recipients aren’t public information. (The two clubs have not responded to requests for comment; neither have VWR or BlueLinx.)

[Update, Documents received by Frying Pan News show that Gold Club Centerfolds did receive approval of its application.]

In fact, because the program falls under the purview of tax codes, much of its day to day workings, including the names of businesses that receive the enterprise zone tax credits, aren’t publicly available. Overall, 61 percent of enterprise zone tax credits were claimed by corporations with more than $1 billion in assets. People familiar with the program say that recipients include huge retailers such as Walmart. The total amount of enterprise tax credits received by Walmart is one of those facts cloaked in the program’s tax secrecy.

Numerous studies have raised questions about the value of the enterprise zone program. The nonpartisan Public Policy Institute of California concluded in 2009 that enterprise zones had no effect on job creation.

“On average, enterprise zones have no statistically significant effect on either business creation or employment growth rates,” the study said. “The absence of evidence of a beneficial effect of California’s enterprise zones on job and business creation clearly calls into question whether the state should continue to grant enterprise zone tax incentives.”

Other critics say that the worst thing about the program is the human toll it takes on workers. Both John Thomas and Hans Burkhardt were willing to move with their companies, but under the provisions of the enterprise zone program the companies cannot take their current workers and still claim the tax credits.

“They should have taken people with them who wanted to go,” says Burkhardt. “I would have gone.”  The union jobs that Burkhardt and Thomas and their fellow workers had at the BlueLinx and VWR locations paid, on average, about $20 an hour, plus benefits. They were replaced with non-union positions that paid about one-half of that, with non-existent or substantially reduced benefits.

“I’ve been up here four years, and this is the most abused program I’ve seen,” says state Senator Jerry Hill, (D-San Mateo), whose district includes Brisbane, where VWR had its warehouse.

“This [the enterprise zone program] is not creating jobs at all,” Hill says. “This is a big-industry, big-business tax grab.” The move by VWR, owned by private equity firm Madison Dearborn Partners, cost Brisbane about $2.1 million a year in tax revenue while saving the company more than $1.5 million annually through the enterprise zone program, according to Hill’s office.

Hill has introduced Senate Bill 434 to reform the program by specifying that employers must create net new jobs to claim the hiring credit and that the jobs pay at least $16 an hour. The legislation also calls for the creation of a public database of companies that get the tax breaks and the number of jobs they created. The bill was approved by the state Senate Appropriations Committee this week, and is expected to go to the full Senate later this year.

Governor Jerry Brown has previously tried unsuccessfully to get rid of the enterprise zone program, claiming that it doesn’t create new jobs and unfairly benefits companies moving from one location to another. Last week he proposed that the zones be replaced by a sales tax credit for firms that buy manufacturing or biotech equipment.  Like his proposal to eliminate the program, Brown’s new initiative is likely to be opposed by legislators whose districts include enterprise zones.

Craig Johnson, president of the California Association of Enterprise Zones, vehemently defends the current program.

“The program does work and it has been successful,” he says in an interview. “It does create jobs. In 2012, the enterprise zone program was responsible for 25,000 new jobs in California and responsible for the retention of 115,000 jobs. By every metric used to evaluate a program like this, it has been very successful.”

Former workers at BlueLinx and VWR, who were represented by Teamsters Local 853, hold a different opinion.

“I’ve been angry. I’ve been upset. It’s not good for the state,” says Thomas, who was among about 75 warehouseman and drivers who lost their jobs when VWR moved its Brisbane facility to Visalia, located 235 miles away in the San Joaquin Valley. “People like me, if we lose our jobs the people of the state of California have to pick up the tab on unemployment.”

Even though he has worked only part-time jobs since then and is currently on unemployment, Thomas feels fortunate that he still has health insurance coverage through his wife’s job.

Burkhardt recalls that, early on, BlueLinx told its workers that they could move with it to a new location. Later, an employee found through an Internet search that the company was actually moving to Stockton, and that workers would not be allowed to transfer with the company.

Doug Bloch, Teamsters political director for the Central Valley and Northern California, says that the situation involving VWR and BlueLinx epitomizes all that is wrong with the enterprise zone program.

“Our union is all for programs that create jobs in economically distressed areas,” Bloch says. “This program doesn’t create jobs.”

The situation involving the layoffs of existing workers when VWR and BlueLinx moved to enterprise zones, he says, “was really perverse. Their tax dollars were given to their employers to replace their jobs.”

“I lost my job and a lot of people got devastated.” says Thomas, now 62. “They pirated jobs from the people at Brisbane and moved to Visalia – and [the company] got paid for it.”

Burkhardt, 58, who has been out work since BlueLinx closed its Newark warehouse, agrees. “You’re taking some people off unemployment and putting some on unemployment.”

Update: Strip Club Approvved for Tax Credits

California’s controversial $700 million enterprise zone program has long been shrouded in secrecy. But now Frying Pan News has obtained documents showing that the Rancho Cordova strip club Gold Club Centerfolds has been approved for enterprise zone tax credits. The documents show that the gentlemen’s club has received credits worth up to $37,440 apiece for nine employees — sales associates, door hosts and security officers — who are paid from $8 to $9.25 an hour.

See Gold Club Centerfolds’ tax credit documents here.

The documents reflect only a portion of all approvals for Gold Club Centerfolds. The approvals were granted by Sacramento’s enterprise zone manager and came in 2011. The documents were obtained by the California Labor Federation under a public records request. The labor federation also requested records to see if another Rancho Cordova strip club, Déjà Vu Showgirls, has similarly been approved for tax credits, but that request has not been granted and officials have not provided those records.

As Frying Pan News reported May 28, Gold Club Centerfolds and Déjà Vu Showgirls were just two businesses applying for the enterprise zone tax credits. The article also reported that the program — which is supposed to spark investment in economically distressed areas and create jobs — has resulted in the loss of well-paying union jobs, rewarded employers for moving from one location to another and helped companies in well-off areas, including San Francisco’s Financial District and the corporate center of downtown Los Angeles.

“I’m reading the article about the strip clubs and it just amazes me,” state Senator Jerry Hill (D-San Mateo) told Frying Pan News. “How can you determine if a program works, how it’s being used or abused if you don’t know where the money’s going and who’s getting it? That’s in Rancho Cordova, but what about downtown San Francisco or South of Market [San Francisco] or downtown Los Angeles? Where’s the money going there, and how much do they need it for economic development in those areas? I would think not much.”

Hill has proposed legislation to reform the program and make it more transparent.

Gary Cohn is a Pulitzer Prize-winning journalist who has worked for the Los Angeles Times, Baltimore Sun and Wall Street Journal. Reach him with comments or ideas atgcohn@fryingpannews.org.

 
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