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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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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.

 
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