Incentives Watch: Tax Credit Specialist Compares New California Competes Tax Credit to Old Enterprise Zone Program


In this interview, Max Shenker, Vice President of Tax Credit Co., compares the California Competes Tax Credit and other new incentives to the state’s former Enterprise Zone program.  The California Competes Tax Credit is nontransferable and may be carried forward for five years, whereas the former Enterprise Zone credit did not originally have a limit on the amount of time unused credits could be carried forward.  On the other hand, the California Competes Tax Credit has much broader geographic availability, whereas the enterprise zone credits are limited to designated enterprise zones in the state.

Mr. Shenker also notes important items that businesses should be mindful of when applying for the California Competes Tax Credit, especially regarding the timing of the credit allocation and the recapturing of credits. 

Overall, “[t]he hope is that, although the total incentive dollars [under the new tax incentives package] will be smaller [than those available under the former Enterprise Zone program], the state will be able to target the available funds to high impact projects,” says Shenker.

Bloomberg BNA:  What is the purpose of the new California Competes Tax Credit program?
Shenker:
  When California made the decision to eliminate California’s Enterprise Zone program in 2010, the Legislature decided to enact a new set of programs in its place.  The California Competes Credit program, along with the New Employment hiring credit and sales tax exemption for certain manufacturing equipment, was designed to replace the Enterprise Zone program with a new set of incentives that were crafted to address the concerns of the critics of the old program.

Bloomberg BNA:  What will be the impact of the program?
Shenker:
  One of the results is that California will spend less in business incentive tax expenditure dollars than it did when it had the enterprise zones.  It is still too early to tell if the California Competes Credit program will have a material impact on economic growth in the state.  The hope is that, although the total incentive dollars will be smaller, the state will be able to target the available funds to high impact projects.

Bloomberg BNA:  Who will benefit from the program?
Shenker: 
Some manufacturers will certainly benefit from the new sales tax exemption. However, since many start-ups or growing operations can take time to become profitable, it may be difficult for them to benefit from the California Competes Credit (CCC).  The CCC is a nontransferable tax credit which is more restrictive than most other states that created similar programs as cash grants.  It has a five-year carryforward period and cannot be used to reduce tax below the tentative minimum tax.

Bloomberg BNA:  Do you know what businesses think of the new program so far?
Shenker: 
Most of the businesses that we have communicated with regarding the credit are curious to investigate if it will work for them, but believe that the new program will result in a much smaller incentive than they were receiving under the prior Enterprise Zone program.

Bloomberg BNA:  How does the new program compare to California’s former Enterprise Zone program that was repealed last year?
Shenker: 
The CCC is theoretically available to businesses anywhere in the state, while the enterprise zones were located only in specific areas.  On the other hand, the CCC has a limited fund of credits to allocate and will allocate them through a competitive application process.  Enterprise zone credits had an unlimited carryforward life, could reduce tax below the tentative minimum tax, did not require a competitive application process, and were relatively easy to administer.  The New Employment hiring credit is more analogous to the Enterprise Zone program, but has many features that are significantly more restrictive than the prior program.

Bloomberg BNA:  Do you think businesses from outside California will relocate to the state based on this new California Competes Tax Credit Program, or do you think the program will mostly drive businesses already located in California to seek the tax credit, or both? 
Shenker: 
It is encouraging that the state now has an economic development tool which will allow them to provide funds which compete with the “closing funds” in other states.  However, given that it is a tax credit as opposed to a cash grant, it remains to be seen how effective it will be as an economic development tool.

Bloomberg BNA:  What do you think about the way the new program is set up in terms of the requirement that the credit amount must be approved by a 5-member group called the California Competes Tax Committee?  The California Competes Tax Committee includes the Treasurer, the Director of Finance, the Director of the Governor’s Office of Business and Economic Development, and an appointee from both the Senate and the Assembly.
Shenker:
  Having applications reviewed by such a committee will hopefully lead to a fair allocation of the credits available.  Texas uses a similar committee structure to administer its fund, while Arizona, for example, does not. 

In California, the Treasurer is the only elected official participating on the committee - all four other positions are political appointments.  The statute requires online publication of the terms of the tax credit awards, so it would be theoretically possible to track down any political bias that may creep into the process.

Bloomberg BNA:  Emergency regulations for the tax credit were recently filed with the Office of Administrative Law.  Have you seen the regulations yet?  If so, what do you think is the most important thing that businesses seeking the tax credit need to know about these regulations?
Shenker:
  The proposed regulations provide a lot of latitude for the Governor’s Office of Business and Economic Development (GO-Biz) to exercise flexibility in the application process.  For example, they propose having the authority to move an applicant directly into the second phase if there is a risk the business may leave or reduce its activities in the state.  It is important to note that the process is meant to encourage completely new investment as well as retention and growth of existing California businesses.

Applicants should pay special attention the timing of the tax credits they apply for.  Credits under this program only have a five-year carryforward life, but the regulations allow applicants to specify when they would like the credit to be allocated.  So, if a new business projects profitability five years after starting operations, they should specify that their tax credit award should only start in the fifth year of the project. 

Taxpayers also need to be extremely careful regarding their ability to comply with whatever agreement they are proposing.  Failure to meet the investment targets stated in the agreement can lead to a full recapture of the credits.

 *Continue the discussion on LinkedIn: Do you think California’s new tax incentives package, which includes the California Competes Tax Credit, is more or less helpful to businesses than the former Enterprise Zone program? 

For more in-depth information about California's tax credits, check out Bloomberg BNA’s Credits and Incentives Portfolios.  

Interviewed By: Kathleen Caggiano

Follow Kathleen on Twitter at:  @katcaggiano .

Follow BBNA on Twitter at: @BBNATax .
Join Bloomberg BNA's State Tax Group on
LinkedIn .