When it comes to tax incentives, Sen. Jerry Hill (D-San Mateo) wants to take it off… as in all off… for two strip clubs in California. Sen. Hill has introduced legislation in the Golden State to put an end to a “loophole” that allows certain businesses to take advantage of a tax break meant to encourage economic development.
Under current law, tax credits are available for businesses located inside forty enterprise zones in California. The zones are called “enterprise zones” in the state and chances are that your state has a similar program. The zones are typically created in economically disadvantaged areas as a means of encouraging businesses to set up shop and make local hires. The idea is, of course, that giving businesses tax incentives to relocate to struggling areas will result in more employment, more sales, and ultimately, a return of tax dollars to the community. Sounds great, right?
The problem, according to Sen. Hill, is that the existing legislation makes it possible for certain businesses to take advantage of tax breaks that were never intended to benefit them. “It was intended to do a good thing,” Sen. Hill said, about the law, “but the problem is it has been gamed.”
The main purpose of the law, according to Sen. Hill and his supporters, is to encourage job creation. Under the law, employers can claim a tax credit of 50% of wages paid to a qualified employee in the first year, 40% in the second year, and so on, up to 150%. Qualified employees can include those eligible for job training programs and most social welfare programs; disabled workers; certain vets and ex-offenders. Employers can also claim the hiring credit for residents of Targeted Employment Areas (TEAs). The program has paid out nearly $4 billion in tax dollars in California since the law first took effect.
Despite the payouts to businesses, not all of those hires for tax breaks are net additions to the community. A number of companies are “shifting” hires rather than creating new hires, taking tens of thousands of dollars of tax breaks per employee with no net gain to the community. Additionally, since employers may get credit for employees who worked for them in past years and have those tax credits refunded for up to four years of past returns, companies are taking advantage of the credits to supplement their existing business practices but are not using the program to create new jobs or make new hires. Supporters of a change cite a survey conducted by the California Department of Housing and Community Development that found that nearly half of businesses report that the credit “never” or “rarely” influenced their hiring decisions, yet businesses are still collecting tax dollars from the state.
This practice made news in the state when a local news crew focused on two strip clubs, Deja Vu Showgirls of Rancho Cordova and Gold Club Centerfolds, found to have received thousands of dollars in tax breaks – without doing anything different from before. Those clubs benefited from their existing locations and were not lured to the area by the promise of tax incentives; additionally, their hiring practices weren’t influenced at all by the tax breaks. That isn’t the point of the credit, according to Sen. Hill and his supporters.
But some, like Matt Gray of the Association of Club Executives, say not so fast. Just because the business is already located inside an enterprise zone shouldn’t disqualify the business from taking advantage of the credit, according to Gray. “The enterprise zones landed on these clubs that were already there,” he said. Gray believes that the exposure had less to do with the business locations and more to do with the nature of the business. The clubs were, it seems, an easy target because they focused on adult entertainment though Gray argues that “[a] business is a business. It employs people legitimately, and I think the employees are more than happy to pay their rent and put food on the table like anyone else.”
He may be on to something. A key supporter of reforming the existing legislation, Sen. Anthony Cannella (R-Ceres), is very clear about what he wants: “We need to stop strip clubs from getting tax breaks.” Sen. Cannella supports the idea of the Enterprise Zone program but says that “the Enterprise Zone must create jobs and keep them in our communities, not allow strip clubs to pocket more money.”
Sen. Cannella is generally on board with Sen. Hill’s bill which would keep the program intact but would limit how businesses could claim tax credits (putting an end, for example, to claiming retroactive credits) and would call for more public disclosure. The bill, SB 434, was ordered for a third reading early today. A two-thirds vote is required to change the legislation.
Some in California think that proposed revisions don’t go far enough: Gov. Jerry Brown (D) wants to eliminate the Enterprise Zone Program completely. The Governor’s push to toss it out didn’t make any headway in 2012 and that isn’t likely to change in 2013.
Cutting tax breaks altogether in a tough economy is never an easy sell. But singling out unpopular businesses might be. It’s easy to gather public support for a bill that points out when a business isn’t meeting the, er, bare minimum but is it fair?
If it’s bad law, it’s bad law and it should be changed. I would suggest, however, that the rationale behind the changes should apply whether you’re selling baskets of kittens or lap dances. My guess is, however, that wouldn’t make nearly as good a story on the floor of the state legislature.
