Client Alert

Eliminating Enterprise Zones in California: An Analysis of the Proposed Budget and Its Effects on California Businesses

February 01, 2011

Jeffrey S. Haber & Edgar Khalatian

The proposed budget for the State of California (the Proposed Budget), which was released on January 11, 2011 by Governor Jerry Brown, calls for the elimination of State Enterprise Zones (EZs). EZs are economically distressed areas that have been targeted for economic development and revitalization. Businesses that locate within EZs are eligible for certain state tax benefits, including hiring credits, wage credits, credits for sales taxes paid on purchases of certain machinery, exclusions of interest earned on qualifying loans to businesses, and expensing of qualified business investments. Currently, there are 42 EZs located throughout California. Though the designations are generally for a 15-year period, some EZs have recently received extensions. The Proposed Budget would eliminate all EZ and similar tax incentives for tax years beginning on or after January 1, 2011.

As with other aspects of the Proposed Budget, the elimination of EZs is extremely controversial. At a time when unemployment in California is at near-record highs, business owners across California are concerned that they will lose benefits afforded to businesses in EZs, and many are projecting higher business costs. Although there is no way to know how the proposal to eliminate EZs will ultimately fare, it is reasonable to expect the proposal to undergo several changes over the next few months and possibly be challenged in court.

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