Employers must pay more for tax break

By Jonathan Horn – JULY 7, 2013
Andrew Pequeno working on the factory floor at Plenums Plus sheet Metal Fabrication in Chula Vista.
Andrew Pequeno working on the factory floor at Plenums Plus sheet Metal Fabrication in Chula Vista. — Nelvin C. Cepeda

Steve Johnston visits four halfway houses in the South Bay anytime he needs new workers for his National City ship repair company.

He has no shortage of applicants for jobs with YYK Enterprises, which hires with a starting pay of $9.50 an hour.

“Word spreads like crazy,” Johnston said.

Johnston’s business currently qualifies for a state tax credit on their wages of up to $12 per hour, called an Enterprise Zone credit. Last year, his company of about 260 employees saved about $360,000 on the breaks.

“They’ve come back to real savings to the business, which allows us to invest in more equipment, which allows us to do more work, which allows us to hire more people off the unemployment rolls,” Johnston said.

But on Jan. 1, if Johnston still wants to get a tax credit from the state for jobs such as blasting away rusted steel, painting ships or placing landing strips on aircraft carriers, he’ll have to boost his entry level salary to more than $12 per hour. That’s because last week, the state Legislature approved a bill that would eliminate the roughly 25-year-old enterprise zone program and replace it with $750 million of new tax incentives, some across the state.

Nobody says businesses in the enterprise zones are going to shut down without the low-income credit, but they may feel a little pinched.

That worries South County officials, such as Chula Vista Mayor Cheryl Cox, whose city had 7.9 percent unemployment in May. Cox said the enterprise zone credits created 1,400 new jobs in Chula Vista last year. She said anyone would like to have a better paying job, but losing the current benefit could hurt the people that just need a chance.

“In many cases you have to start somewhere and for some people the enterprise zone gave them that first foot in the door,” she said. “I think the state sometimes does the kinds of things that are considered at the state level to be a fix or a cure, but I’m looking at this and thinking this was perhaps considered a fix that I’m not sure needed fixing.”

Hiring tax break

Example hiring tax credit, beginning Jan. 1, 2014

Credit is available on wages between $12 and $28 per hour.

Qualifying employee hired on Jan. 2, 2014, by a qualifying employer in a qualifying location and the pay is $28 per hour and the employee works the maximum hours of 2,000 for the year.

The credit calculation would be as follows:

$28 — $12 = $16

$16 * 2,000= $32,000

$32,000 * 0.35 = $11,200 tax credit.

Source: California Governor’s Office of Business and Economic Development

There are currently 42 enterprise zones across California, drawn and expanded by public officials to help create jobs in disadvantaged areas.

The San Diego Enterprise Zone, which originated in 1986, is mainly composed of areas in National City, Chula Vista, and parts of south and east San Diego. It provides credits on wages of up to $12 per hour, and allows businesses to claim sales tax paid on manufacturing equipment as an income tax credit at the end of the year. The region’s enterprise zone has expanded over the years to include pockets of North County to provide incentives to companies like Soitec, a solar panel manufacturer that chose Rancho Bernardo over other states for a major plant.

While enterprise zones are popular with those who reap their benefits, Gov. Jerry Brown says they don’t work. That’s why he pushed hard to eliminate them through Assembly Bill 93, which passed last week. A report issued in May by the Legislative Analyst’s Office said the zones are generally not shown to be effective, and that job gains in some areas are offset by losses in others. The report recommended the zones be eliminated partly because their costs have ballooned on average 18 percent per year since 2000, six times faster than the state budget.

Brown is now moving the state enterprise zones to a new system that encourages higher pay, and broadens some tax incentives to all businesses.

Moving forward, wage credits are going to stay in current enterprise zone areas that are not considered wealthy, but will also be expanded to businesses in census designated areas of high poverty. Brown originally wanted to only apply the credits to the census designated areas, but that was changed during the legislative negotiations.

Come Jan. 1, future qualifying employees — long-term unemployed, veterans at discharge, ex-offenders and those on the federal Earned Income Tax Credit — will only be eligible for a tax break for their employer if they are paid above $12 per hour.

The state will give a credit on 35 percent of the difference between the actual pay and $12 per hour, with the wage maximum of $28 per hour. That means that if an employer pays a worker $13 per hour, the credit would be based on $1 per hour.

Steve Copp, who owns Chula Vista based Plenums Plus, a manufacturer of air conditioning equipment, said about 20 percent of his new hires earn $12 or more.

Other new tax incentives created by the legislation will apply all over. The widest example is eliminating sales tax on manufacturing or biotech equipment. The state will also create an agency called California Competes, which will offer income tax incentives to companies and small businesses that are considering creating jobs in California, a state with some of the highest costs of doing business due to high taxes. Small businesses are set to receive 25 percent of the incentive credits.

Johnston, president of YYK Enterprise, who bought the company five years ago, said ex-offenders have an opportunity to work their way into superintendent positions, which pay $30 per hour. He said he plans to continue his same hiring practices, whether the new employees qualify for a tax credit or not. Johnston said he hired 45 more people Tuesday and is hoping to add another 75.

The current enterprise zone system, including tax credits on low-income jobs, will be available through the end of 2013. Anyone hired before Dec. 31 will qualify for the credit for five years. Companies that have banked previous enterprise zone tax credits have 10 years to use them.

Cox, Chula Vista’s mayor, said she feels the state reneged on a commitment to keep the zones in place through 2021. Still, she hasn’t yet noticed an influx of permit applications at the city to start businesses before the opportunity goes away.

“I don’t see any rush in the immediate future,” she said. “I do think though that as businesses become more aware of the opportunities presented in an enterprise zone, they’ll inquire with us.”



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