May 31, 2012
By Assemblyman Mike Davis
California continues to struggle through the worst economic recession since the Great Depression, with unemployment hovering at 11 percent. The mortgage foreclosure rate, while it has fluctuated since January, has not improved significantly over the prevailing rate at this time last year. Home sales are increasing while the sale prices are falling. In my district in Los Angeles, unemployment continues to be a major problem, and long-term unemployment has grown to the point that it saps the strength and economic vitality of the community.
But South Los Angeles is not unique. Many parts of the state are plagued with similar problems in today’s economy. But what are we doing about it in Sacramento? Anticipated revenues for this year have not materialized, and the Governor’s May Revise told us that our budget deficit has increased by $6.5 billion since January – for a total of over $15 billion.
Against the backdrop of this harsh budget reality, the question remains, what are we doing to foster long-term economic development and job creation, which we need now more than ever? Even in this time of draconian budgets and yet deeper cuts, we cannot afford to neglect the need to devote state resources to creating jobs and stimulating long-term economic growth – particularly when there is a federal program to help us with those goals.
There are many things we can and should be doing in California to facilitate job creation and assist small business, which historically has been the engine igniting an economic recovery.
One such thing is to launch a new tax credit program with a proven record of economic development and job creation in other states. Wait a minute, you say. Tax credits? Aren’t they just revenue give-aways? We don’t have money for that. Well, it is a hard question of priorities, and we desperately need to create jobs in California if we are ever to climb out of this recession. The federal New Markets Tax Credit program has a proven track record – it will not be a revenue give-away because other states have implemented this program, and can point to concrete gains resulting in job creation and revenue generation. For example, the State of Missouri has generated $38.7 million in new state and local revenues resulting from its New Markets Tax Credit investments, and has created or retained nearly 6,000 jobs.
The last budget enacted by the State of California included a planned revenue loss to fund $400 million in hiring tax credits for employers. As it turned out, of the $400 million allocated, employers applied for and received only $50 million in tax credits by the close of the fiscal year. The fund was undersubscribed because that particular tax credit was not large enough to induce employers to alter their hiring behavior. So $350 million went to waste in that it was intended to be issued as tax credits, but laid dormant and unused all year. It created no jobs, stimulated no economic development.
Discussions immediately began in Sacramento about a potentially better use for that $350 million for the upcoming 2012-13 Budget. My proposal is to use a large portion of that money ($200 million) for a program that will leverage still more federal money in tax credits, and inject those funds into small businesses throughout the state to stimulate job creation. This represents a diversion of those funds for a very similar purpose, but this time plugging into on a federal program with a proven track record.
For the past 11 years, New Markets Tax Credit has assisted state efforts at local economic development, including job creation, by providing matching funds for small businesses, schools, and business-related real estate ventures. At least nine states that have established state matching programs and have seen remarkable results in returns on their initial investment. They have on average, successfully leveraged $13.00 in federal monies for every dollar in state revenue allocated to fund the tax credit program, all of which they were able to invest locally to help the state economy. That’s right – a return on investment of 13 to 1.
New Markets Tax Credit (NMTC) was established under President Clinton in 2000 after Congress enacted it with bi-partisan support, backed by leaders in both parties: George Bush, Ted Kennedy, and Jack Kemp. It has been renewed by every administration since, including that of President Barack Obama. Again, NMTC is a proven model of economic development, local job creation and expansion of the local tax base – things California desperately needs.
To this end, I have introduced AB 2037 to establish a state New Markets Tax Credit program. The bill’s goal of harnessing $200 million to create jobs in low-income areas is ambitious, particularly in an atmosphere of yet another round of painful budget cuts that have hurt interests dear to Democrats – most notably, public education and child care. There are many competing ideas about other uses for these funds. But none will so directly address California’s economic plight, or promise such a significant return on investment, as New Markets Tax Credit. With an unemployment rate of almost 12 percent, heading into a fifth year of recession, we cannot afford to pass up any opportunity for job creation. Choosing the alternative of directing funds to this or that group in a compassionate but ultimately futile attempt to partially restore recent budget cuts will be like placing a drop of water on a hot skillet: both will evaporate without effect.
Here’s how it would work: AB 2037 would authorize a tax credit valued at 39 percent of a taxpayer’s qualified equity investment in a community development entity (CDE), starting in 2013 and ending in 2019 (these terms are defined according to federal guidelines). It allows the tax credit to be applied against the investor’s personal and/or corporate tax liability. The credit is spread over seven (7) years: 5 percent annually for the first three years, and 6 percent annually for the following four years.
I am proud to say this bill has bi-partisan support, as it is jointly authored by my Democratic colleague, Assemblymember V. Manuel Pérez, as well as leading Republican Assemblymembers Paul Cook and Cameron Smyth.
Decisions on what investors are awarded the tax credit will be made according to federal guidelines issued by the Treasury Department. Locally, the program will be administered by the Tax Credit Allocation Committee within the State Treasurer’s Office. Records would be subject to federal audits for compliance.
Businesses continually clamor that California constitutes a hostile climate for them, that our tendency to tax and regulate, our workers compensation laws and extensive environmental regulations, has caused many of them to leave, and those that remain to consider leaving. We in government must take affirmative steps to provide support for small businesses if we are serious about job creation and using the tools at our disposal to chart an end to this recession.
Working with my colleagues in a bi-partisan fashion, I have put forward a plan that works.