Capitol Alert: Gov. Jerry Brown seeks rollback of employer tax credit

Brown administration officials released a new set of rules Friday restricting how employers claim tax credits for hiring workers in distressed areas.

The proposal saves an estimated $60 million through June 2014 and $310 million in the first five years, according to the Department of Housing and Community Development.

Under the state's enterprise zone program, employers can receive tax credits for hiring employees who live or work in areas with high unemployment. The credits are as large as $37,440 over five years per employee.

Brown took dead aim at the program in his 2011 budget proposal, asking lawmakers to eliminate enterprise zones the same way they ultimately did redevelopment agencies. Lawmakers resisted that call, and Brown is now seeking to curb what he considers the worst abuses. The state gave out $732 million in credits through the program in 2010.

The new rules would limit so-called "retroactive vouchering," a practice in which accountants or tax consultants scour company records to claim past tax credits for employees hired years earlier.

Critics say that hiring credits should provide an incentive to hire, not retroactively reduce tax bills. Those working in the industry have said the practice is legitimate because employers often have good reasons for neglecting to claim credits they were owed.

Brown's proposal would give employers only one year after the hiring date to claim an enterprise zone voucher. It would also give employers a one year grace period after the regulations become effective to claim vouchers for workers hired in the past.

The proposal also requires employers to document that their workers live in "Targeted Employment Areas," neighborhoods prioritized for employment benefits. Employers must submit a utility bill, Department of Motor Vehicles document or other third-party form, rather than the current W-4 tax form that state officials believe can be manipulated.

Not all of the plan adds restrictions. One new change is designed to make it easier to claim credits for hiring veterans and welfare recipients.

HCD spokesman Colin Parent said the administration hopes to make the rules final by May. Brown is counting on $10 million in savings by the end of June.

Craig Johnson, president of the California Association of Enterprise Zones, said his group has concerns but is willing to work with state officials in crafting the regulations.

"We are concerned with a number of the bureaucratic regulations included in HCD's release of proposed changes to California's successful enterprise zone program," Johnson said in a statement. "Small businesses in some of our state's most rural and distressed areas are going to be hurt by adding additional layers of red tape to the process, which will undoubtedly result in less job creation and retention at a crucial point of California's economic recovery."