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California dishes out $80 million in tax credits to businesses to spur hiring

Lockheed Martin technicians get a close-up look at NASA’s InSight exploratory spacecraft in 2018. (Photo by Gene Blevins for the Los Angeles Daily News/SCNG)

If aerospace giant Lockheed Martin Corp. keeps its end of the bargain  — creating 450 jobs and investing $100 million in California over five years — it will be rewarded with tax credits totaling $29.8 million by the state of California.

Better Holdco, a consumer lending company in Irvine and Oakland, promises to add a meaty 3,500 jobs and invest $55.4 million in exchange for credits that’ll cut its tax bill by $25 million.

And if American Honda Finance Corp. in Cypress adds the 75 jobs and invests the $9.2 million it has promised, it’s on track for tax credits worth $5.2 million.

But as the Governor’s Office of Business and Economic Development (GO-Biz) cheerfully announced $80 million in tax credits last week — aiming to create 6,535 new, well-paying, full-time jobs and spur $400 million in new investments in pandemic-ravaged California — it also terminated 66 similar agreements with companies that didn’t, or couldn’t, deliver what they had promised over their own five-year agreements.

Crystal balls are in notoriously short supply in the business world, so projecting with accuracy five years into the future can be quite a challenge. Of the $38.3 million in total tax credits extended to those 66 companies, California is “recapturing” more than $24 million — or 63 percent — so it can go to businesses that will, hopefully, use them.

Funds “recaptured”

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The state had extended $2.5 million in tax credits to Honey Science Corp. of Los Angeles and Santa Barbara in exchange for 254 jobs and $10.2 million in investments back in 2017. But that has not come to pass, so the entire $2.5 million in unused credits is returning to the state.

Same for the entire $875,000 extended to rPlanetEarth in Vernon, a green company aiming for “a truly sustainable, closed-loop system for the recycling and reuse of post-consumer plastics.”

And for the entire $500,000 extended to Hi-Shear Technology Corp. in Torrance, which delivers advanced systems and products to the aerospace and defense industries.

And the $160,000 for Premier Physical Therapy in Irvine and Costa Mesa.

And the $400,000 for Nor-Cal Beverage Company in Anaheim.

Dasco Engineering in Long Beach and Torrance used the majority of its $1 million in credits, so just $450,000 of it will be recaptured by the state.

Credit where credit’s due

The California Competes Tax Credit is an income tax credit available to businesses that want to locate in California, or stay and grow in California. It’s not a subsidy, but an incentive, officials said — a performance-based program where companies that do what they said they’ll do can claim an income tax break.

It began in 2013 under then-Gov. Jerry Brown as a five-year program, and was extended for another five years, through 2023. It distributes $180 million in tax credits each year to qualifying businesses, and the “recapture” of unused credits is designed to ensure they don’t go to waste. The state recaptured some $50 million last year, meaning it has $230 million in credits to bestow this year, officials said.

After the application and award process, businesses sign an agreement clearly laying out how much credit they can claim each year if they achieve their employment, wage, and investment milestones, said Scott Dosick, CalCompetes deputy director, by email.

“In some cases, the businesses achieved some but not all of their milestones — which is why you see a recommendation for a partial recapture of the credit,” he said. “In other cases, the business failed to achieve any of its milestones over the 5-year period, and thus the entire credit is recommended for recapture.”

Most of the agreements recommended for recapture last week were for those whose five-year terms had expired.

“At the end of the day, the recaptures approved yesterday demonstrate that the CalCompetes program is working as designed,” Dosick said. “Businesses that do not achieve their contractual obligations do not get to claim the CalCompetes income tax credit. CalCompetes is a model of both transparency and accountability.”

A woman looks at signs at a store closed due to COVID-19 in May. (AP Photo/Nam Y. Huh)

Too tough?

Good Jobs First, a national policy resource center that studies, collates and publishes public data on state and local job subsidies, has cast a wary eye on many such arrangements. They can work, said Greg LeRoy, president and CEO, who noted that performance-based agreements are safer for taxpayers because they avoid “political discretion issues.”

“Some of those deals listed apparently never got started, so the ‘recaptures’ equal the awards, which suggests a rescission of a tax credit on a failed project that never broke ground,” LeRoy said.

Clawing back 63 percent of the credits extended to those 66 business struck him as quite high. Lucy Dunn, president and CEO of the Orange County Business Council, is inclined to agree.

“If that’s normal, then Go-Biz should reconsider if their claw-back agreements are too stringent, or how the approval/denial process in general (works),” Dunn said by email. “If the Legislature agrees to commit X amount of dollars a year to a program, all of it should be used to maximize employment.”

LeRoy wonders how it’s all going to play out with a once-in-a-century pandemic battering the economy.

“We know from high-disclosure states that during past recessions, the number of clawbacks/rescissions/recalibrations can rise sharply,” he said. “It’s no one’s fault, and it is fortunate that more states are structuring incentives to be performance-based, because that circumvents the problem of timid officials using enforcement loopholes to avoid treating all companies equally.”

Source: Orange County Register

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