Oakland Fails State Audit of Tax-Credit Handouts

California's "enterprise zone" tax breaks are out of control, and Oakland is the prime example, according to a California Budget Project report (CBP) and a state audit.

Businesses are supposed to create jobs in economically needy "enterprise zones" in order to get a tax break, but the reports find these problems:

• At least 61 percent of the tax-credit vouchers issued by the City of Oakland were given to companies located in the enterprise zones of other cities.
  
• Nearly all (97 percent) of the outsider credits were issued six months or longer after the employee was hired, despite the fact that the enterprise zone program is supposed to be an incentive to hire a qualifying person, not a reward for having done so in the past.
  
• According to the audit performed by the state Franchise Tax Board, "Oakland performed no systematic independent verification of employee eligbility critiera with respect to a significant number" of approved tax credits. Companies are shopping for the most lenient issuers of tax credits, and they have hit a bonanza in Oakland. Indeed, although Oakland has only one percent of the state's population, in 2003 it issued nearly seven percent of the enterprise zone tax credits, making it the second largest enterprise zone operation in all of California.
  
• Oakland approved one out of seven applications for a tax credit under a rule that had already expired!
  
• State auditors checked addresses of supposedly qualifying employees and found that 10 percent of them were invalid.
  
• Oakland could not supply another 10 percent of the paperwork for the state auditors because, the City said, it was misfiled. Overall, the state audit concluded, "Records were inadequately maintained, insufficiently documented or missing."
  (Source: Nov. 17, 2003 memorandum by Audit Division of the state Franchise Tax Board. Our thanks to the California Budget Project for providing a copy of this audit. See the CBP report in Acrobat format at http://www.cbp.org/publications/documents/0608_bb_enterprisezones_001.pdf)

The City hands out state money, collecting processing fees for doing it. "From January 2001 through August 2003 alone, Oakland issued more than 29,000 vouchers for other zones, netting nearly $600,000 in fees." (Contra Costa Times, Mar. 30, 2006) According to the state audit, the City approved corporate applications with little or no effort at verification.

Who gets the enterprise zone (EZ) tax breaks for supposedly creating jobs? "In 2003, corporations with assets of $100 million or more claimed 80.9 percent of all EZ credits claimed by corporations." (CBP report, p. 7) "Oakland's enterprise zone – one of the most vast in the state – blankets nearly 30 square miles from the port and airport to downtown office towers. JetBlue alone picked up $2.2 million in tax credits last year from Oakland and other California enterprise zones." (Contra Costa Times, Mar. 30, 2006) Indeed, the City itself boasted back in 2004, "Most commercial and industrial areas of the City are within the Enterprise Zone." (Comprehensive Annual Financial Report, Feb. 29, 2004, p. vii)

The California Budget Project concludes that the tax break for hiring in enterprise zones needs serious reform. For us in Oakland, the lesson of the state audit is a bit different. The City of Oakland is simply not serious about prudent oversight of programs. The City's official agenda for lobbying the state legislature commits to no reforms, insisting instead, "The City must ensure the continuation of its designation as an EZ [practically all of Oakland!] and the optimal benefits and flexibility that come with the designation." (State Legislative Agenda for 2006, April 27, 2006)

The disdain for oversight is apparent in the case of the enterprise zone program. In general Oakland is increasingly addicted to granting money to private agencies for social programs, violence prevention programs, youth programs, etc. etc. These grants are poorly supervised, issued in uncoordinated bits and pieces, and dominated by councilmembers' political bargaining. We already had the example of embezzlement at PUEBLO, a so-called youth agency whose adult officers not only bought themselves jewelry and travel but also spent City money campaigning for and against various ballot initiatives. Now we have a comprehensive state audit of another program.

For Oakland voters, the practical step is to defeat all parcel tax proposals submitted by the city council – until the City makes public safety and basic infrastructure its top priorities. The City must demonstrate that it is doing the job of municipal government with competence and efficiency, two qualities state auditors could not find in "enterprise zone" tax breaks.