Enterprise Zone Reform Awaits Governor’s Approval
June 15, 2012 - 5:07pm
As part of the spring legislative session, the Illinois General Assembly approved a sweeping reform measure intended to add transparency, accountability and competition to the State’s Enterprise Zone Act.
The final version of the measure, Senate Bill 3616, passed both chambers of the legislature unopposed on the final day of regular session, May 31, 2012. Earlier in the spring a series of community meetings and hearings were held to assess the effectiveness and need for the geographically based tax incentive areas that were first enacted 30 years ago in Illinois in 1982. The bill is currently awaiting signature from Governor Pat Quinn.
Enterprise Zones provide incentives for businesses that locate and employ individuals in economically depressed areas of the State. Currently the law provides for State and local tax incentives, regulatory relief and improved governmental services for businesses and individuals that invest in creating jobs within these designated zones. According to the Illinois State Comptroller’s most recent tax expenditure report issued for FY2010, the benefits provided by the State (including income tax, sales tax and utility tax exemptions) reduced revenues by a total annual cost of $104.2 million. This number does not account for property tax, sales tax and licensing benefits provided in Enterprise Zones by local governments.
The State currently has a total of 97 zones, many of which expire in the next several years. In order to designate a zone under the current law the General Assembly must pass legislation defining its boundaries and life span. However, if SB3616 is signed into law the process of creating and renewing the Enterprise Zones will change dramatically.
First, the legislation extends all zones expiring in the next few years to FY2016. At that point and thereafter, authorization of all zones that expire will be competitively bid between any interested communities. The bill also eliminates the five River’s Edge Redevelopment Zones upon their expiration and converts them into additional Enterprise Zones.
Under the reform legislation, the Illinois Department of Commerce and Economic Opportunity (DCEO) will manage the application process for renewal or reassignment of the zones to new areas by scoring the application based on ten specific criteria. To apply for renewal or to compete for a zone, the area applying must meet at least three of the following ten criteria:
1. All or part of the local labor market area has an annual average unemployment rate of at least 120% of the State's annual average unemployment rate for the most recent calendar year or the most recent fiscal year as reported by the Department of Employment Security;
2. Designation will result in the development of substantial employment opportunities by creating or retaining a minimum aggregate of 1,000 full-time equivalent jobs due to an aggregate investment of $100 million or more, and will help alleviate the effects of poverty and unemployment within the local labor market area;
3. All or part of the local labor market area has a poverty rate of at least 20% according to the latest federal decennial census, 50% or more of children in the local labor market area participate in the federal free lunch program according to reported statistics from the State Board of Education, or 20% or more households in the local labor market area receive food stamps according to the latest federal decennial census;
4. An abandoned coal mine or a brownfield is located in the proposed zone area, or all or a portion of the proposed zone was declared a federal disaster area in the 3 years preceding the date of application;
5. The local labor market area contains a presence of large employers that have downsized over the years, the labor market area has experienced plant closures in the five years prior to the date of application affecting more than 50 workers, or the local labor market area has experienced State or federal facility closures in the five years prior to the date of application affecting more than 50 workers;
6. Based on data from Multiple Listing Service information or other suitable sources, the local labor market area contains a high floor vacancy rate of industrial or commercial properties, vacant or demolished commercial and industrial structures are prevalent in the local labor market area, or industrial structures in the local labor market area are not used because of age, deterioration, relocation of the former occupants, or cessation of operation;
7. The applicant demonstrates a substantial plan for using the designation to improve the State and local government tax base, including income, sales, and property taxes;
8. Significant public infrastructure is present in the local labor market area in addition to a plan for infrastructure development and improvement;
9. High schools or community colleges located within the local labor market area are engaged in ACT Work Keys, Manufacturing Skills Standard Certification, or other industry-based credentials that prepare students for careers; or
10. The change in equalized assessed valuation of industrial and/or commercial properties in the five years prior to the date of application is equal to or less than 50% of the State average change in equalized assessed valuation for industrial and/or commercial properties, as applicable, for the same period of time.
After scoring the applications based on these factors DCEO will then forward the final appraisal to a newly formed Enterprise Zone Board. A majority vote of the board will be required in order to approve the designation of any Enterprise Zone. The board will consist of the directors of DCEO and the Illinois Department of Revenue (IDOR) and three members appointed by the Governor. The law states that the appointed members must be picked geographically so that one represents Cook County, one represents the collar counties bordering Cook and one can be from anywhere else in the State. The Senate would confirm the nominated members.
The reform measure also limits the total time any Enterprise Zone can exist to 25 years but with a review after the first 13 years where the board will determine if it should expire after the initial 15 or be extended for an additional 10 years.
Among other provisions, SB3616 also would increase reporting requirements for taxpayers that receive benefits within the Enterprise Zones. All businesses receiving tax breaks within these zones would be required to annually report the total benefits received, the type of incentive and the zone affiliated with the exemptions. Utility providers would be required to file an annual report with the IDOR specifying the total use tax deductions given to businesses within any zone, including the name of the business and its address. According to the Comptroller’s report the utility tax incentives make up the largest portion of the State’s Enterprise Zone costs, totaling $69.1 million, or 66.3%, of the total in FY2010.
The law also changes in the definitions of full-time and qualified jobs. For businesses to qualify for tax incentives within a zone there are minimum requirements for job creation and retention specified in the Enterprise Zone Act. A full time job is defined as a person working for at least 35 hours a week for 52 weeks for a total of 1,820 hours per year. A company will receive incentives for the number of hours it employs workers rather than the total number of workers employed. Companies will also be able to use staffing agencies or part-time workers to tap into incentives.
SB3616 eliminates three income tax incentives for businesses, the Jobs Tax Credit for Enterprise Zone Employers, the dividend subtraction for corporations investing in zones and the exemption for interest income earned by business that make loans to secure property within Enterprise Zones. All together these incentives cost the State $8.7 million in FY2010, or 8.3% of its total annual Enterprise Zone costs.
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