Success of Tax Breaks in Riot-Torn Zone Unclear : Revitalization: Critics call program ineffective, costly. Backers concede no conclusive proof of job creation exists.

The program billed as the state’s chief response to the 1992 Los Angeles riots is costing about $100 million a year--at least three times as much as expected--yet even supporters concede there is no conclusive evidence that it is working.

Called the Los Angeles Revitalization Zone, the program works on the same principle as enterprise zones: It provides tax breaks to businesses in communities where investment has lagged.

The idea is to boost employment and investment in neighborhoods where violence erupted in May 1992. Companies within the zone--both new and existing--pay lower sales and hiring taxes, and can also take advantage of other enticements.

But some say the zone is so vast--and the tax breaks so easy to utilize--that companies may simply be helping themselves while doing business as usual. They question whether the zone has actually sparked new investment in the inner city, or just provided an attractive loophole.

What’s certain is that the tax breaks are proving more popular than anyone thought. Revitalization zone tax credits and deductions are now projected to cost the state about $100 million per year in revenues, say officials with the California Franchise Tax Board--not the predicted $10 million to $30 million per year.

“It’s either one hell of a successful zone, or it’s a big giveaway,” said Jim Lites, who is reviewing the zone for the state Assembly Taxation and Revenue Committee.

The review was requested by the committee’s chairwoman, state Assemblywoman Juanita McDonald (D-Carson), who calls the zone’s cost “almost prohibitive” and faults policymakers for showing little accountability.

“I asked for data on it and no one could give it to me,” said McDonald. “I asked, ‘To what degree are we profiting from this?’ No one could tell me that.”

City and state officials say the cost is offset by gains in job creation, and Los Angeles Mayor Richard Riordan and others are pushing to extend it five more years. The zone is slated to end in 1998.

With little hard data to back their views, supporters are having to defend millions of dollars in corporate tax relief chiefly on the strength of anecdotes.

The Los Angeles Revitalization Zone bill, sponsored by state Assemblywoman Marguerite Archie-Hudson (D-Los Angeles), zipped through the state Legislature in the last days of the session in 1992.

It was just a few months after the riots, and pressure on politicians to act was intense. Local officials were given “one hot minute” to look at the bill before it became law, said Reynold Blight, now charged with implementing the program for the city of Los Angeles.

The zone’s borders embrace scores of places where poverty and riots intersected. As a result, the zones cut a swath across a quarter of the city and through miles of land outside city limits.

Within those areas, businesses can take modest write-offs on state taxes if they buy equipment, construct new buildings or add employees. Employees claimed for tax credits under the program must live within the zone.

A slightly different and more restrictive set of rules has been the basis of state enterprise zones for years.

In fact, as a concept, zones have provided a model for poverty-fighting measures nationwide. In California alone there are now 40 enterprise zones and other tax-incentive zones of various types--including five in the Los Angeles area. A handful of recent bills have asked for new or expanded ones.

“Everyone wants a zone, it’s the ‘in’ thing,” said Lites, the legislative consultant.

But it has been difficult to determine how well they work. Nationwide, academics have found that some work and some don’t. But the factors that cause local economic changes can be complex, and experts say that isolating ones that relate to zones is a daunting task.

“Frankly, the only way to do it would be to interview every single company” that uses the tax breaks, said Pat Noyes, director for the office of business development at the state Trade and Commerce Agency.

In California, efforts to track zone companies have been so primitive that when state auditors launched a study of enterprise zones several years ago, a chief tool for locating such businesses was the Yellow Pages, said state auditor Kurt Sjoberg.

Subsequent studies have been more sophisticated, but have yielded conflicting results.

A UC Berkeley study a year ago found that California enterprise zones overall performed the same or worse than adjacent communities.

But another, more recent study by the California state auditor found that they performed better. However, the study stopped short of giving the credit to the tax incentives. Instead, the auditor said other factors could be at work and said adequate steps to monitor the program had not been taken.

The question of how many residents of Los Angeles’ riot-torn neighborhoods are benefiting from the Los Angeles Revitalization Zone is probably unanswerable.

State officials say they don’t know how many new jobs are attributable to the zone. Nor do they know the type or location of businesses that help themselves to the tax breaks.

Confidentiality policies are part of the reason. Companies use the tax breaks simply by taking write-offs on state income tax forms that aren’t open to the public, said Jim Shepherd, spokesman for the Franchise Tax Board.

Shepherd said the tax board doesn’t have the personnel to closely monitor the zone. Nor does revitalization-zone law require it. The same goes for Trade and Commerce officials. Employees there who oversee the zones spend most of their time establishing new ones, said Noyes.

Los Angeles officials, anticipating criticism of the zone’s cost, have just launched a survey of businesses to get an idea of how the tax breaks are used. And officials with the state Trade and Commerce Agency say they are now taking steps to tighten oversight of the program.

For now, lack of information has made it difficult to dispatch one of the main criticisms of the revitalization zone: that it benefits businesses that don’t need help.

Linda Griego, president of the nonprofit riot-recovery group RLA, formerly Rebuild L.A., suspects that the zone is too broadly drawn, and that those who ought to benefit, such as small manufacturers in depressed areas, lose out to firms with tenuous links to the inner city.

Griego was surprised when her accountant told her that a restaurant she owns near Figueroa Street and Wilshire Boulevard downtown qualified for zone tax credits. “I have a problem with that,” she said. “If I can take advantage of the tax credits, so can IBM. And all those law firms. And Sanwa Bank.”

In fact, Sanwa Bank does use the tax breaks, said a spokesman. IBM representives said they couldn’t say for sure.

Who gets the benefit of the tax breaks depends on who finds out about the program.

City officials conducted seminars with accounting firms to get the word out.

Alexander Gordon, a Panorama City dentist, had never heard of the revitalization zone, though his office is within its borders and he hires employees from the neighborhood.

During the riots, Gordon had just enough time to snatch his diplomas off the wall and flee before a mob burned down his office. He’s managed to start over, but tax breaks would have come in handy, he said.

Data on enterprise zones collected by the state auditor indicates that the largest direct beneficiaries of those tax breaks are banks.

The auditor found that nearly $28 million of the $53.4 million claimed in zone-related write-offs during 1988-1992 were in the form of net interest deductions for lenders.

The net interest deduction is a provision that allows banks to write off state tax on interest for loans to companies in zones. The revitalization zone program contains an identical provision. The idea is to increase the availability of capital--the very mother’s milk of revitalization--in depressed areas.

No information is available as to what extent the interest deductions account for the high cost of the revitalization zone. But Newport Beach executive Roy Berelowitz, who provides banks with software to flag zone addresses, believes they are used extensively.

Banks use his company’s software to check addresses on thousands of loan requests, Berelowitz said. The deduction stimulates the flow of capital to neighborhoods that need it, he said. “It’s a fantastic program.”

But the zone does not induce lenders to make higher-risk loans--say, to struggling inner-city entrepreneurs who wouldn’t otherwise get one, he said. Regulatory and fiduciary restrictions make that unlikely. “Banks don’t behave that way.”

Loree Steckler, a vice president for American Pacific State Bank in Sherman Oaks, agreed. She said the bank expects to save $200,000 in taxes in 1995 from zone programs. The bank sometimes gives slightly better terms to zone borrowers, but most are existing customers, and “as far as risk, our lending criteria doesn’t vary for that,” she said.

David Dowall, a professor of urban economics at UC Berkeley who led the critical study of enterprise zones last year, questioned whether this is worth it. “That doesn’t sound as though there’s an effect on the margin,” he said.

Archie-Hudson, the assemblywoman responsible for starting the zone, defends its performance, though she concedes that data is lacking. She also said it is too soon to judge the zone’s full effect.

“I am interested as everyone else has on having a real cost-benefit analysis,” she conceded. “But I won’t let you argue there that there is no benefit to tax base by putting people to work.”