From: Jackie Hulme <cadwallader@igc.org>
Newsgroups: soc.culture.latin-america
Date: 26 Jul 92 17:09 PDT
Subject: Re: CRITIQUE OF ENTERPRIZE ZONES/OFFER
Nf-ID: #R:cdp:1473800103:cdp:1473800104:000:22992
Nf-From: cdp.UUCP!cadwallader    Jul 26 17:09:00 1992


 
NEWS FROM IPS
 
Institute for Policy Studies              FOR IMMEDIATE RELEASE
1601 Connecticut Avenue, NW
Washington DC20009                CONTACT: Laura Burstein
FAX: 202 387 1795                    (202) 234-9382 ext. 249
 
ENTERPRISE ZONES ARE NOT COST EFFECTIVE
 
        Enterprise zones that grant tax relief to businesses for
locating their operations in economically depressed areas are not
the best use of taxpayer money, according to "Enterprise Zones: A
Critical Analysis," a briefing paper written by Ralph Estes and
published by the Institute for Policy Studies and the Center for
the Advancement of Public Policy.
 
Adherents of supply-side economics argue that business expansion in 
run-down areas will create jobs and revitalize the community better 
than would more direct training, jobs, and social programs, but there 
is little evidence to support their view. Thirty-seven states have 
established enterprise zones, and their record on job creation is 
spotty to poor. Few objective studies exist, while numerous instances 
of abuse have been documented in the press. 
Where enterprise zones appear to have worked reasonably well, they 
have been supported by comprehensive community programs including 
improved law enforcement, social services, job training, and 
infrastructure support. 
        Billions of dollars for enterprise zones in bills pending before 
congress, according to Estes, can better be invested in direct 
assistance to inner cities, such as public employment programs to 
hire inner city residents and provide them with essential training.
 
Dr. Ralph Estes is a resident scholar at the Center for Advancement 
of Public Policy and the Institute for Policy Studies in Washington, 
D.C. A CPA, he is also professor of accounting at American 
University. His books include Corporate Social Accounting, Accounting 
and Society, and the forthcoming Tyranny of the Bottom Line. He is 
currently working on two books dealing with national tax policy. M. 
Jeff Hamond, a graduate student at the John F. Kennedy School at 
Harvard University, assisted with research for the paper. 
Institute for Policy Studies
and the
Center for Advancement of Public Policy 
July 1992                        Briefing Paper
 
ENTERPRISE ZONES:
A CRITICAL ANALYSIS
 
                by Ralph Estes, Resident Scholar, 
                with M. Jeff Hammond 
        The basic concept of enterprise zones, not always made explicit, 
is to provide tax incentives to induce business to expand or relocate 
into targeted distressed areas. An enterprise zone is a defined 
geographical area of a city designated to qualify for certain 
benefits. Zones are often, but not always, selected on the basis of 
level of unemployment, condition of residences and neighborhoods, and 
lack of business activity. The implicit assumption is that business 
expansion in run-down areas will create jobs and revitalize the 
community better than will more direct social, jobs
9training 
programs. 
        Businesses that start up, relocate, or expand within the defined 
area receive tax breaks and other prescribed benefits. Benefits used 
most frequently by the states have included sales tax credits, wage 
credits, employer income tax credits, easing or exemption from 
regulations, tax credits for hiring disadvantaged residents of the 
area, capital financing, property tax credits, and investment tax 
credits. 
        The term "enterprise zone" was coined in 1978 by Geoffrey Howe, 
a member of the British Parliament. Prime Minister Margaret Thatcher 
then used the zones as part of a supply-side attempt to rebuild some 
of the run-down areas of Great Britain. Stuart Butler, a British 
economist, sold the idea to HUD Secretary Kemp--then a U.S. 
Representative--but it never became part of President Reagan's 
domestic strategy, so the states started legislating enterprise zones 
on their own in 1982. To date 37 states and the District Columbia 
have created over 600 zones. 
        
 
State Sponsored Enterprise Zones
 
        The evaluation of state-sponsored enterprise zones is mixed. 
Some zones appear to have attracted at least some new businesses. In 
several, perhaps most, cases, businesses have moved in, but inner 
city areas have seen little or no improvement. In virtually every 
case, it is impossible to draw  firm conclusion that the social and 
economic benefits of enterprise zones.
 
        Some of the larger state enterprise zone projects include: 
Baltimore. Park Circle is the home of 60 businesses that employ 1,400 
people, but the adjacent neighborhood has not improved, and teenage 
unemployment among blacks in the area still hovers near 40 percent. A 
GAO study on Maryland's enterprise zones found "little or no program- 
related effect on employment." 
 
Connecticut. Eleven cities and towns in the state have enterprise 
zones, but the state has no way to assess whether the programs have 
been cost-effective. In spite of a 50 percent credit on corporate 
business taxes for the first ten years, the zones have not helped the 
state recover from its disastrous economic slump. 
 
Kansas, Several years' experience led to cancellation of the program 
last year. Cities gerrymandered zone boundaries to include wealthy 
and prosperous neighborhoods and to take in existing facilities of 
healthy companies such as Boeing, Beech Aircraft, even the Coors 
distributorship. Cities also established zones entitling businesses 
to ten-year tax abatements, then moved the zones to take in a new set 
of businesses without cancelling the previously granted abatements - 
They thus created a shell game with enterprise zone boundaries that 
benefited business but had lile effect on jobs and inner city 
conditions. 
 
Los Angeles. Since 1988, the Pacioma zone has created 212 jobs, the 
Watts zone 159, and the Central City zone 220. Pacioma has seen a 
spurt of industrial activity, but city planners doubt that it has 
been a result of enterprise zone tax incentives. Some businesses 
simply moved in from other areas, leading to no net gain in jobs. 
 
Milwaukee. State tax credits in the inner city during 1990 helped 
create 384 new jobs; 20 percent of the new businesses had relocated 
from the suburbs. 
 
New Jersey. Job growth in enterprise zones has been larger than in 
communities outside the zones, but researchers have been unable to 
trace the growth directly to the program. Researchers did find that 
only a third of the businesses in the zones say the tax breaks were a 
big factor in their decision to locate in the inner city. St. Louis. 
Since a zone was established in the Manchester Avenue area in 1983, 
only four small businesses have been created. Of the 328 new jobs 
created by these businesses and others that expanded or relocated 
into the zone, only 25 have gone to area residents. 
San Diego. The Barrio Logan zone is described as one of the most 
successful in the state, hiring over 1,600 unemployed or government 
job-training program graduates since 1987. But the city government 
has no way of knowing what these employees are being paid, whether 
they would have been hired without tax credits, or whether they end 
up on unemployment when they leave their jobs.
 
        How well have state-sponsored enterprize zones worked? The brief 
answer is: nobody knows. Some jurisdictions have assembled extensive 
data on the tax expenditure costs of enterprise zone legislation, but 
none has developed credible estimates of benefits to depressed areas. 
State and local economic development officials who were interviewed 
consistently voiced the view--never for public quotation--that the 
social benefits were unlikely to equal the tax costs.
 
 
Questions Raised by the State Experience
 
No consensus exists on the enterprise zone issue. Some of the 
questions being debated are:
 
  Is it more important to provide incentives for businesses to locate 
a expand in the area, or to provide jobs for individuals living 
within the zone? 
 
  Are tax incentives alone sufficient inducement for a company to 
locate  in a run-down or burned-out area, when the increased costs of 
insurance and security are taken into account? A 1988 study by the 
General Accounting Office found that financial inducements ranked 12 
out of 13 when employers in two enterprise zones were asked to rate 
the importance of factors in their location decisions. Business Week 
recently reported that infrastructure and access to markets are more 
important than fiscal incentives in choosing a location. 
Richard Cowden, executive director of the American Association on 
Enterprise Zones, argues that the most effective zones  provide 
additional funds for improved law enforcement, social services, job 
training, and infrastructure, in addition to providing tax breaks. He 
warns that programs that consist only of tax incentives are unlikely   
to work. 
 
  Will companies find skilled laborers or managers in the zone area? 
If a company simply brings in employees from outside the zone, then 
there is little or no benefit to the zone. 
 
  Once tax credits and other benefits have been granted, will 
companies stay in the enterprise zones, or will they merely "take the 
money and run"? 
 
  Will there be a relocation tradeoff? If a company moves from one 
neighborhood into another that is designated as an enterprise zone, 
are jobs just being moved around to take advantage of tax benefits 
with no net gain? 
 
~ Most importantly, are enterprise zones cost-effective? Is this the 
best use of limited public funds, or are more direct forms of 
assistance to inner-city areas and the unemployed more effective? 
Proposals Pending in Congress
 
The Bush administration put forward a proposal for enterprise zones 
based roughly on the reco[[Qions of HUD Secretary Kemp; a 
modification of of this plan was passed by the House of  
Representatives on July 2 by a vote of 356 to 55, and now goes to the 
Senate. It would provide federal tax incentives for business owners 
and investors, and contains provisions creating 50 new zones, half to 
be in urban and half in rural areas; appropriation of $2.5 billion in 
"weed and seed" spending for job training, social services, and anti-
crime measures, with 80 percent of this spending going to urban areas 
and tax incentives to business worth an estimated $2.5 billion. These 
include:
 
1) 15 percent tax credit to employers for the first $20,000 of wages 
paid to each employee who both lives and works in the zone; 
 
2) exclusion of 50 per cent of capital gains tax on the sale of 
enterprise zone assets held at least five years;
 
3) tax deductions for investors of up to $25,000 per year for the 
purchase of stock in certain enterprise zone companies; and 
4 An increase of $20,000 for the first year deduction for new  
equipment purchased by zone enterprises, up from ten thousand.
 
        While the House modified some of the administration's proposals 
that: appeared designed more to subsidize business than to help 
distressed urban areas, their product was not greeted with 
enthusiasm. Some called it a step in the right direction, but Boston 
Mayor Ray Flynn acerbically called it a "meaningless package;" the 
head of the U.;S. Conference of Mayors said it was too little, and 
The New York Times editorialized that "this measure has gone from 
legislation to help cities to something that permits members of 
Contress to help themselves."
 
 
Some Probable Scenarios
 
Since it is difficult to evaluate the effects of abstract proposals, 
it may be useful to consider some cases based on the compromise plan 
that passed the House.
 
        Case A. A multinational corporation considers opening a 
fabricating and assemply plant in a zone area. It would employ 200 
workers; most of the jobs would require technical skills, experience, 
or training. Adequately skilled employees are either not available 
within the zone or would have to be attracted away from other jobs 
they already hold so few or no zone residents would find new 
employment at the plant. 
        No taxes would be due on gains from the sale of the plant's 
capital assets as long as they had been held at least five years. 
Since this plant would represent a fairly substantial undertaking, 
the company would not plan to liquidate it in the near future. Any 
benefit from avoidance of capital gains taxes would therefore be 
deferred at least several years in the future. If the plant were sold 
in fifteen years at a gain of ten thousand dollars, economic analysis 
would calculate this as a benefit with a present, or real, value of 
only about dol 400. This small amount is unlikely to be a significant 
factor in the decision. 
        Because of the company's size, stock investments in it would 
probably not qualify for the investment tax deduction. In this case, 
the enterprise zone subsidies would probably have no effect on the 
company's decision, and if it went ahead with the plant there would 
probably be little effect on the zone community.
 
        Case B. A bank opens a branch in the enterprise zone. Because of 
education and and experience requirements, most branch employees are 
transferred from other branches or hired from outside the zone. Three 
zone residents are hired as a security guard, a file clerk, and a 
building custodian. The file clerk was already employed outside the 
zone but was able to avoid a commute by changing to the branch. Wages 
for these three employe,  total $42,000. The bank would save $6,300 
from the wage tax credit. 
        The bank leases its branch building. If the bank is later 
closed, capital assets (furniture, computers, vaults) that may no 
longer be needed in the branch would not be sold but would be 
transferred to other branches; capital gains would not occur, and 
avoidance of a capital gains tax is irrelevant. The additional first-
year deduction of $10,000 for equipment investment would be worth 
only approximately $865 in present value, or real dollars-- obviously 
not enough to significantly affect the decision. 
        The bank, like most mature companies, finances new investment 
through retention of earnings or borrowing; new stock has not been 
issued in over 15 years. Tax deductions for purchase of stock are 
thus also irrelevant. 
        The bank would provide needed service to the zone community, but 
the effect of new jobs provided would be inconsequential. Bank 
management would weigh the tax credits against the risks and 
additional costs of locating a branch in a depressed area. The final 
decision would probably be made on strictly business projections of 
profit and loss; it is unlikely that the tax credits would be 
decisive. If it was not a good business decision in the past without 
the tax credits, it is probably still not a good business decision 
with a $6,300 tax credit and an $865 tax benefit on equipment 
purchases. 
 
        Case C A zone resident opens a convenience store. Two zone 
residents are hired at total wages of $24,000 per year, producing a 
tax credit of $3,600. 
        The building is leased, not owned. Small amounts of capital 
equipment are purchased, which after several years' use could not be 
sold at a gain; thus no benefit would accrue from avoidance of the 
capital gains tax. The business is a proprietorship, and thus tax 
deductions for purchase of stock would be irrelevant.
The community would benefit from the store. Two new jobs would be 
created. But it seems highly questionable that $3,600 in tax credits 
would be sufficient inducement to cause someone to open such a 
business if the business opportunity had not been attractive without 
these credits. 
        It appears from these cases that the enterprise zone proposal 
currently before Congress would provide next to no incentive to 
relocate or to establish new facilities for large enterprises with 
complex processes. Smaller enterprises might be nominally encouraged 
by the tax credits, but these would not be sufficient to turn bad 
business deals into good business deals. 
        Over the course of a decade an enterprise zone neighborhood 
could probably count a small number of incremental jobs,  traceable 
to the proposed llegislation.  Meanwhile accountants and lawyers 
would be busily at work determining how to exploit the capital gains 
and stock investment provisions of the act, provisions that would 
appear to have virtually no potential for producing either new 
business or new jobs in depressed areas.
 
 
A Variety of Options
 
        In a simple sense the enterprise zone idea can be appealing: 
stimulate business expansion and new enterprise creation in depressed 
areas, which will provide jobs to the unemployed and be a catalyst 
for neighborhood renewal. But current proposals, including the 
compromise version worked out by the Bush administration and the 
House of Representatives, involve subsidizing business and investors 
using the national treasury. There is little likelihood of 
concomitant benefits to economically depressed areas. 
These tax expenditures, totalling billions of dollars, must come from 
the pockets of other taxpayers or from reduced spending on other 
programs. Given Congress's self-imposed barrier to transferring 
budget funds from military programs to social programs, any such 
reductions would almost certainly come out of the hide of already 
starved social programs and most likely out of existing programs to 
aid cities and communities. 
        The policy question is straightforward: is this the best use of 
taxpayers' money to help cities? The answer is no. Enterprise zone 
legislation currently being considered, whether originating with the 
Republicans or the Democrats, is an election-year cosmetic  response 
to a newly-perceived crisis in the cities. It is another card in the 
supply-side, trickle-down economics deck. The President and the 
Congress ought to put enterprise zone proposals aside and turn to 
seriously addressing the economic, health, structural, and human 
problems of inner cities. A gimmicky quick-fix will not cure a 
generation of neglect. 
        The record and objective analysis demonstrate that the 
enterprise zone is an idea whose time has not come. But if the 
administration and Congress persist in considering enterprise zone 
legislation despite the evidence, it is imperative that they address 
the following issues:
 
1) The focus should be on jobs, not simply enterprise creation or 
expansion. Tax credits should apply only for net new hires of 
employees who live in the zones; this requirement was added by the 
House, but was not in the Bush administration's proposal and may not 
be retained by the Senate. It doesn't help a depressed area if 
employees come from stable areas across town, supplies are bought 
from outside the area, goods are shipped out of the area, and the 
business facility is virtually a fortress surrounded by a chain-link 
fence, and is not a real part of or contributor to the community. As 
a 1989 Urban Institute Study noted, <Few of the tax benefits in the 
leading proposals accrue directly to the disadvantaged residents.>
 
2) The experience of the states demonstrates that the enterprise zone 
concept has a reasonable chance of working only when it is integrated 
with a comprehensive program that includes job training, improvement 
of public transportation, better law enforcement, necessary social 
servics, education of both inner city residents and of business, and 
strong support from the city, state, and federal administrations.
 
3) Proposed reductions or elimination of capital gains on enterprise 
zone assets should be dropped. Any such reduction will not give 
venture capitalists a meaningful incentive to undertake projects that 
will provide long term benefits to the inner cities. This proposal 
appears to be simply a renewed effort to cut capital gains taxes with 
no demonstrable benefit to depressed urban areas. If incentives are 
going to be given to business, they must be much more closely tied to 
the desired outcomes. 
 
4) Accountability must be required. The record of the states shows 
that companies obtain long-term benefits, such as exemption from 
sales taxes, with no requirement of continued evidence of 
eligibility. Economic development officers report that claims for new 
jobs created are often nothing more than double-counting, 
exaggeration, and creative bookkeeping. 
 
5) To insure that companies do not simply " take the money and run," 
performance bonds should be required for benefits granted in advance- 
These could be returned to the company at the rate of so much per 
year, but retained by the government if the company does not earn the 
benefits already collected. Taxpayers would thus be fairly 
compensated for tax subsidies previously granted but not fully 
earned.
 
6) An audit mechanism should be established to insure that benefits 
granted to business are indeed earned, and continue to be earned- The 
record is too clear that we cannot simply take business's word. 
 
7) If the problem is inner-city distress and decay, the zones should 
not be allocated half to rural areas as the present legislation 
proposes. This appears to be nothing more than pork-barrel politics 
designed to generate support from members of Congress who represent 
rural districts.
 
8) Finally, any serious attempt to create federal enterprise zones 
must be preceded by careful testing in a small number of sites, 
probably no more than five. Thorough accountability must be achieved 
in such tests to provide even a moderately reasonable basis for 
objective evaluation--a basis that is simply not available in the 
past experience with state enterprise zones. 
 
        These "fixes" won't change the fact that enterprise zones are 
not a cost-effective use of taxpayers' dollars. The concept is 
flawed: bribing business to induce it to help the inner cities will 
always mean that the bulk of the benefits will go to business, not to 
the targeted communities; otherwise business would not be interested. 
This nation needs to turn its attention to the needs of the inner 
city. Washington should take the billions of dollars it is talking 
about putting into enterprise zones and invest it more productively 
and efficiently in direct aid to communities (the US cConference of 
Mayors has  already identified 7,252 projects that would put people 
back to work and repair the urban infrastructure). Invest in public 
employment programs to hire the inner city unemployed. Equip them 
with training, transportation, appropriate health support. Give them 
jobs repairing streets, sewers, and sidewalks, cleaning vacant lots, 
renovating buildings, planting trees and shrubbery, removing 
graffiti, building and staffing libraries, parks, and recreation 
centers. In other words, invest taxpayers' dollars in people, not in 
corporations.