Enterprise Zones: A Bipartisan Failure

Enterprise Zones: A Bipartisan Failure

REUTERS/Larry Downing

On Wednesday, President Obama endorsed the idea of “promise zones,” a variation of the old Republican idea of enterprise zones. These new zones—located in San Antonio, Philadelphia, Los Angeles, Southeastern Kentucky and the Choctaw Nation in Oklahoma—will receive intensive federal support, together with state and local initiatives, to raise growth and employment.

The idea of targeting tax and other incentives to specific areas dates back at least to the 1968 presidential campaign, when both Richard Nixon and Bobby Kennedy endorsed the idea. In the 1970s, the idea was picked up in England, where more than two dozen enterprise zones were established.

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In the 1980s, New York Reps. Jack Kemp and Robert Garcia, the former a Republican and the latter a Democrat, cosponsored legislation to create enterprise zones in the U.S. But they failed to get Congressional approval, although some state-level enterprise zones were created.

As secretary of Housing and Urban Development during the George H.W. Bush administration, Kemp continued to push hard for enterprise zones, which he liked to call empowerment zones. Legislation was finally enacted in 1993 and expanded in 1997 and by subsequent legislation. In 2000, Congress enacted the New Markets Tax Credit as an additional enterprise zone incentive. Thus we now have considerable experience with the enterprise zone idea in operation.

Unfortunately, the evidence shows that enterprise zones are at best a very weak generator of jobs. The U.S. Government Accountability Office has done several studies and concluded that there was no significant difference in economic growth or job creation inside the enterprise zones from the surrounding area.

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Academic research confirms this conclusion. A 2006 article in the Journal of Urban Affairs found only a few instances in which economic activity in the zone was better than that in comparable areas outside the zone. An article in the Economic Development Quarterly in 2009 found “no evidence that these enterprise zones affected the employment of zone residents.” An article in the Journal of Urban Economics in 2010 found, “The evidence indicates that enterprise zones do not increase employment.”

The evidence is equally weak regarding the New Markets Tax Credit. A 2009 article in the Public Finance Review found no change in investment in low-income communities. A report on the tax credit for the Treasury Department by the Urban Institute in 2013 found that job creation was small and carried a high cost, averaging $53,162 in tax credits for each job created.

There are a variety of reasons for why enterprise zones have failed. One is that businesses simply gamed the system and figured out ways to get the tax cuts without doing much of anything in return, something economists call “rent-seeking.” Often, the “job creation” in the zones resulted simply from the relocation of business just outside the zone into the zone. Another problem is that high taxes are not a significant reason why businesses don’t invest in the inner cities now. It’s more because they lack an educated labor force, transportation, a local population with purchasing power and other factors that the enterprise zone concept didn’t address.

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Supporters refuse to acknowledge that enterprise zones were a good idea that was worth trying and just didn’t work. Instead, they keep beating this dead horse as if it is still an untried idea from which we have no experience of failure. On Dec. 18, Sens. Rand Paul and Mitch McConnell, both of Kentucky, proposed new enterprise zone legislation as if they just came up with the idea for the first time.

It is tempting to members of both parties to come up with a place-oriented policy that targets the problems of poverty and unemployment in high-profile locations where they are especially bad. In theory, a relatively small amount of money can be leveraged to jump-start growth in areas where there may be positive spillover effects.

This approach is attractive in an era when government resources are severely limited. Democrats are unable to repeat Lyndon Johnson’s “war on poverty,” which was launched 50 years ago this month, while the sorts of big tax cuts implemented by Ronald Reagan 33 years ago are also off the table due to the budget deficit.

Perhaps the new Obama administration initiative will add something new to the tried-and-failed enterprise zone strategy of the last 20 years. But I am extremely doubtful. To me, this looks like the equivalent of establishing a government commission to investigate a problem; that is, a way to appear to be doing something about it without really doing anything at all.

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