Evaluating Enterprise Zones
NCSL/Annie E. Casey Partnership on Family Economic Success
By Ian Pulsipher
Zone-based initiative programs, commonly referred to as enterprise zones, are included in the economic development policy of 43 states. Designed to encourage investment and economic growth in distressed communities, enterprise zone programs have been in operation in this country for more than 20 years. Many zone incentives and requirements are common to the programs of different states, although the design, purpose and goals of each state's enterprise zones vary significantly. Despite the popularity of enterprise zones as an economic development tool, significant disagreement still exists as to whether they deliver the proposed benefits to states and communities. With legislative authorization for many programs set to expire, some states are choosing to expand their programs; others are content to see them go.
State Enterprise Zone Programs, Origins and Current State
The idea for enterprise zones first came to America from the United Kingdom. British House of Commons member Lord Geoffrey Howe and Professor Peter Hall coined the phrase and promoted the concept of enterprise zones in 1978. The belief of Howe and Hall--that 1) reducing governmental involvement in commerce on a geographically designated basis would increase local economic development and that 2) targeting underdeveloped communities for this strategy would decrease economic disparity between areas--still forms the rationale and design of today's U.S. state enterprise zone programs.
Connecticut became the first state to create enterprise zones in 1981, and by 1995, more than half the states had followed suit. Currently, 43 states operate approximately 3,000 enterprise zones under a variety of different names, including "Renaissance Zones," "Empire Zones," Pine Tree Opportunity Zones," "Crop Zones," and "Economic Target Areas." The prevalence of these programs in the states varies. New Mexico's program consists of one enterprise zone located in the city of Deming, while more than 1,700 separate enterprise zones are spread throughout Louisiana. A third of Ohio is reported to be covered by the state's enterprise zones, and three states--Arkansas, Kansas and South Carolina--have designated their entire state as an enterprise zone. Still, most state programs are comprised of less than 50 defined zones that average less than 20 square miles in area.
Federal Zone Programs
In addition to state zone-based incentive programs, federal enterprise communities and empowerment zones were created by the Clinton administration in 1993. These zones, modeled after state enterprise zones, share the same goals and methods of improving distressed communities--the facilitation of economic investment by reducing tax burdens on business and provision of further financial support for development.
The authorizing legislation, included in the Omnibus Budget Reconciliation Act of 1993, allows for nine empowerment zones (six located in urban areas and three located in rural areas), and 95 enterprise communities (65 urban, and 30 rural). For an area to become either an empowerment zone or an enterprise community, conditions related to distress and poverty must be demonstrated to the secretary of Housing and Urban Development, which designates urban zones, and to the secretary of Agriculture, which was assigned to designate rural zones.
Purpose and Goals of Enterprise Zones
Enterprise zone programs, in both their conception and current operation, are designed to improve the economic conditions of underdeveloped areas and communities. Enterprise zones encourage economic growth in these areas by creating more favorable and attractive conditions under which businesses can operate. Enterprise zones have increasingly been regarded as an orthodox economic development and business attraction program for states; however an understanding and commitment to the original focus of improving distressed communities remains almost universal in the states. Even the three states that have designated the entire state as an enterprise zone maintain a focus on the most vulnerable communities by offering increased incentives to more distressed areas.
Although the general commitment to decreasing regional economic disparity through increased focus on underdeveloped areas is common to all enterprise zone programs, the focus and stated goals of enterprise zone programs for achieving that objective can and do vary.
In Michigan, goals of enterprise zones include curbing population flight from inner city neighborhoods. Detroit's Neighborhood Enterprise Zone program offers property tax cuts for residing in certain areas to stop the exodus of residents from the city.
Other enterprise zone programs focus on improving a community's infrastructure--an important factor in fostering economic development. New Jersey's program directs the sales taxes collected from businesses that operate in the zone to neighborhood improvement efforts, including street cleaning, façade repair and security. A 2005 proposal in New Jersey would channel funds originating from enterprise zone business taxes into community schools.
Many state enterprise zone programs have a goal of increasing investment generally by enticing new firms to relocate in the state without targeting specific types of industry or firms. The Missouri program, for example, offers considerable flexibility in the designation of enterprise zones by allowing communities to create new enterprise zones or to alter existing boundaries to encourage negotiations with specific firms that are considering relocation within the state.
The goals of many state programs focus on employment issues. Tax credits for increased payroll expenditures as a result of more hiring are among the most common incentives offered to firms in enterprise zones throughout the states. Efforts to increase local employment often are accomplished through attracting manufacturing facilities that require significant labor inputs to relocate to enterprise zone communities. Illinois, for example, offers a 50 percent tax abatement for 10 years to qualifying manufacturing firms that locate or significantly expand in enterprise zones.
Requirements and Incentives
To ensure that enterprise zone programs are being used to help less developed communities, most states require a condition of economic distress in the area, demonstrated by specified economic or demographic indicators, for an area to be designated as an enterprise zone. These indicators usually include high unemployment, low overall investment and poverty. Some states also include low real estate occupancy, physical blight and population loss as conditions that qualify areas for enterprise zone designation.
States may offer firms that relocate or expand in designated enterprise zones a number of financial incentives aimed at reducing costs associated with governmental regulation of their business activities. The most common incentives, offered in more than half the enterprise zone states, include income tax credits, job creation tax credits, and sales and use tax exclusions. Other incentives--such as direct state loans, property tax relief, investment tax credits, tax increment financing, and improvements on public infrastructure and services--are offered by more than a third of the enterprise zone states. Incentives--including venture capital funds, employee income tax credits, and other general reductions of regulatory burdens--also are offered to firms in some state enterprise zone programs.
Beyond physical location in the zone, firms also may be required to demonstrate performance measures on net job creation, capital investment in facilities located within the zone, and employment of enterprise zone residents or other workers who belong to a group defined by the program as disadvantaged, in order to maintain eligibility for the incentives.
Evaluating Enterprise Zones
Despite the popularity of enterprise zone programs in the states, significant disagreement still exists regarding the effectiveness of these programs. The most obvious divisions of opinion are visible between private business interests and economic development offices that support the programs and academics whose studies often show little significant economic benefit in operating enterprise zones and call for their replacement.
The existence of an enterprise zone and its accompanying incentives usually is not credited as the sole factor in the relocation, hiring or investment decisions of firms, nor are they often credited as the only reason for increases in economic activity in the host communities. However, private business and state government officials often describe enterprise zone incentives as an important factor in these dynamics and as an important component of a complete and effective community and economic development strategy.
Academic reviews of enterprise zones, often prepared using econometric models, have found little evidence that zone programs would actually result in net job creation and increased community investment. Some economists hold that, as a rule, fiscal variables have very little effect on economic development, thus undercutting the fundamental rationale for enterprise zone programs.
For those who maintain that fiscal variables do exert influence on development, such influence is described as only moderate, and the incentives that are commonly offered in enterprise zone programs are said to be too small to induce firms to change their business and investment decisions. In addition, in areas that have experienced growth after enterprise zone designation, it has been difficult--in empirical considerations of enterprise zones--to demonstrate a causal relationship between the two developments.
State governments also have conducted a number of reviews of their respective state enterprise zone programs. As with other economic development programs, authorizing legislation for enterprise zones usually stipulates periodic reviews of zone operations. In addition, as several state enterprise zone programs have approached their expiration date--typically fifteen or twenty years--considerations about whether to continue the programs in some cases have led to comprehensive state program evaluations that are larger in scope than they scheduled assessments.
In 2004, the Office of the State Comptroller in New York published the report Assessing the Empire Zones Program: Reforms Needed to Improve Program Evaluation and Effectiveness. Available online to the public, this report details areas of the program that could be targeted for improvement, and contains specific recommendations to that end. Also included in the report, for contrast and comparison, is information about other state enterprise zones.
Also in 2004, Florida's Office of Program Policy Analysis and Government Accountability published an information brief that provided background information about Florida's enterprise zones, data about zone distribution and program components of other states, and recent developments concerning enterprise zones on a national scale.
Periodic and comprehensive reports usually include relevant information such as the amount of incentives offered and the amount actually accepted by firms qualifying for the enterprise zone program, the number of firms participating in the program, the number of jobs created in the zone, capital investments undertaken by the firm, the number of local residents employed by firms within the zone, and information about program administration. This information, although it is not the only data needed for definitive evaluation of enterprise zone program effectiveness, would provide state lawmakers with a crucial understanding of actual results of the programs
A common frustration often voiced by those who conduct these reports, and by legislators who reference them for their policy decision, is that accurate and complete information about economic activity within the zone is not available. Among the factors that contribute to lack of actionable data in the state reports are incomplete reporting by participating firms, lack of resources and capability to conduct thorough reviews of the zones, and a general misunderstanding of the purpose and goals of the state programs.
In addition to the obvious difficulty presented by the lack of proper information to analyze, the evaluation of enterprise zone programs has been difficult due to lack of program focus. Economic development officials and zone administrators may be unclear about the existence and relative importance of the various goals that an enterprise zone was designed to meet. This can lead to imprecise accounting and reporting for the goals of the program, making even more difficult the analysis of the success or failure of reaching those goals.
Effects on Communities and Families
Central to the goals and functions of enterprise zones is the ultimate increase of the wellbeing of the communities and families inside the zone boundaries. Another part of program evaluation, therefore, is consideration of how enterprise zones affect communities and families within their borders.
Chief among these possible effects are those related to employment and small business development. Zone incentives often are used to attract new companies to an area, thus increasing the overall level of investment in a community and adding local employment opportunities. In addition, many enterprise zone programs design incentives to induce firms to hire more workers, and often more specifically, to hire more local residents or disadvantaged workers.
Louisiana's enterprise zone program that requires firms hire 35 percent of their workers from specified groups of disadvantaged individuals if they wish to be eligible for selected incentives. Enterprise zone firms in Illinois are eligible for a $500 income tax credit for each "dislocated worker" or "economically disadvantaged individual" hired, provided they have added a minimum of five employees from one of these groups.
The effect of enterprise zones on small business start-up and expansion and the consequential effects on the local community are other important micro-level aspects of zone programs. Enterprise zone incentives that focus on small businesses can be particularly important during the periods of start-up and expansion that involve large, fixed costs--and, therefore increased risk--for firms. Benefits to small firms during this time--even marginal benefits that would encourage their development--translate into gains for the community and local residents represented by increased business activity and employment. Enterprise zones that successfully encourage what many have deemed the engine of economic development--small businesses--can affect communities in significant and positive ways.
Maine's Pine Tree Zone program, although still in the early stages of operation, has received a strong response from small businesses that already are operating in the state but are hoping to expand. In the first year of program operation, eight zones were designated with 30 businesses participating in the program by the end of 2004. Maine's commissioner of economic development reported in November 2004 that another 100 businesses had made inquiries about participating. Officials in Maine do not expect that level of interest to continue indefinitely. They do, however, describe the Pine Tree Zone program as one that facilitates business expansion by providing firms with the opportunity to invest through a decrease in overall costs, albeit by marginal amounts.
In addition to employment and small business development, enterprise zone goals often include the broad aim of improving general community economic conditions. A study conducted by Fannie Mae in 1999 attempted to measure this. The study considered whether the presence of enterprise zones in a community would result in positive economic effects that would be visible through a broad development indicator of appreciating local housing markets. The study found that enterprise zone areas with low vacancy rates did experience positive growth in housing rates, while their findings for communities with high vacancy rates exhibited no similar benefit from enterprise zones programs.
Recent Developments
As legislative authorization for many state enterprise zone programs approaches expiration and state economic and fiscal conditions remain less than ideal, more states are considering programs options.
Colorado's enterprise zone program could possibly undergo modifications to expand. In 2005, the Colorado economic development office hopes to further extend enterprise zone incentives with bill proposals that would extend to businesses outside the currently designated enterprise zones the same job creation tax credit offered inside the zones. The proposal also would allow the application of investment tax credits to equipment owned by a firm that is operating within the enterprise zone, but whose capital machinery--long haul trucks--are used in business operations outside zone boundaries.
Kentucky, on the other hand, is phasing out its enterprise zone program by allowing legislation for its 10 enterprise zones to expire. Bills proposing to renew the program have failed four times in the state legislature. In addition to concern that the revenue lost as a result of the tax breaks has exacerbated the state's fiscal difficulties, a major complaint about the program was that data collected for program evaluation was incomplete and did not allow for meaningful analysis of the program's effectiveness. Although many small businesses and state and local economic development officials have been vocal in their support for continuation of the program, Governor Fletcher has indicated his intent to discontinue it, and possibly replace it with a new incentive program.
At the same time, some states have recently initiated enterprise zone programs. Maine's Pine Tree Zone program, discussed earlier, began operating in 2004. Although the program's short history makes it difficult to distinguish the relative importance of its economic contribution from outside factors, the Pine Tree Zone program has been well regarded and welcomed by Maine business and government.
Contact for More Information:
Ian Pulsipher
NCSL--Denver
(303)-364-7700, ext. 1649
Posted 26 February 2008.
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