In The Zone

A new study finds that state enterprise zones don't do much good, partly because they suffer from fuzzy policy goals.
December 2003
William Fulton
By William Fulton  |  Columnist
Director of the Kinder Institute for Urban Research at Rice University and former mayor of Ventura, Calif.

Many economic development efforts are based on the assumption that it is possible to use public policy--and, in particular, financial incentives--to move businesses into economically distressed areas. This is one of the basic tenets of redevelopment, and in the past 20 years it has also formed the foundation of the move toward enterprise zones as well.

But are these policy levers really strong enough to move businesses around and to induce them to employ people who actually live in the distressed areas? That would be a tall order for any public policy, and a new study from the Upjohn Institute suggests that it's just not happening--at least so far as state-level enterprise zone programs are concerned.

In a wide-ranging and mostly quantitative analysis of state enterprise zone programs, Alan Peters and Peter Fisher of the University of Iowa came to the conclusion that these programs don't seem to do anything they are supposed to do. They don't draw into distressed areas businesses that wouldn't otherwise locate there; and the businesses that do locate there don't appear to employ many workers who live in the vicinity. What's worse, the subsidy incentives in state programs favor capital investments, pushing businesses toward a capital-orientation rather than employment.

The Upjohn study's number-crunching is pretty impressive. But the bigger picture that emerges is the danger of falling in love with a policy fad when the policy's overall goals aren't clear, and other policies are working at cross-purposes.

Enterprise zones were a Reagan-era policy innovation--a kind of a twist on supply-side economics that rested on a simple principle: If you cut taxes and regulation in distressed areas, then those areas will thrive economically. The idea was aggressively promoted by then- U.S. Representative Jack Kemp of Buffalo. Unfortunately, the idea was never really tested on the federal level, unless you count the Clinton era's watered-down "empowerment zones."

A lot of states passed enterprise zone programs. But without federal tax and regulatory incentives, state programs were limited in scope. And in some states, Democrats added a lot of strings--such as local hiring requirements--to a Reagan Revolution idea. (California passed no less than two enterprise zone programs, one promoted by the Democrats and one promoted by the Republicans.)

In their comprehensive analysis, Fisher and Peters found that state enterprise zones didn't do much good, partly because they suffered from fuzzy policy goals. As with similar tools, such as redevelopment, enterprise zone advocates sometimes can't figure out whether they're promoting general economic growth, growth in business profits or improved employment. The study found that incentive packages could be easily wiped out by a small wage premium, and that most people who work in enterprise zone companies live elsewhere. Amazingly, enterprise zones were a net minus to city tax coffers in most cases.

The most startling finding, however, had to do with all the other things states were doing while they were supposedly promoting enterprise zones. During the 1990s, states dramatically ramped up their overall financial incentives for manufacturing (a sector that enterprise zones focus on). This was especially true in the Midwestern and Southern states that were duking it out for auto assembly and other manufacturing jobs. In Michigan, for example, incentives increased from $3,500 per manufacturing job in 1990 to more than $10,000 in 1998.

Many states showed dramatic increases in these financial incentives during the same time period--so much that they more than counterbalanced the enterprise zone incentives. As a result, enterprise zones were actually at more of a disadvantage with regard to state taxes at the end of the '90s than they had been a decade before. In other words: Even as they were trying to lure businesses into enterprise zones, states were trying so hard to lure businesses to locate anywhere that they gave more away outside the zones than inside.

It's hard enough to craft a public policy that succeeds in locating successful businesses--or any other successful human activity, for that matter--in specific geographical locations. But it's harder still to do so when the overall pressure for lower taxes and less regulation is so great.

When Steve Forbes ran for president in 1996 on a flat-tax platform, enterprise zone enthusiast Jack Kemp supported the idea by declaring that it would "make the entire country a vast enterprise zone, from sea to shining sea." This was great rhetoric, of course, but it also fuzzed up the purpose of enterprise zones.

If a flat tax--or any other tax incentive--is applied everywhere, then how can those areas that are already unattractive gain an advantage? No matter how good an idea the enterprise zone is, success can be undermined by the headlong rush to, in President George W. Bush's words, make the pie higher.