State Enterprise Zone Programs: Have They Worked?

The Failures of Economic Development Incentives

“…Papke (1995) is skeptical that tax differentials are big enough to matter. Some have put the tax estimates deriving from hypothetical firm rnodels into the right-hand side of econometric equations of taxes and growth-the results here are again highly variable (L. Papke, 1991, showing a substantive and statistically significant impact, and othets showing little or none: Peters & Fisher, 2002b;Steinnes, 1984;Tannenwald, 1996) Finally, there is the issue of whether or not statistical significance also adds up to practical significance. Suppose for a moment that we accept the new "consensus" position (as put forward by Bartik, 1991) that taxes have a statistically significant effect on economic growth, and that the interstate elasticity of economic activity with respect to taxes is about -0.3.…”

“…The econometric, survey, and case study research they reviewed found small or no effects in all but a few instances (most importantly, L. Papke, 1994). Peters and Fisher's (2002b) review of some of the same literature and a recent flurry of new econometric papers on enterprise zones and growth concur. Why have enterprise zone incentives failed to promote economic growth?…”

“…Bartik came to much the same conclusion. It is also likely that incentive competition has intensified, and the size of the tax and incentive differentials across states and cities has increased (for recent empirical support, see Peters & Fisher, 2002b).…”

“…Incentives, for all their cost to state and local government, are still too small to matter much. Typically, a firm's wage bill will be much greater than its tax bill; for the average manufacturing firm in the U.S., payroll is about 11 times, the firm's state and local taxes before incentives (Peters & Fisher, 2002b). Thus fairly small geographic differentials in wages could easily outweigh what appear to be large tax and incentive differentials.…”

“…This is true even of the incentives offered in that most generous of target regions-the enterprise zone. Peters and Fisher (2002b) calculate that across their sample, all state and local incentives added together are equivalent to a mere 1.6% (minimum) to 7.1% (maximum) cut in wages. For a job paying $10.00 an hour, the cut would equal between 16 and 71 cents an hour.…”