What Do We Know about Enterprise Zones?

Abstract

In the last decade, most states have targeted certain depressed areas for revitalization by providing a combination of labor and capital tax incentives to firms operating in an "enterprise zone" (EZ). Britain is also completing a federal program that designated zones for a ten-year period. These zone experiments can add to our understanding of the influence of tax policy on business investment, and provide insights into the design and implementation of federal programs with similar objectives. This paper summarizes the theory and empirical evidence on the operational success of these EZ programs. Economic theory predicts that the effect of tax incentives on zone wages and employment will depend on the elasticity of supply of factors to the zone and on the elasticity of demand for zone output. For plausible parameter values, a labor subsidy or an equal-cost subsidy to zone capital and zone resident labor will raise zone wages. A capital subsidy alone may actually reduce zone wages. Employment effects are likely to be small if labor is inelastically supplied. The British national EZ program was intended to promote new economic activity in vacant areas with little or no industry and few residents. Studies of this program found that between 50 and 80 percent of zone businesses were relocations, at an annual cost per job of approximately $15,000.

Do enterprise zones create jobs? Evidence from California’s enterprise zone program

“…Instead, studies have used aggregate data on zip codes (e.g., Dowall, 1996;Bondonio and Greenbaum, 2007) or census tracts (e.g., O'Keefe, 2004;Ham et al, 2009), the boundaries of which correspond only approximately to those of enterprise zones. These approximations, however, introduce measurement error by incorrectly assigning areas (and the workers or businesses in them) as inside or outside enterprise zones (Papke, 1993). For example, Elvery (2009) notes that for the two states he studies, if enterprise zones are defined as the areas encompassing all zip codes that overlap with enterprise zones, then the resulting enterprise zone definitions are six times larger than the actual zones.…”

The transfer of Tax Increment Financing (TIF) as an urban policy for spatially targeted economic development

“…This is in a similar vein to other spatially targeted economic development initiatives since the 1980s, that have had some element of policy transfer association such as Urban Development Grants (UDG) (Meyer and Kraushaar, 1989;DSD, 2011;Goodhall, 1985), Urban Development Corporations (UDC) (Miller and Kraushaar, 1979;Raco, 2005), Business Improvement Districts (BIDS) (Cook, 2008;Lloyd et al, 2003) and Enterprise Zones (EZs) (Lloyd et al, 2001McGreal et al, 2002;Papke, 1993;Mossberger, 2000).…”

“…Examples of these transfers include: Urban Development Grants (Goodhall, 1985); and Urban Development Corporations (Raco, 2005); Business Improvement Districts (Cook, 2008); Tax Increment Financing (BPF, 2008); The Core Cities Group (2008Group ( , 2010. In the case of Enterprise Zones transfer has seen a UK to US direction of travel with individual US states enacting zone programmes in the early 1980s and the federal government adopting a zone program in 1993 (Mossberger, 2000;Papke, 1993). Whilst some have been primarily interested in documenting the transition of individual policies such as BIDs (Cook, 2008), others (Mossberger and Wolman, 2003;Wolman, 1992) have sought to evaluate the efficacy of policies once transplanted.…”

Do Corporate Tax Concessions Really Matter for the Success of Free Economic Zones?

“…6 Particularly tax incentives in areas of high unemployment are more likely to be cost-effective and progressive (Young and Miyagiwa, 1987), although this empirical finding is questioned by Fisher and Peters (1998) and Gross and Phillips (1999). 7 In addition, as Papke (1992) suggests, ''incentive may affect factor prices, and incentives that lower the price of capital goods have both an output effect (whereby production and employment increase because costs are lowered) and a substitution effect (whereby capital is substituted for labour). If the substitution effect is stronger, a capital intensive could reduce employment'' (Fisher and Peters, 1997, p. 125).…”