| T |
he effectiveness of state enterprise zone programs, which offer tax abatements and other incentives for businesses to expand or move to economically blighted areas, remains a source of debate more than 20 years after states began creating them.
Some state programs – like the Empire Zone program in New York, among others – are so successful in luring projects that they virtually have become entire incentive programs in their own right.
But while state economic development agencies say they can be effective if developed and promoted properly, several university researchers dismiss these programs as a waste of taxpayers’ money.
Zones Attract Investment
Michigan’s enterprise zones are known as Renaissance Zones, or RenZones, and began in 1996. Advocates of enterprise zones often tout Michigan’s program as an example that works. The program has attracted 255 projects worth $1.8 billion in private investment, which has created 6,400 jobs, according to the Michigan Economic Development Corp. (MEDC).
Jeff Kaczmarek, senior vice president of business and community services at the MEDC, which oversees the program, says the first seven years have provided key lessons. He says enterprise zones are not a panacea and must be looked at as part of an overall economic development strategy.
“First, you must properly define an enterprise zone,” Kaczmarek says. “Communities must have the responsibility initially to make sure there’s a rationale for why they are doing a zone. Some areas are so distressed that they are unlikely to attract investment.”
|
Michigan’s RenZones are a mixture of public and private properties. Kaczmarek says agreements should be made in advance with private property owners requiring them to upgrade facilities in exchange for tax-free status. These deals should include performance bonds, he says.
“You have to market these zones,” Kaczmarek says. “The fact is it’s like any other economic development program in that you have to be constantly marketing to prospects. It has to be an ongoing and consistent effort.”
Kaczmarek says the taxes Michigan has waived have been a small fraction of the investment in Renaissance Zones. The state has completed its second round of zones, with all now in place. Firms receive 15 years of tax forgiveness, and the last ones will expire in 2017. Kaczmarek says the MEDC will support a third round if properly put together.
“We’re taking a hard look at the numbers to make sure we have good information on the investment,” he says.
“In general, we found these programs do not have any impact on total amount of economic activity in the designated areas,” says Dr. John Engberg, an economist with the RAND Corporation in Washington, D.C.
Engberg and his students examined comparison areas resembling actual enterprise zones prior to designation.
“We looked at employment, the number of business establishments and measured housing prices in the surrounding area with the idea that if the zone was doing better, the surrounding area would be more valuable,” Engberg says. “We couldn’t find much evidence they were having any impact at all.”
Engberg says his research indicates that new businesses often operate at the expense of other businesses near the enterprise zones. However, he notes that his study was an analysis of a six-year period and that longer-term results may be different.
Peter S. Fisher, a University of Iowa professor, and colleague Alan H. Peters co-authored State Enterprise Programs: Have They Worked?, published in 2002. Their conclusion in the book is that they haven’t.
“There’s probably better things you can do with the money,” Fisher says, noting infrastructure and educational needs. “In general, there is this continuing need felt by state governments – by legislators in particular – to say they are dong something about economic development. There has been a copy-cat effect as they look around and see what other states are doing. There’s not much evaluation by states to see if they are effective. They assume every job that happens in an enterprise zone is because of the zone.”
“Much of the research evidence is somewhat negative,” says Timothy Bartik, senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich., publisher of the book. “By definition, enterprise zones are supposed to target areas that have had a lot of economic problems,” he says. “But will an enterprise zone be enough to overcome high crime? Maybe that’s an issue we need to solve.”
Bartik says enterprise zones make sense for a piece of land, particularly a brownfield area, that is difficult to develop. He also notes that not all enterprise zones have been studied, so the jury may still be out.
Maine may soon join the 40-some states that have created enterprise zones since the early 1980s. Gov. John Balducci is pushing the establishment of eight “Pine Tree Opportunity Zones” throughout the state. Balducci’s proposed tax incentives would involve all levels of taxation, including those applicable to project construction.
Bret Nelson and Eric Powers operate the NAI Capital office in Bakersfield, Calif., which is active in enterprise zone work. They say the state program’s success has been tempered by a recent law requiring that companies going into enterprise zones pay prevailing wages.
“We’ve had companies pack up and leave the table when they learn about the prevailing wage law,” Nelson says.
But he also passes along anecdotal evidence of one manufacturer of high-end furniture who says his company will never pay any sales taxes as a result of earning so many credits.
“There are some good things and some bad things,” Powers says. “We have some clients who love the program who say they will never pay taxes. But we did lose a 1-million-square-foot [92,900-sq.m.] deal here that required prevailing wage.”
