Enterprise Zones: Do They Really Work?

Conservatives have said for a decade that inner cities could be rejuvenated the way the character Ray Kinsella drew baseball crowds to his farm in the movie Field of Dreams. The urban solution: Give businesses tax breaks, and they will come.

Now, in the wake of the Los Angeles riots, the "enterprise zones" notion is moving out of right field. Suddenly, much of Washington is working on a plan to sweeten existing, state-sponsored enterprise programs with federal tax breaks. The aim is to create jobs by providing tax relief to businesses that settle in the desolate areas.

LIGHT INDUSTRY. The program has long been popular outside of Washington: Since 1982, 38 states have created 600 enterprise zones in blighted inner-city neighborhoods. Phoenix Lighting Products Corp., a manufacturer of lighting equipment on Chicago's depressed West Side, opened its doors four years ago with the help of a 57% reduction in state and local taxes. Says co-owner David Hesse: "It would have been really tough to make it without the enterprise zone."

But experts believe that few businesses will want to move into troubled neighborhoods--even if federal aid is available. "The additional cost of doing business in these communities is significant enough that tax incentives alone can't offset the cost of insurance, security, and the ability to recruit a skilled work force," says Chris Walker, a researcher at the Urban Institute, a Washington think tank.

Indeed, several studies indicate that many companies consider variables such as infrastructure and access to markets more important in picking sites than tax breaks. James C. Harper says his outlet in New Jersey's Camden enterprise zone is the most successful of his four Rally's Inc. hamburger franchises. And while noting the tax advantages, he says, "We probably would have gone in anyway."

There are some basic drawbacks to enterprise zones. Some businesses move into the zones from outside--a zero-sum game that creates jobs in one area at the expense of another. And the goal of employing residents often isn't met, largely because companies can't find the skilled workers they need in the community.

In the Benton Harbor (Mich.) enterprise zone, for instance, the 101 companies that get tax breaks are encouraged to hire residents from the community, which has a 28% jobless rate. But David J. Yardley, an executive at TRIAX Inc., a custom metal fabricator, says no more than 40% of the 40 jobs at his company go to city residents. Few locals have the required skills for the engineering and support-staff jobs, he says. "It's not the residents' fault," he says. "They're just entrapped in a cycle of poverty."

HALF THE TAX. New Jersey's enterprise-zone program is considered one of the best--and, at nine years, one of the oldest. Nearly 2,500 companies have moved into 10 New Jersey zones, where they're exempt from paying sales tax on personal property and on the cost of materials to renovate buildings.

They get another big tax break, too. Zone retailers charge just half of the 7% sales tax normally collected. The rest is paid into a fund for improvements to the local infrastructure. In Trenton, Apex Lumber Mart has a sign in its window advertising the low sales tax. Owner Mark Goitein says that real estate agents call all the time to offer suburban properties, but that the tax breaks keep him downtown. He says many of his customers come from the suburbs, anyway. "If they didn't have an incentive to come into the zone, most people would tend to stay away," he says.

The program isn't a big drain on state coffers, but results have been hard to quantify. A study by Marilyn Rubin, an associate professor at John Jay College of Criminal Justice in New York, found that New Jersey's enterprise zones generated nearly $2 in revenues to the state for every $1 it spent. But just one-third of zone businesses say tax breaks were a big factor in their decision to locate in the inner city. Meanwhile, job growth was larger in the zones than in communities outside them, but Rubin couldn't trace that directly to the program.

Even their most ardent boosters concede that enterprise zones alone won't work. Representative Charles B. Rangel (D-N.Y.), an early proponent of such incentives, says he won't support any proposal that isn't part of a larger package, with funds for job training, housing, and other programs. "The enterprise zone is only one tool to be used in the revitalization of economically depressed communities," he says. Then again, Washington has to start somewhere.

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