Editorial Board

California Doesn’t Need Enterprise Zones

Since 1986, California has used an “enterprise zone” program in an effort to spur investment and job creation in specified areas. The state awards tax credits, more than $700 million a year as of 2010, to businesses that hire designated kinds of workers within the zones. The program is popular with businesses and local officials.

Unfortunately, it doesn’t appear to create jobs. A 2009 study by the Public Policy Institute of California found no difference in job creation between zoned and comparable unzoned areas. Given this finding, Governor Jerry Brown wisely tried to ax the program in his 2011-2012 budget, and is now working to scale it back. He is meeting strong resistance. (Brown succeeded in 2011 in getting rid of another wasteful program aimed at “depressed” areas: 400 regional development agencies.)

Enterprise zones share errors of location-specific economic incentive programs in many states. Although they are nominally aimed at “economically depressed” areas, they often cover neighborhoods with no need for tax credits to draw investment. San Francisco’s enterprise zone covers the city’s financial district and the tourist mecca at Fisherman’s Wharf. Los Angeles’s covers its entire downtown office core.

As with similar programs, enterprise zones turn business investment into a political process. You can see, for example, the 2011 redrawing of the enterprise zone in Santa Clarita, north of Los Angeles; the red triangle near the center of the map happens to match a location where the Walt Disney Co. had decided to open a new studio. The PPIC report found that while zones didn’t increase employment, they appear to reduce the number of employers, suggesting zones draw large companies with the ability to work the system at the expense of small ones.

Brown’s latest move focuses on changing the rules about claiming tax credits; companies would be limited to applying within one year of hiring an eligible employee, instead of the current four. His staff argues that you can’t encourage businesses to hire specific classes of people, such as veterans and released convicts, by giving companies credits for past hires they didn’t know were eligible.

This change would be a step in the right direction, but it would be better to get rid of the program altogether. At best, all programs like enterprise zones do is shift jobs from one place to another. California instead needs policies that will draw companies to do business and create jobs wherever in the state best suits their needs.

The state has a number of problems that make it a daunting place to do business. Income tax rates are very high, particularly at the top of the income scale, and therefore on many small businesses. And California -- unlike, say, Maryland -- has trouble making the case that its high taxes are a value proposition, as the quality of government services is often poor.

But the biggest barrier to job creation in California is probably its high home prices. Net domestic migration from California is driven not by the rich fleeing higher income taxes but by lower- and middle-income residents, whose savings on housing in other states tend to be much larger than their savings on taxes. More development-friendly laws -- essentially, allowing more total housing units within popular cities such as Los Angeles -- would make it easier for middle-class people to afford to live and work in California, and therefore for businesses to hire and expand.

Last month, the Los Angeles City Council passed a resolution stating that a reduction in the enterprise zone program would be “devastating to thousands of Los Angeles businesses.” The mayors of Los Angeles and eight other large California cities have since signed a letter opposing new restrictions. If the PPIC report is any indication, they’re in the wrong. The hundreds of millions of dollars the state would save by ending the program could be put to use in ways that would make Los Angeles, and the rest of California, a better place to do business.