February 20, 2006
posted online February 24, 2006

Track record of anti-poverty 'Enterprise Zones' is mixed

By Mark Reutter, mreutter@uiuc.edu

CHAMPAIGN, Ill. — Since Ronald Reagan's presidency in the 1980s, attempts to alleviate poverty have shifted away from urban renewal and centralized government planning to so-called "market-based solutions."

These efforts include Empowerment Zones and Enterprise Communities, programs that seek to lift families out of poverty through market expansion. As part of these programs, tax credits are given to businesses that create jobs and spur development in designated low-income areas.

But the verdict on these programs is decidedly mixed. "Although economic growth has occurred within the targeted areas, the beneficiaries of these initiatives have largely been private businesses and investors who have taken advantage of the tax incentives offered," Jennifer Forbes, a law student at the University of Illinois, concluded.

The idea of enterprise zones originated in England in 1979 under Prime Minister Margaret Thatcher, Forbes wrote in the latest issue of the University of Illinois Law Review. Modeled after free-trade districts in Hong Kong, the zones were designed to lure large and mid-sized corporations into abandoned industrial and mining areas. Despite tax breaks and eased restrictions on land use, few industries took up the government's offer, and the program was considered a failure.

The ideological underpinnings of tax credits nevertheless made their way to the U.S., championed by the Reagan administration and former Republican U.S. Rep. Jack Kemp. While Congress balked at creating so-called "EZs" during the 1980s, nearly all state governments implemented some form of low-tax zones for depressed urban and rural areas.

The 1992 Los Angeles riots prompted the federal government's entry into the enterprise business. Generous tax incentives, which could be deducted from corporate-tax bills, were offered to businesses that located or expanded in designated zones and hired "qualified zone employees."

Examining the record of EZs in Baltimore, Chicago and Philadelphia, Forbes reported that only the Baltimore program generated positive economic growth. Between 1993 and 2003, the zone posted a 108 percent increase in the number of local residents employed and a 158 percent rise in the number of locally run businesses.

"In spite of the noteworthy successes in Baltimore, it is still unclear whether the progress is sustainable," the article stated. Only half of the residents who were in job-training programs sponsored as part of the program were still working two years after the legislation creating nine national EZs and 95 ECs (Enterprise Communities) expired in 2003.

Moreover, the growth rates within Baltimore's EZ were uneven. In the southeast part of the city – largely white and already undergoing gentrification – private investment totaled $400 million, while only $50 million in private capital was recorded in black West Baltimore. Whole blocks of the latter were still boarded-up and derelict when the program ended.

President Bill Clinton signed the latest national effort, known as the Community Renewal Tax Relief Act, into law on Dec. 21, 2000. So far, the program has offered $15 billion in tax credits to private Community Development Entities (CDEs) certified by the Treasury Department as providing "capital or technical assistance to disadvantaged businesses or communities."

Investors often have combined these tax credits with historic-district tax credits because many U.S. historic districts are located in impoverished inner-city census tracts.

"Under this 'twinned' tax approach," Forbes wrote, "the investor benefits from a greater New Markets Tax Credits (NMTC) yield, and the historic tax credit developments benefit from increased equity."

Many awards, for example, have been granted to the National Trust Community Investment Corp., a for-profit subsidiary of the National Trust for Historic Preservation, and to groups restoring abandoned buildings, such as $767,000 for the Dia Beacon Art Museum near Beacon, N.Y., and $9 million to rehabilitate the Hippodrome Theater in Baltimore.

Forbes faulted the program's bias toward historic preservation at the expense of offering low-income families opportunities to improve their job skills and establish their own businesses.

"Residents of inner-city neighborhoods live in isolated enclaves delimited by a history of residential segregation, federally sponsored mortgage red-lining, racially disparate zoning practices and spatially concentrated public housing," the article noted.

"By using low-income census tracts as boundaries to target tax incentives, the NMTC programs reinforce this spatial isolation without challenging the underlying structure that creates these boundaries. Driven by capital investment and the goals of economic development, the programs fail to promote the social change necessary to support sustainable communities."

NMTC-subsidized projects could be structured to create financial incentives for investors to improve the "human capital" of poor families. For example, projects that offered job training or child care to residents could receive more tax credits. "This would result in a greater return for the investor, and residents will become invested in a project if they can see how it will eventually benefit them," Forbes argued.

She pointed to studies showing that minority-owned businesses are more likely to hire minority residents than non-minority businesses. But unless a minority-owned company is located in a designated low-income census tract, it is not eligible for NMTCs, even if it employs minorities from the census tract.

Her article is titled, "Using Economic Development Programs as Tools for Urban Revitalization: A Comparison of Empowerment Zones and New Markets Tax Credits."