DO ENTERPRISE ZONES WORK, AND CAN THEY WORK BETTER?

David Neumark

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Outline of Comments

Detailed research from a large state enterprise zone program

What is the goal, and what are the expected effects?

How can we tell whether whether enterprise zones work?

What are our results? What do we learn from this and other

research about how to make enterprise zones more effective?

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Businesses in California Enterprise Zones Get Numerous Benefits Principal state economic development policy

geared to specific locations that are economically distressed and include industrial or commercial area

Most important incentive: state tax credit for hiring “disadvantaged employee”

Based mainly on residence in “targeted employment area” (TEA)

Other incentives: sales or use tax credits, other tax advantages, preferential treatment on state contracts, and incentives to lenders

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Enterprise Zones Should Create Jobs Hiring tax credit should create jobs by

reducing cost of hiring workers eligible for credit Hiring credit in first year: 50% of wages up

to 150% of minimum wage, falls 10 percentage points each year

Should boost employment of less-skilled, and employment overall

Job creation is stated goal of legislation

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Why Might they Fail?

State allows retroactive filing for credits for up to 4 years Creates incentives for tax consulting firms to seek

credits for past actions firms would have taken anyway Credits do not depend on net job growth, just on

hiring Labor-labor substitution, problem with narrow-

targeting Other program tax incentives could favor capital

over labor Benefit may get weakened by increases in land

values, as rents rise to tax benefits

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How Can We Tell if Enterprise Zones Work?

Bad evidence: business growth has occurred in Ezs Would growth have occurred anyway?

Central to this research is construction of valid comparison areas to ask what would have happened in that area absent the zone incentives

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Compare Job Growth in Zones to Most Comparable Areas Want to avoid comparisons with areas that

weren’t subject to the same influences besides enterprise zone incentives

Compare changes in employment levels and growth rates in newly-designated areas with: 1,000-foot “control rings” around zones Areas designated earlier or later (expansions)

– most likely to be “otherwise identical”

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Precise, Comprehensive Methods Needed for Accurate Assessments Identified precise zone boundaries and

business locations – over time – using GIS software and businesses in California

Created digitized zone maps Account for overlap with state enterprise

zones of other areas offering incentives – state redevelopment areas and federal zones

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Santa Ana Redevelopment Areas (Magenta), Federal Zones (Blue),

and State Enterprise Zone Streets as of 2004

Zones Overlap with Redevelopment Areas and Federal Zones

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Santa Ana Enterprise Zone, Initial 1993 Designation (Red), 1994 Expansion (Blue),

and 1,000-Foot Control Ring (Green)

Santa Ana’s Original Zone, Expansion, and Control Ring

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Detailed Efforts to Map Businesses to Zones

NETS data cover all California business establishments, 1992–2004

Geocoded exact longitude and latitude for each address, down to side of street

Selected businesses as inside or outside the zone and control areas, by year

Estimated error rate less than 1%

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 Employment in enterprise zone,

2004Share of county

employmentLos Angeles 274,434 5.9

San Francisco 215,329 35.9

Santa Ana 175,018 10.1

Oakland 163,181 21.0

Shafter 3,695 1.5

Lindsay 2,758 2.2

Porterville 2,633 2.1

Merced 641 0.9

Employment in all zones 1,376,562

Employment in all counties with zones in our sample 12,643,891

Statewide employment 16,441,979

Zones Range from Large to Very Small

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-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8-0.300

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No Immediate or Longer-term Effect on Employment

Years before/after zone designation

(includes control ring)

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Dots = best estimate

Bars = confidence intervals

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-5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8-0.300

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0.100

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Same Results Without Control Rings

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Years before/after zone designation

(without control ring)

Dots = best estimate

Bars = confidence intervals

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Is There Any Potential for Effective Enterprise Zones? Results thus far: averages across all of California’s

zones Individual enterprise zones differ

Administration of program Complementary incentives offered Industry mix, workforce skill level, and other

conditions Surveyed administrators of all 42 zones in state,

and used supplementary data, to classify zones along many dimensions

Question: Are there some types of zones that are effective?

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Three Factors Contribute to Zone Effectiveness Smaller share of jobs in manufacturing

Other local economic development activities may matter more for manufacturing

Program also encourages investment in machinery and property, which is more important in manufacturing

Greater self-reported effort on marketing and outreach

Less effort on facilitating the earning of tax credits Efforts may have focused on retroactive credits Cross-vouchering was especially problematic Detract from other efforts to create jobs now

Findings imply earlier evidence (average effects) may be overly pessimistic

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Tax Incentives Alone May Simply Not be Enough Positive employment effects of federal

empowerment and renewal zones (Busso and Kline, forthcoming; Ham et al., 2011) Hiring credit for those who lived and worked in

community Entail other interventions based on social service

block grants ($100 million per zone) for business assistance, infrastructure investment, training programs, youth services, etc.

Moretti (2012): program worked because credits and spending/services created mutually-reinforcing benefits

Effectiveness of federal zones is contested (Hanson, 2009)

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And Tax Incentives Can Simply Morph into Tax Breaks Not clear areas are well-chosen; clearly

not continuously evaluated In 2006, when original 1986 zones expired,

all new applicants (some of which expanded existing zones) were approved

State has never “de-designated” zones Tax consultants, Chamber of Commerce,

etc., vigorously advocate for enterprise zones at CA legislative hearings

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Conclusions

Findings show that local tax incentives may not and often don’t work, and can be hard to get right In California, likely that billions have been wasted

Research suggests some key elements From research on hiring credits generally

Incentives for job creation – especially net job creation, although that is complicated

Claw-backs Complementary investments and activities may be

essential Important to build evaluation into programs, and have

mechanism for ending programs that aren’t successful

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State vs. Local Programs

Programs I’ve discussed are state or federal Question as to whether local design and

control would be more effective Local programs could lead to more competition

for the same jobs Funding constraints at local level depending on

what and how much local government taxes Could still imagine some local funding, or choice

about how to use state revenues flowing to local government

But likely impossible to match federal efforts

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Research Can Influence Policy Cross-vouchering eliminated in 2007 Governor Brown tried to eliminate program in

2011-2012 budget, to no avail Cited our concluding that “there was ‘no statistically

significant effect on either employment levels or employment growth rates’ within enterprise zones as compared to neighboring areas.”

Reforms proposed this year include eliminating retroactive application for hiring credits more than one year after hire occurs Administration: Retroactive vouchering is a significant cost

to the General Fund, and rewards employers for past hiring decisions not incentivized by Enterprise Zones