Do enterprise zones work, and can they work better?

1. Do enterprise zones work, and can they work better? David Neumark

2. 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?

3. 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

4. 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

5. 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

6. 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

7. 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”

8. 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

9. Zones Overlap with Redevelopment Areas and Federal Zones Santa Ana Redevelopment Areas (Magenta), Federal Zones (Blue), and State Enterprise Zone Streets as of 2004

10. Santa Ana’s Original Zone, Expansion, and Control Ring Santa Ana Enterprise Zone, Initial 1993 Designation (Red), 1994 Expansion (Blue), and 1,000-Foot Control Ring (Green)

11. 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%

12. Zones Range from Large to Very Small

13. No Immediate or Longer-term Effect on Employment Dots = best estimate Bars = confidence intervals Percentage difference in employment Years before/after zone designation (includes control ring)

14. Same Results Without Control Rings Dots = best estimate Bars = confidence intervals Percentage difference in employment Years before/after zone designation (without control ring)

15. 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?

16. 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

17. 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)

18. 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

19. 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

20. 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

21. 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