Bookmark and Share

Academics: Enterprise Zones Are Flawed and Need Reform

How do we know if Enterprise Zones are effective? At hearing after hearing, proponents of the Zones trot out small business owners to testify about the benefits of the program. But the state cannot afford to make decisions about multi-million dollar programs based on anecdotes. The question is not if the program is meeting the needs of business, but if it is meeting the needs of Californians.

Almost all reliable, independent research shows that the Enterprise Zone program has failed overall. A summary of the literature on the subject clearly document that the program is ineffective and flawed. Below are some of the most recent and important academic research on Enterprise Zones.

  • Public Policy Institute of California (PPIC): An exhaustive study by PPIC in 2009 found that “on average, enterprise zones have no statistically significant effect on either business creation or employment growth rates.”[1] They went on to conclude that “the absence of evidence of a beneficial effect of California’s enterprise zones on job and business creation clearly calls into question whether the state should continue to grant enterprise zone tax incentives.”[2]
  • Legislative Analyst’s Office (LAO): The state’s non-partisan LAO has produced several reports on the Enterprise Zone program. A 2003 study found that “EZ incentives have little if any impact on the creation of new economic activity or employment.”[3] They also found that EZs shift jobs around the state rather than create new economic activity. In 2010, the LAO was more concise, concluding that “Because they are expensive and not strongly effective, the area programs should be eliminated or restructured.”[4] The LAO made an even stronger recommendation in 2011 that the program be eliminated with no restructuring.
  • W.E Upjohn Institute for Employment Research: Researchers from the University of Iowa published an article in 2002 called The Effectiveness of State Enterprise Zones that studied 75 Zones in 13 states, including California. They found that “most of the evidence suggests that zones have almost no influence on local growth.”[5] Even worse, was the price paid by state government for their investment in the program. Because many firms claimed EZ tax credits for without good cause, state and local governments had  “a revenue loss of about $59,000 for every new job induced by incentives.”[6]
  • California Budget Project: CBP’s 2011 report on Enterprise Zones found that the Enterprise Zone Tax credits have grown substantially over time and have cost the state $3.6 billion since the program began in 1986. Major corporations with assets over $1 billion claimed the vast majority of EZ tax credits, and business located in the urban San Francisco EZ claimed the highest proportion of credits. They found that the majority of credits were claimed by business in urban areas while “those in rural areas with very high unemployment rates, such as Calexico, Delano, and Shafter, claimed relatively fewer tax breaks.” [7]
  • California Research Bureau: A study by Suzanne O’Keefe and Roger Dunstan in 2001looked at both employment growth and income levels in Enterprise Zones. They found that there was faster job growth in the Zones than in comparable areas, however the study did not connect job growth to use of tax credits, so it is unclear if the EZ credits caused the growth. In addition, they found that the jobs in EZs paid lower wages versus comparable jobs outside of the Zones. The researchers’ explanation was that the structure of the hiring credit, which caps the credit for wages at 150% of the minimum wage, created a disincentive for higher wages. They concluded that “The incentive is for lower wage jobs, and that is exactly what we get.”[8]
  • California Policy Seminar: In 1994, researcher David E. Dowall and others examined whether the Zones had any measurable impact on levels of employment of businesses in the Zones. They found that most of the growth in Enterprise Zones was due to normal population and industrial growth and that there was little evidence the EZs created jobs. In a survey of businesses, they found that most firms did not make decisions based on the availability of credits, but saw it as an added benefit rather than an incentive.[9]
  • Department of Housing and Community Development: DHCD, the agency that administers the Enterprise Zone Program, released an oft-cited report in 2006 about the positive impacts of Enterprise Zones. However, independent researchers have questioned the results of the study based on a lack of data and an overstatement of the positive aspects of the report. The California Budget Project critique states that the report “exaggerates the performance of California’s enterprise zones, inaccurately attributes economic improvements in zones to EZ tax breaks and understates evidence that EZ tax breaks are not effective.” [10]

 


[1]Jed Kolko and David Newmark, Do California’s Zones Create Jobs? (Public Policy Institute of California: June 2009), pp. 14-15.

[2] Ibid. p. 22

[3] Legislative Analyst’s Office, An Overview of California’s Enterprise Zone Hiring Credit.(December 2003), p.

[4] Legislative Analyst’s Office, California’s Enterprise Zone Program. (March 10, 2010), p. 5.

[5] Alan H. Peters and Peter S. Fisher. The Effectiveness of State Enterprise Zones. (Employment Research: Vol 9. No 4. 2002) p. 2.

[6] Ibid. p. 3.

[7] Alissa Anderson. California’s Enterprise Zone Program: No Bang for the Buck. (California Budget Project: February 2011) p. 3.

[8] Suzanne O’Keefe and Roger Dunstan. Evaluation of California’s Enterprise Zones. (California Research Bureau: August 2001. P. 1.

[9] David E. Dowall, et al., Evaluation of California’s Enterprise Zone and Employment and Economic Incentive Programs (California Policy Seminar: March 1994).

[10] David Carroll. New Study Overstates Effectiveness of Enterprise Zones. (California Budget Project: August 2006) p. 2.