In the zone: small business benefits from the rebirth of enterprise zones

Entrepreneur, May, 1996 by Cynthia E. Griffin

Small business benefits from the rebirth of enterprise zones.

Enterprise zones. Empowerment zones. You've heard the terms and the promises attached to them so often, you're ready to zone out.

But before you do, there is something you should know: Small businesses can benefit from these zones. However, those expecting the new federal empowerment zones or even the ever-growing list of state enterprise zones to be a panacea for urban and rural decay and neglect are doomed to disappointment.

Enterprising Idea

The enterprise zone concept can be traced back to England in the 1970s, when officials were trying to improve underdeveloped areas around London. When the idea took hold in the United States in the late 1970s, it evolved in two directions. "The idea became popular in the Reagan era when the emphasis was on less [government] regulation," says Michael Brintnall, a political science researcher and member of the American Political Science Association who has studied the impact of enterprise zones. "Reagan supporters wanted to apply it nationwide, the idea being that any kind of tax reduction would stimulate growth."

Other supporters, he continues, thought enterprise zones had the potential to replace top-down, heavy-handed urban renewal programs.

While federal legislators bickered about how best to implement such zones, Brintnall estimates some 30 states created their own programs. The programs vary greatly, but the basic idea is the same: tax breaks for businesses in distressed areas.

According to Brintnall, those zones that succeed are a carefully nurtured part of an overall economic development plan. "There's a tendency for states to set up zones, make the announcement, and sit back and wait for growth to occur," he explains, adding that often little happens in these instances. "The places that designate an active staff and make efforts to promote development are where something happens." Zones are just one tool to help revitalize distressed areas, continues Brintnall, and in most cases, they are not successful by themselves.

But if everything comes together, the concept can work. The Evansville, Indiana, enterprise zone is often cited as an example of how successful the programs can be. "In 1983, the state government [designated] six zones including the Evansville site," explains Alan Jones, executive director of the Evansville Urban Enterprise Association. "Our zone is an old industrial core of 2.1 square miles," says Jones, adding that it suffered problems common to other central cities. "Starting in the late 1950s, the older industrial companies declined."

Evansville's core industry of refrigeration manufacturing, populated by corporate giants such as Whirlpool, Seger, Servel and International Harvester, basically evaporated, leaving some 2.5 million square feet of vacant or underutilized business space.

To help solve the problem, Evansville now offers businesses locating within the zone a 100 percent exemption from inventory tax on works in progress, raw materials and finished goods that will be sold outside Indiana, Jones says. There is also a gross income exemption and a tax credit of $1,500 per person per year for companies that hire zone residents. People who live and work in the zone get a wage credit of almost $300 annually. To reverse two decades of decay, these business incentives are packaged with community development efforts, job training, child-care programs and more.

Today, there are some 205 businesses employing 10,000 people in the Evansville enterprise zone, according to Jones. He estimates the zone has created 8,000 new jobs and more than $200 million in capital investment.

Richie Johnson, vice president of Johnson Plastics and Supply in Evansville, says his family-owned firm was drawn to the area first due to its central location and second because of the zone benefits.

"We looked on the north side of Evansville, with its newer facilities, and at the east side, where lots of construction was going up. But the [city] center was always our [preference] because of the diversity of reaching every place," explains Johnson, whose company was launched in the zone in late 1994. "The other areas were a little more expensive and didn't have the advantage of the inventory tax exemption."

But while the benefits of the enterprise zone were a plum inducement, Johnson stresses that the other conditions had to be right as well. "We wanted to know who else was here because we wanted to put our facility with other [companies] that had good reputations." Johnson also liked the building: Although 50 years old, it had been renovated and offered the plastics distributor plenty of expansion space--something he didn't see in newer locations.

Business experiences can vary widely within one enterprise zone, however, as Wendy and Philip Thorson found out when they moved their business into the Evansville zone. Like Johnson, the Thorsons moved their business, Sonrise, into the area to take advantage of the tax benefits. They also liked the lower rent, spacious building, centralized location and loading dock.