Too few good enterprise zones - urban economic development

Nation's Business, Oct, 1993 by John S. DeMott

When he was governor of Arkansas, Bill Clinton embraced the urban enterprise zone concept with the gusto of a Razorback wide receiver going for the ball on a crisp Saturday afternoon. In all, 458 zones were set up in the state in the 1980s, a time when 2,714 additional zones were established by 34 other states and the District of Columbia.

Clinton pushed the concept when he became president and included 110 zones as part of the fiscal 1994 budget measure he proposed earlier this year. Zone advocates then eagerly awaited the proposal's federal tax incentives to augment the modest state benefits conferred on businesses when the zones were set up in the '80s. (See "Recasting Enterprise Zones," February.)

But the budget measure signed by Clinton on Aug. 10 calls for precious few bona fide federally assisted enterprise zones and has thus met a lot of criticism. While $3.5 billion would be allocated for the program, the bulk of the benefits would go to just nine "empowerment zones"--five in big cities, one in a smaller city, and three in rural areas.

The nine zones would have $2.32 billion in tax incentives available to them, roughly $1.6 billion in the form of wage credits to employers. For each $15,000 in wages paid to an enterprise-zone worker, for example, a company could take 20 percent, or $3,000, as a credit against income taxes.

In addition, the nine megazones would be eligible for $720 million in direct grants for social-services spending on child care, employee training, education, and security and crime prevention.

The rest of the $3.5 billion would go to a lower tier of 95 other areas called "enterprise communities"--65 in cities and 30 in rural areas. They would receive most of that amount in the form of a change in federal rules permitting tax-exempt bond financing to be used for nonmanufacturing as well as manufacturing businesses, a benefit also enjoyed by the nine "empowerment" zones.

The 95 "enterprise communities" would also share $280 million in social-service grants.

At least officially, the targets for federal assistance will be chosen by the U.S. Housing and Urban Development (HUD) and other agencies on a competitive basis, probably, though not necessarily, from among existing zones.

The actual choosing of recipients is likely to be heavily influenced by politics. New York Democrat Charles B. Rangel, who has assertively represented Harlem in the U.S. House for a quarter century, helped fashion the final measure and, associates say, fully expects federal zone benefits to flow to his district.

Longtime observers of enterprise zones say the Clinton administration has come forth with some good ideas but is investing them in too few areas. Rangel told the Senate Small Business Committee as the legislation was taking shape: "You could take all these zones and put them in one congressional district."

Jack Kemp, secretary of housing and urban development during the Bush administration, calls the zone program a "tragedy, a hoax." Kemp has been a vigorous enterprise-zone booster for a dozen years.

It's not only the small number of zones that draws criticism. The wage-credit incentive, of all the incentives that could have been used, is perhaps the least effective for creating jobs, say critics, because it will likely go not only for new jobs brought into the zones but also for jobs already there.

Nearly all zone proponents would have preferred to see significant capital-gains tax breaks for investors in enterprise-zone businesses, if only on an experimental basis to gauge the impact on investment and new hires.

Yet critics do have a few good things to say about Clinton's zone program. Dick Cowden, executive director of the American Association of Enterprise Zones, in Washington, says it's the "first truly new piece of urban legislation in 15 years" and could help set a realistic national standard for defining a "distressed area" in both urban and rural areas and for determining how local, state, and federal agencies would interact in dealing with it.

Despite criticisms that the experiment is tepid, White House aides who have worked on enterprise zones maintain they are committed to making a federal version of the concept work. In doing so, they would be building on state and local groundwork. Advocates of zones cite a HUD report that such economic areas have created or at least preserved more than 663,885 jobs and have attracted $48 billion in investment. The concept has been endorsed over the years by the National Governors' Association, the Council of State Legislators, the U.S. Conference of Mayors, and the U.S. Chamber of Commerce.

Says Sen. Joseph I. Lieberman, D-Conn., a promoter of enterprise zones as a member of the Senate Small Business Committee: "Properly designed enterprise zones will help convince business to build and grow in poor neighborhoods. We have now got more than 10 years of experience with enterprise zones, and we know they work."

Rangel, typically, does not mince words. If the U.S. can help developing countries, he says, "God knows we can do it with our own."