Incentives Touted to Revive Cities
States try the tax-break concept in hard-hit urban areas; Congress may create its own zones. ENTERPRISE ZONES
AL CALLOWAY has opened his new store, "Mailboxes," because he sensed opportunity for the private mail service. Now that he has customers walking through the doors, Mr. Calloway is hoping to boost his business further by joining the Newark Enterprise Zone. He has applied to join the 537 other businesses in this city who can legally charge customers a 3 percent state sales tax instead of the normal 6 percent.Skip to next paragraph
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"It's another selling point," Calloway says.
Eager to have something to sell to voters, Congress and the White House are also getting on the enterprise-zone bandwagon.
With the memory of the Los Angeles riots still fresh, Congress, with the support of President Bush, has included a provision for federal enterprise zones in the $31 billion tax bill now on the floor of the Senate. A version of the tax act passed the House on July 2. Since Congress is now adjourned, the Senate debate over the bill won't be completed until after Labor Day.
In the Senate version, Congress would set up 125 zones that would give businesses tax breaks for wages paid to workers who live in the zones, as well as tax credits for retraining workers and rehabilitating buildings.
The House version sets up only 50 zones but, at the urging of Housing and Urban Development Secretary Jack Kemp, provides some capital-gains tax relief for small business. HUD will make the final determination on which cities are designated zones.
If the tax bill passes - which is far from certain - the federal government will be following 30 states plus the District of Columbia that currently have operative enterprise zones.
According to HUD, 22 states report 258,395 people working in the zones. As of June 1991, 18 states reported capital investment of $28 billion.
So far, Congress has taken the advice of enterprise-zone professionals who have argued against just giving tax breaks. "We think the overall goal is to revitalize an area. You have to do things to set the stage, like fix the streets, upgrade blighted structures, abate ground water contamination, and clean up graffiti and litter," says Richard Cowden, executive director of the American Association of Enterprise Zones in Washington. Mr. Cowden says he is already getting phone calls from cities eager to par ticipate in the prospective federal program.
The Senate version of the bill requires applicants to develop an action plan to think through the problems in their zones and address them directly.
"Sometimes there is a perception that a city is antibusiness, or that it has a high sales and use tax, or it has a high crime rate, or not enough fire protection," says Michael Allan Wolf, a professor of law at the University of Richmond and director of the Virginia university's enterprise-zone project.
Newark, for example, had a reputation as a high-crime area, lacking many public services. Thus, the state agreed to deposit the sales tax collected from the members of the Newark Enterprise Zone in a separate trust fund to finance public service improvements. So far, the $10 million collected has gone into building a police kiosk at Broad and Market Streets to make the police more visible, attractive bus shelters, and repaving 60 streets within the zone.
While Newark competed with other cities to become an enterprise zone, a few states have opted to make all eligible communities enterprise zones.
This is the case in Gov. Bill Clinton's home state of Arkansas, where there are 458 zones. Investors get a rebate on the state sales and use tax of 4.5 percent and corporate income tax credits for employees hired. Arkansas followed Louisiana, which decided that any community that ranked in the highest 25 percent in terms of unemployment and welfare rates would automatically be designated an enterprise zone.
"The advantage we have ... is that there is a zone in every county and it keeps the legislators more tuned in. If you have a limit to the number of zones, you have a bunch of legislators with no zones," which weakens political support, says Wendell Adams, former administrator of the zones and now special assistant to the director of the Arkansas Industrial Development Commission.
Since the Arkansas plan was passed in 1983, Mr. Adams says 674 companies have had their investments approved, creating 18,980 jobs. The zones have cost the state a total of $31 million in tax revenue.
Measuring the economic advantages or disadvantages of enterprise zones is no easy task; some jobs might have been created even without tax incentives, for example. Nonetheless, some states have attempted to assess the costs and benefits.
In an analysis of New Jersey's zones, Marilyn Rubin of Urbanomics, an economic consulting firm, concluded that the intent of the zones to improve the position of the state's most distressed communities has been met. She also concluded that the zones had not hurt the fiscal base of the state. But in a different conclusion, James Papke, a professor of economics and public finance at Purdue University, was skeptical of any linkage between tax incentives and employment in an Indiana enterprise-zone program.
Another state, Kansas, decommissioned its program after deciding that companies were getting tax benefits but the state was not getting economic development.
In testimony before Congress, Mr. Papke cautioned against "an open-ended entitlement program that carries with it a questionable degree of probable success." To try to limit the cost to the taxpayers, Congress is keeping the initial cost to $5.5 billion.
Will the zones turn blighted urban areas into sparkling renaissance villages? Certainly this is not the case in Newark, where the downtown shopping area retains a seedy appearance. But Mr. Wolf says success may not be easily quantifiable. "Success can be measured by asking, `has a pro-business environment been created where it did not exist before,' " he says.