California Enterprise Zones: A Boon or a Boondoggle?

With California facing double-digit unemployment it would seem to be an odd time for members of the legislature to be considering the demise or significant altering of the only job creation incentive program left in this state, but the talk of eliminating the California Enterprise Zone program persists.  Enterprise zones are economically distressed areas of the state that have been granted certain incentives in order to improve the economic prospects of those regions. The most important incentive that these firms get is a tax credit for hiring people who meet certain criteria, such as long term unemployment.

Several recent economic studies have attempted to measure the true impact of California’s Enterprise Zone program.  The results are, as they say, mixed. This has led some to call for elimination of the program in order to recapture the “lost tax revenues.” Though these studies provide a thorough hindsight view, it is important to include a forward looking perspective of the business climate that California faces before considering any changes to California’s enterprise zones.

 There’s an old cliché about not seeing the forest for the trees.  You can extend that perspective a bit like this: If you use a magnifying glass to carefully analyze a single oak tree in the forest for several days at a time, you won’t see it grow.  Your conclusion would then be that the tree isn’t growing and by extrapolation, there is no hope for the tree or the forest.  Sometimes you need to back up a bit.

 One of these studies was an analysis by Kolko and Neumark for the Public Policy Institute of California that found there was “no statistically significant effect on either employment levels or employment growth rates” within enterprise zones.  That result led to their conclusion that Enterprise Zones failed in their primary mission, creating jobs. But backing up a bit (both figuratively and in their article), they also report that almost 1.5 million people in California work in these enterprise zones; about 10 percent of California’s workforce.  The forest is pretty big guys.  Perhaps you were standing too close.

 The thrust of Kolko and Neumark’s paper is that employment growth rates near, but not in, enterprise zones are about the same so the zones aren’t creating jobs any faster.  But even if one takes that analytical approach as sensible, the forest is a lot smaller.  The “control rings,” as they call them, employ about half a million people. It stands to reason that some jobs won’t end up in the zones; specifically those jobs that don’t give firms any of the zone’s tax advantages. But even if one takes that analytical approach as sensible, the “control rings” just outside the zone are a lot smaller; they only employ about 500,000 people.

 And there is good evidence that enterprise zones accomplish precisely what they were intended to.  In separate studies, economists at USC and the California Franchise Board found that wages and family incomes are higher in the zones and unemployment is lower. What that means is that the jobs that people get in these zones are more stable and higher paying. That these jobs are higher paying is a direct result of the tax credit that these firms get for employing the at-risk people that the tax incentives apply to. The tax credit actually creates competition for these workers in a way that nothing else could. Unemployment rates rise when people change jobs a lot, so lower unemployment rates likely mean that those who are employed in the zones tend to stay employed for longer.

 The employment benefits of enterprise zones seem clear if you look at the forest and not the trees (or perhaps the rings of the trees). There is still the question of bang for the buck. Are these jobs and their corresponding higher wages worth the tax credits? Would it not be better, as some say, to eliminate or scale back enterprise zones and deploy the resulting increase in tax revenues somewhere else? While the answer to that is only knowable with a crystal ball, you needn’t think, as Kolko and Neumark’s paper does, in terms of recapturing the “lost tax revenue.”

 If the politicians in Sacramento snapped their fingers and eliminated all of the tax advantages tomorrow, many of the enterprises and jobs in the zones would be gone, like the Baltimore Colts, on the next Mayflower moving van. And the remaining firm’s tax revenues would be more than used up on social services for the newly unemployed (or perhaps to house some of them in our very expensive correctional facilities when they can’t find a job). To wit, if only a third of the current enterprises in our zones left, the resulting increase in unemployment of 500,000 people would increase social service spending by far more than the remaining moneys in recaptured tax revenues.

Looking forward and not back, California has double-digit unemployment now and likely will for many years to come. States all around the country are competing for employers. The tax advantages of our enterprise zones are one of our very best and most effective tools for bringing employers to the state. As the biggest state in the union, we need the most jobs. Anything that worsens the business climate and job picture in California – and that includes even talking about eliminating the enterprise zones – is, to be blunt, insane.