Did the Community Renewal Tax Incentives Pirate Businesses from Other Places?

Abstract:     
Since the early 1980s, US states have experimented with tax incentives targeted to distressed places to encourage economic development. The literature raised concerns that these expenditures were a net social loss because they would just subsidized a business to move from one location to another. In 1993, the US Congress passed the Empowerment Zone/Enterprise Community (EZ/EC) program, it addressed this concern with an "anti-pirating" provision that prohibited local government from using the EZ/EC resources to relocate a business from one jurisdiction to another using grants or loans.

When Congress passed the Community Renewal Act of 2000, it expanded the EZ program and added 40 Renewal Communities (RCs). They key incentive was an employment credit worth up to $3000 for hiring employees who live and work in the RC/EZ. The RC did not include an anti-pirating provision, possibly because it was assumed that tax credits alone would not entice a business to relocate. As the program sunsets in 2011, we can see if this assumption was valid. Were businesses more likely to relocate into the RC/EZ compared to neighboring areas? Were they less likely to move out? If the program enhanced social gain while minimizing social loss, we would hope that the program minimized relocations into the RC/EZ while preventing moves out.

To examine this question, I compared the business moves within 1000 feet of the either side of the border of the RC/EZ using data from the National Establishment Time Series Database. The sample included RC/EZs from California and Tennessee. The Oakland, CA and Nashville, TN ECs served as placebo test because they did not receive the tax incentives and their designation expired in 2004. The results show that while the RC/EZ incentives appear to have increased moves into the RC/EZ along the border by 25% holding pretreatment levels and trends constant (t=2.38, p=0.02). However, moves out of the RC/EZ along the border also increased leading to no statistically significant net change in firms. This finding is consistent with recent studies. Findings may be compromised by the small sample and limitations of the data source. Further research would be needed to determine if the firm moves that happened left the RC/EZ regions better off in terms of jobs and the tax base.

Number of Pages in PDF File: 47

Keywords: Community Economic Development, Tax Incentives, Urban Policy, Empowerment Zones, Renewal Communities, Business Relocation

JEL Classification: O18, O20, O21, R38, J68, K34

working papers series