Caution: Enterprise Zones

Abstract

This article analyzing the likely impact of tax incentives proposed in federal enterprise zone legislation appeared some 25 years ago, long before SSRN existed. I am posting it now because its arguments bear upon current discussion and expectations regarding Opportunity Zones. The 1993 article urged that any geographically based tax incentives include incentives to hire workers. For example, it quoted a 1991 CRS study by Jane Gravelle warning that “a capital subsidy will actually decrease employment and wages, making the residents of the zone worse off than they were before.” It also described how the section 936 income tax credit for Puerto Rico produced few jobs.

The Opportunity Zone provisions lack any tax incentives for labor, although some commentators, such as students in Professor Clint Wallace’s University of South Carolina Law School’s Tax Practicum Class have suggested interpretations of the statute that would permit such incentives. The absence of incentives for labor will blunt the impact of this new law.

More fundamentally, the article questioned geographically based tax incentives, whether for labor or capital. It reviewed evidence from other attempts at establishing enterprise zones, including state programs with tax incentives for both labor and capital that failed to achieve the desired impact. Results were disappointing even when tax incentives for capital reduced current operating costs for businesses by lowering property or sales taxes, rather than focusing, as Opportunity Zones do, on long-term capital gains. Experience with enterprise zones suggests that Opportunity Zones will do little to spur meaningful economic development and job creation in distressed communities.