Tax Policy and Urban Development: Evidence from the Indiana Enterprise Zone Program

Abstract

In the last decade, most states have targeted certain depressed areas for revitalization by providing a combination of labor and capital tax incentives to firms operating in the "enterprise zone" (EZ). Despite the large number of state initiatives, and the frequent re-introduction of federal EZ legislation, there have been few statistical analyses of the effect of EZs apart from surveys of plan administrators. This paper analyzes the effect of the Indiana EZ program on local employment and investment using a panel of local taxing jurisdictions. In 1988, the direct budgetary costs of the Indiana program totaled over $11 million, averaging $13,933 per participating firm, $4,564 per new job, and $31,113 per new zone resident job. I estimate that zone designation initially reduces the value of depreciable personal property by about 13 percent, but also reduces unemployment claims in the zone and surrounding community by 19 percent. Both estimates are statistically significant. The value of inventories in Indiana zones is 8 percent higher than it otherwise would be, and the estimated effect is marginally statistically significant.