Little Data to Support Gulf Enterprise Zone’s Promise
WASHINGTON — As Congress sizes up President Bush’s plan to turn the hurricane-stricken Gulf Coast into one huge, tax-sheltered enterprise zone, it might take a look at northwest Mississippi’s new dishwasher plant.
Viking Range Corp., based in Greenwood, Miss., decided earlier this year to situate the plant outside town but inside the boundary of the Mid-Delta Empowerment Zone. That qualifies the factory for a variety of tax breaks, including a $3,000-a-year credit for every zone resident it hires.
Would Viking have built a new plant without the tax breaks? Yes, it says. Did the empowerment zone keep the plant and its 200 new jobs in the Greenwood area, or would they have wound up there anyway? Even the company can’t say for sure.
“We looked at a couple of adjoining states,†said Bill Crump, Viking’s government affairs director. “When you place a plant like this, you have to look at a lot of different factors. The zone was a factor. I don’t think it was the major factor. But it was one.â€
Viking’s inability to state with certainty what would have happened is a microcosm of a much larger debate over the merits of Bush’s proposed Gulf Opportunity Zone, a centerpiece of his plan to help finance the biggest reconstruction effort undertaken in America.
Despite the creation of hundreds of local, state and federal enterprise zones that have bestowed billions of dollars in tax benefits on thousands of qualifying businesses over the last two decades, nobody has been able to demonstrate conclusively that the incentives actually work.
Evidence that the federal programs have spurred business development “is virtually nonexistent,†the nonpartisan Congressional Research Service said in an Oct. 6 report. Most studies of state-run enterprise zones, the research service said, “have not found evidence of effects on growth or employment.â€
In the absence of hard data, ideology tends to define the debate.
“It’s a form of corporate welfare,†said Robert B. Reich, who was Labor secretary when the Clinton administration launched federal empowerment zones a decade ago. “In most of these circumstances, the businesses would have gone in anyway for other economic reasons. It just gives taxpayers’ money away to businesses that don’t need it.â€
“The enterprise zone has never been fully tried,†countered Jack F. Kemp, secretary of Housing and Urban Development in the administration of George H.W. Bush. “It ended up a tax credit here, a tax credit there, some spending here, some spending there.... They have to be juiced up.â€
Ultimately, supporting the current White House plan appears to require a willingness to wager an estimated $2 billion in tax revenue on the proposition that the GO Zone would prompt more firms to open their doors -- and hire more people -- than they would otherwise.
Evidence or no, supporters say, this is no time to hesitate.
Michael Olivier, secretary of Louisiana’s Department of Economic Development, said about 81,000 of the state’s 197,000 business enterprises have shut down or scaled back because of Hurricane Katrina. Some have been unable to get financing to make repairs or cover cash shortfalls, he said. Others are deciding whether to stay in the region.
“Unless we give them something right now in incentives and make it easy for them to get back into business where they were, they’re not coming back,†Olivier said. “We’ve got to get this Congress to move faster.â€
Bush’s GO Zone would provide tax breaks and business loans in New Orleans and hurricane-stricken regions of Louisiana, Mississippi and Alabama through 2007. Under the plan:
* All businesses would be allowed to immediately write off half the cost of new investments in buildings and equipment.
* Small businesses could write off the entire cost of equipment purchases up to $200,000, double the current limit.
* Small and minority-owned firms could get government loans of as much as $10 million, up from $1.5 million currently, at lower interest rates.
Bush said the intent was to create jobs and reduce poverty in the region.
“It is entrepreneurship that creates jobs and opportunity,†Bush said when he announced the plan last month. “It is entrepreneurship that helps break the cycle of poverty, and we will take the side of entrepreneurs as they lead the economic revival of the gulf region.â€
The White House has left it up to lawmakers to draft specific legislation for Bush’s GO Zone proposal. Tax bills incorporating its provisions and other hurricane recovery proposals are expected to be introduced soon by key members of the Senate Finance and House Ways and Means committees.
Over the last 10 years, the federal government has chartered 40 empowerment zones and 40 renewal communities, both of which offer tax breaks to qualifying businesses. One is in Los Angeles. Another covers a portion of New Orleans.
In addition to the federal areas, many states and cities have their own enterprise zone programs.
Over the years, economists have attempted to measure the effectiveness of the zones. Some studies have found statistical evidence of higher rates of economic growth and job creation. Others have not. Several analysts who reviewed past research have told Congress the overall results are inconclusive.
When asked for empirical evidence that enterprise zones work, the White House and the Treasury Department cited a 2001 study by the Department of Housing and Urban Development, which oversees the federal programs.
HUD looked at the first six urban zones established during the Clinton administration. They were in Atlanta, Baltimore, Chicago, Detroit, New York and Philadelphia.
Of the six, four experienced greater job growth than comparable areas where the special benefits were not available, the HUD study said, and owners reported that the climate for doing business had improved.
But two zones fared worse than comparable areas, and 65% of businesses in the six areas reported no benefit from being in empowerment zones. In addition, few firms took advantage of the tax credits, and more than half of those that used them said they were of little or no importance in hiring or investing decisions.
HUD said it was unable to reach conclusions about the effectiveness of the zones.
Kemp, one of the originators of the enterprise zone concept, said the existing programs have not generated convincing results because their incentives were too circumscribed. The president’s plan offers an opportunity to get it right, he said, but it will need more backing than the White House has provided so far.
Kemp and other conservatives want Congress to make the GO Zone incentives more generous. At the top of their list is a capital gains tax waiver. Someone who invested $100,000 to help rebuild a French Quarter blues bar, for example, could later sell his stake for $200,000 and pay no taxes on the profit.
“If you eliminate the capital gains tax on any man or woman who puts his or her savings at risk in the gulf region, I guarantee you that will attract capital,†Kemp said.
Then, if the area undergoes an economic revival, political support would grow for cutting taxes for businesses and investors across the country, he said.
In northwest Mississippi, an area with high rates of poverty and unemployment, the debate over Bush’s plan strikes some people as needlessly divisive.
Crump, the Viking Range executive, said so many calculations go into deciding whether to build a plant, buy equipment or put more people to work that it was probably impossible to prove when tax breaks have tipped the scales.
In the aftermath of Katrina and Rita, he said, it made sense to create Bush’s GO Zone and hope for the best. “Maybe it will be that last little straw that will cause someone to say, ‘We ought to go back and give it one more try,’ †Crump said.
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