In Praise of Enterprise Zones

Obama speaks about the sequester in Washington

This is from my article published by the Oklahoma Council of Public Affairs in their February Issue of the Perspective Magazine.

Economic distress does not always manifest equally throughout America. Some communities are hit hard economically while others may only feel a small economic hiccup. If the same communities are hit repeatedly then they may slide into a state of permanent decline—Detroit is the current poster child for this kind of economic tragedy.

Of course, this is not a new problem. Policymakers have been attempting to tackle hotspots of economic distress for decades. Perhaps the most popularized attempt was the idea of “enterprise zones” first touted by Jack Kemp while serving as Secretary of Housing and Urban Development under President George H.W. Bush.

Fast forward to today and the idea of enterprise zones is alive and well. In fact, President Obama has even embraced the idea of enterprise zones with his recently launched Promise Zones (PZ) initiative.

PZs are designed to help areas of the country that were hit hard by the recent Great Recession and will initially include areas such as San Antonio, Philadelphia, Los Angeles, Southeastern Kentucky, and right here in the Choctaw Nation of Oklahoma. The PZs are intended to help build infrastructure, increase access to education, reduce crime, and, most importantly, provide incentives for businesses to hire and invest by expanding the existing Empowerment Zone tax credit.

Additionally, Senator Rand Paul (R-KY) recently unveiled his Economic Freedom Zones (EFZs) (pdf) which would reduce taxes, enhance educational opportunities, and reduce regulatory burdens. Sen. Paul’s tax reductions include enacting a 5 percent flat rate for the individual and corporate income tax, a 4 percentage point reduction in the payroll tax, boosting expensing on new investments, eliminating the capital gains tax, and a $5,000 per child educational tax credit to help children attend the school that most meets their needs. Unlike PZs, EFZs will be available to any jurisdiction that meets certain criteria and would receive these benefits for 10 years.

However, it’s not just Uncle Sam that has found the enterprise zone model to be useful. There are currently more than 3,000 enterprise-type zones in the United States. Most of these zones are implemented by the states, but they can also be coupled with local tax relief through a popular vehicle known as Tax Increment Financing, which often provides rebates on property taxes or earmarks money to be used for infrastructure improvements.

These initiatives are noteworthy, especially since a new problem has arrived on the scene which threatens to drag down economic prosperity: demographic winter.  Demographic winter is the situation which arises when, due to declining birthrates, there are not enough young people to sustain the current population level. As a consequence, the area afflicted with demographic winter experiences a slow-moving economic depression as both the labor supply and customer base shrinks.

Recently, Kansas implemented a new twist on the enterprise zone model—the Rural Opportunity Zone (ROZ)—in an effort to fight the growing problem of demographic winter in its rural counties. There are currently 73 counties that qualify for a ROZ. ROZs offer individuals a 5-year abatement on their individual income tax and/or student loan repayments up to $15,000 if they move into one of the qualifying counties from out of state.

Overall, enterprise zones, in their many forms, are a step in the right direction. Yet, there are still flaws that reduce their effectiveness. Among the largest flaws is the degree of difficulty complying with the selective parameters of the program. For example, while a tax credit does reduce one’s tax liability, it does not reduce the complexity and compliance costs associated with tax filing—it could actually make them worse. At the extreme, these problems can cause businesses and individuals to forgo the benefits of these zones.

One proposal in Maine seeks to address the problems associated with such complexity. The Free ME initiative would eliminate Maine’s income tax (individual and corporate) and sales tax completely on a county-by-county basis starting in the most economically distressed county. Free ME would create a clean, level playing field for all participants and would not disappear until tangible economic benefits are seen—specifically, seeing the county move back to the state average on key economic variables such as unemployment and poverty. The Free ME initiative is receiving much-deserved state and national attention. This is worth keeping an eye on.

In conclusion, it is not every day that two people from opposite ends of the ideological spectrum, like President Obama and Senator Paul, agree that changing incentives do in fact make a difference in the lives of families across America. This targeted approach embedded in the idea of enterprise zones can help pave the way to broader reforms as the EMZs show progress in tackling some of the most difficult economic challenges of our time, such as stubborn pockets of poverty and demographic winter. The recipe may need tweaking, but at least policymakers are in the right kitchen.