Bush's Gulf Enterprise-Zone Plan Has Failed to Deliver Before
By Brendan Murray
Sept. 26 (Bloomberg) -- President George W. Bush's main proposal for reviving the storm-stricken Gulf Coast has a history of failing to deliver on the promise of prosperity.
The Gulf Opportunity Zone that Bush outlined in a national address from New Orleans on Sept. 15 is the latest version of a Reagan-era idea for using tax breaks and other incentives to revitalize blighted urban areas. Backers of enterprise zones -- mainly Republicans, though they were also supported by Democratic President Bill Clinton -- argue that jobs and economic growth will flow into such areas.
In the two decades since such initiatives have come into widespread use, researchers have found little evidence they work very well. Critics say the main beneficiaries often aren't the people the zones are designed to aid, but businesses that end up with tax incentives for investments they would have made anyway.
``It's a politically efficient way to respond to people's need to do something,'' says James Spencer, a professor of urban planning at the University of Hawaii at Manoa and co-author of a study on the development zone set up in Los Angeles after riots there in 1992 damaged 10,000 businesses. ``The actual effects are very minimal, and they don't last.''
Bush's plan for the 90,000 square miles of Louisiana, Mississippi and Alabama declared a disaster area from Hurricane Katrina would double to $200,000 the amount businesses can deduct from their taxes for investments in new equipment. It also would provide a 50 percent bonus depreciation and make loan guarantees available. The benefits expire at the end of 2007.
`Work Extremely Well'
``We think it will work extremely well'' in the Gulf region, Al Hubbard, director of Bush's National Economic Council, said last week after Bush announced the plan, which must be approved by Congress. The administration hasn't estimated how much it would cost.
The White House wants to model the Gulf zone after the $6.1 billion New York Liberty Zone, created after the Sept. 11 terrorist attacks to help rebuild Manhattan. It let businesses reduce 30 percent of an investment's cost for depreciation and extended $15 billion in tax-exempt bonds for construction.
Unlike Lower Manhattan, home of some of the world's highest property values, the area affected by Katrina has long suffered from what Bush termed ``deep, persistent poverty.'' Edward Gramlich, an economics professor at the University of Michigan in Ann Arbor and a former Federal Reserve governor says enterprise zones often ``are used for trying to inspire business in depressed areas, and the tax benefits are great. But if the firm doesn't think that it's going to be a profitable business area, then you're fighting upstream.''
The Los Angeles Experience
The Los Angeles zone, covering downtown and the South Central neighborhood as well as parts of Long Beach, offered tax credits or deductions for hiring, sales, business expenses and interest from 1992 until it ended in 1998.
The program ``did not have a noticeable effect on total private sector investment when compared to the region as a whole,'' Spencer concluded in a research paper published in the November 2004 edition of Economic Development Quarterly. One reason was that six years was too short a span for new businesses to migrate into the area, the report said.
A broader 2001 study of California's 39 enterprise zones found that while they helped boost job creation, they also ``produced notably lower incomes than jobs in other areas.'' That's because while employers in the zones got tax credits for wages paid, the credits phased out at 150 percent of the minimum wage, creating a strong incentive to limit wages to that level.
`Padding Investor Pockets'
``We need some guarantee that the tax incentives and loans will be used for rebuilding and job creation, not for padding investor pockets,'' says Suzanne O'Keefe, an economist at California State University in Sacramento and co-author of the study.
Enterprise zones created in Mississippi in the 1980s brought a significant increase in jobs and helped lift rural workers out of poverty, said Jim Couch, an economics professor at the University of North Alabama in Florence, who co-wrote a report on the subject earlier this year.
However, in a January 2004 study, Couch found Alabama's enterprise zones were guided by local officials mainly to benefit wealthier communities rather than poorer ones.
``You get mixed results,'' Couch says. ``Politicians being politicians, they were very clever in how they designated the criteria for zones in Alabama.''
In some cases, companies may get incentives that they wouldn't need or be otherwise eligible for to set up shop. Last week, officials in Mississippi said they may let Las Vegas-based Harrah's Entertainment Inc. and other casino companies, which generated about $1.24 billion in sales last year, rebuild along the coast with help from tax breaks in Bush's plan.
`Money for Nothing'
``This would be money for nothing,'' says William Shughart, an economist at the University of Mississippi in Oxford. ``Firms choose to locate for reasons like access to markets, transportation and availability of skilled labor, and taxes typically are down on the list.''
Herb Lewenthal, president of Kitchen and Bath Wholesalers, a division of American Metal Molding Corp., both based in Philadelphia, is an example of how an entrepreneur can leverage the benefits of an enterprise zone. In 1985, he built a 70,000- square-foot warehouse in a Philadelphia zone that offered him a low-interest loan. He used the zone's loan program again five years ago on a 30,000-square-foot addition. Employment has grown to 72 from 46 two decades ago, Lewenthal says.
Small Companies
For smaller businesses, taking advantage of those benefits is more difficult. The owners may not seek traditional financing, the business may be too small to qualify for the tax breaks or it doesn't have enough employees to justify applications for hiring tax credits.
``There really isn't any clear evidence that very small micro- businesses -- mom and pop operations -- will benefit,'' says Robert Boyle, associate dean of the urban planning department at Wayne State University in Detroit.
Supporters argue that creating enterprise zones will deliver exactly what is needed in the Gulf region, where the tax base in many areas was wiped out by Hurricane Katrina.
``We're already having concerns by major employers that their workforce is disappearing,'' says Bill Crawford, deputy director for asset development at the Mississippi Development Authority in Jackson. ``The faster we can get investment back in there and recreate an economy, the sooner this will all come back.''
Urban planners say New Orleans in particular will need more than tax incentives to overcome businesses' reluctance to resettle in the region and repair the economic damage of the storm. Katrina wiped out or disrupted 145,341 companies that employ 2.4 million people, or 2 percent of the total workforce, according to the U.S. Labor Department.
``What the hurricane has done is shown in dramatic fashion the prospects of substantial business interruption,'' says Ned Hill, vice president of economic development at Cleveland State University. ``If I was a shareholder and I had a business that was in New Orleans that suffered this loss and moved back in -- a very noble civic thing to do -- I'd sell my stock.''