Enterprise Zones: What's Everyone Arguing About?
"All the companies are moving out, and our cities are dying," cried the mayors to the congressman. "You've got to help us."
"Our people need jobs," shouted the minority group leaders to the congressmen. "You've got to help us."
"Taxes and regulations are killing us," shrieked the small business owners to the congressmen. "You've got to help us."
So the congressmen went back to Washington and wrote a bill, which they showed to the mayors, the minority leaders, and the small business people.
"You pick out the most devastated areas in your cities, reduce the property taxes there, and we'll call them enterprise zones," they told the mayors.
"We'll lower federal taxes for any company that moves into an enterprise zone or any company that starts there," they told the small business people.
"Now your people can start their own companies or work for those that move into the enterprise zones," they told the minority group leaders.
"But we can't reduce property taxes," cried the mayors. "We'll lose revenue."
"You didn't cut the federal taxes enough," said the small business people, "and besides, this bill helps big business, too."
"These aren't going to be good paying jobs," complained the minority leaders. "You're just trying to cut people's welfare payments, and how do we know the companies will hire neighborhood people, anyway?"
So the congressmen went back to Washington once again and tried to rewrite the bill.
"Don't you dare mess with our regulations," warned the environmentalists.
"We think you're trying to undermine the minimum wage laws," growled the labor unions.
"You haven't included the cities in my district," sniped their colleagues.
"Any company already in one of these enterprise zones will get a windfall," chided the liberals.
"You must let us decide who is eligible," advised the bureaucrats.
"If you cut taxes, we'll lose revenues," sobbed the Treasury.
The congressmen heard all these complaints, but they wrote another bill anyway.
By most accounts, the second version of the proposed Urban Jobs and Enterprise Zone Act, the version currently in congressional committee, is a better bill. Its tax incentives for business are sharper, it avoids stepping on organized labor's toes, it gives state and local governments more scope to fashion their own enterprise zone packages, and it's less administratively complex.
The bill is still a far cry, however, from the idea hatched four years ago by British socialist Peter Hall, who suggested an urban policy that he conceded was "based on fairly shameless free enterprise." Eliminate taxes, regulations, social services, and bureaucracies in the worst parts of a decaying industrial city, and the result, Hall said, would be "to recreate the Hong Kong of the 1950s and 1960s." Entrepreneurs would flock there to reap profits and, in the process, create jobs.
Congressmen Jack Kemp and Robert Garcia, House co-sponsors of the enterprise zone bill, want to create the urban jobs, but not, as Hall suggested, by allowing an orgy of free enterprise. "Jack has never had the 'let 'er rip' attitude toward enterprise zones," says an aide to Kemp, a conservative Buffalo Republican. Furthermore, Kemp's colleague, Robert Garcia, is a liberal Democrat from the Bronx. While this oddcouple pairing has helped assure the bill of wide congressional support -- already more than 60 co-sponsors have signed on in the House -- the compromises required to accommodate such divergent political ideologies could make the final measure impotent.
The federal tax breaks proposed in Kemp-Garcia are attractive and, all other things being equal, a business owner or would-be entrepreneur would be foolish to ignore them. "But," observes economic development consultant Paul Pryde, "with enterprise zones, all other things are not equal."
To compensate businesses for the risk of locating in undesirable urban areas, Kemp-Garcia proposes to give them:
* A refundable credit against taxes worth 5% of the wages paid to CETA-eligible employees;
* A zero tax rate on most capital gains;
* Exclusion of 50% of gross receipts from taxable income;
* Cash-basis inventory accounting (provided gross receipts are less than $2 million);
* Twenty-year loss carry-forward.
These "future-oriented" tax incentives promise greater reward to entrepreneurs who make the high-risk investment, said Kemp in testimony before the Senate Finance Committee that is considering his bill. Pryde, on the other hand, points out that start-up businesses need help in the present. "They're worried about where they are going to get this week's tax [payment] and this week's payroll," he told a conference of state legislators recently.
Since most start-up firms are not profitable, tax cuts don't help their cash flow. Refundable tax credits, however, do, and David Birch, a Massachusetts Institute of Technology researcher and an authority on business location issues, applauds the refundable jobs tax credit contained in Kemp-Garcia, but not its size. "My own rough estimate," he says, "is that 5% is not enough to hack it." Small business people he's talked to suggest an initial refundable tax credit of somewhat between 30% and 50% that would decline to zero over three to four years, Birch says.
Furthermore, to be eligible for the credit, a business must hire at least 40% of its workers from among the CETA-eligible unemployed. That's fine for a large assembly plant employing non-skilled labor, but not so fine for the two-worker firm that needs to add a third employee. Stuart Butler, a scholar at Washington's Heritage Foundation and an active enterprise zone booster, suggests that the 40% rule shouldn't apply until a company reaches a certain employment level.
Indeed, one of the problems plaguing Kemp-Garcia is that its sponsors haven't yet decided just what they're after. Jobs, yes, but as Butler observes, "Nobody goes into business to create jobs. They do it to generate profits." Cleveland mayor George Voinovich says Congress should decide whether this is going to be "an economic revitalization bill or a social welfare bill."
Neither have the bill's architects made clear what kinds of businesses they're trying to lure into the inner cities. The branch plants of large firms? Small, single plant companies? Entrepreneurial ventures created by the indigenous population? There is a "misconception" that this is some kind of small business bill, Sen. John Chafee (R-R.I.), a co-sponsor of the Senate version, told a group of Boston business people earlier this year. "It's not that," Chafee said. "If it's IBM or Wang, three cheers, so long as it provides jobs."
Credit Kemp and Garcia with having the patience not to rush quickly into the unknown. They introduced their first enterprise zones bill last year, the second one this summer, and they may submit still a third bill incorporatng more changes this fall. They've had so much criticism, in part, because they have sought it out. "By now even the most skepitcal observer must be convinced that Representative Garcia and I meant it when we asked for suggestions," Kemp says.
And even if enterprise zones fail, says Kemp, "we would be no worse off than before." That's partly true. We would not have bulldozed entire city blocks and moved poor people from one slum into another, as some of the earlier urban renewal programs managed to do. But we would be worse off for having wasted an opportunity to show ourselves what the private sector might do, given the flexibility and freedom to act. We may not get another chance.