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In Dark Times, Enterprise Zones Shine

A weak economy and hotly contested state budgets may prompt lawmakers to put enterprise zone programs on the chopping block, but that’s the last thing they should do, USC professors say. New research shows that, in California and other states, enterprise zones are bright spots of economic development and employment.

The weak economy and hotly contested state budgets may prompt some lawmakers to put enterprise zone programs on the chopping block, uncertain whether the state tax credits to companies in disadvantaged areas actually work.

A new study by USC College professor John Ham and USC Marshall School professors Ayse Imrohoroglu and Charles Swenson reveals that enterprise zone programs are indeed bright spots in areas lagging in economic development and employment, across California and the rest of the nation.

“If you’re going to eradicate a program, you need to evaluate it on the number of outcomes, and we found these programs had a positive impact,” says Swenson, an expert on state taxation. “In a time of economic downturn, the last thing you’d want to do is cut a program that increases jobs and decreases poverty.”

Ham, Imrohoroglu and Swenson’s study uncovers evidence showing that enterprise zone programs foster growth by creating jobs and increasing incomes, thus reducing poverty and unemployment rates in these areas.

Based on research Imrohoroglu and Swenson reported in 2006, the new study includes complete data on state and federal enterprise zone programs from 1980 to 1990 and 1990 to 2000. The precise data, taken from census reports and correlated to show the differences between enterprise zones and adjacent non-enterprise zones, looked at jobs, family income, unemployment rates, the percentage of households with wage income, and poverty rates.

The new study controls for county and national effects, and for the effects of some overlapping federal tax zones. In both studies, the professors discovered that for all criteria, enterprise zone programs had a statistically significant impact.

“For California, we found that enterprise zones increased employment by 2.2 percent and increased the fraction of houses with wage and salary income by 2.1 percent,” says Swenson, adding that the programs have had a positive effect in all states that have them.

An enterprise zone is an area defined by a state that is behind in economic development and employment opportunities while meeting a number of poverty criteria. The state gives tax breaks to qualified companies within the zone to encourage economic development. Enterprise zone programs encourage job growth, job tax credits and capital formation with lender net interest deductions and sales/use tax credits for certain machinery and equipment.

These programs have been criticized in the past, as states pumped billions of dollars into them. Swenson notes that a recent study claiming California’s enterprise zones weren’t working examined only jobs and wasn’t able to detect growth, as the USC study was.

The USC professors’ first study, published in 2006 and commissioned by the California Department of Housing and Community Development, found that when compared with the rest of the state, enterprise zones had a 7.35 percent drop in poverty rates, a 7.1 percent increase in household incomes, and a 3.5 percent increase in salaries. Their work was cited by Gov. Arnold Schwarzenegger shortly after it appeared.

Next, Swenson and his colleagues plan to look at the effects of enterprise zones on business retention in California as well as on firm profitability and capital expenditures. The wage credit element of enterprise zone programs should impact all of these factors, Swenson says, adding that “looking at, say, just employment rates is only a part of the picture.”

To read the full study, click here.

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In Dark Times, Enterprise Zones Shine

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