Enterprise zones have worked best when tax incentives to attract new businesses are combined with other aid targeted to distressed areas, state and local officials said yesterday.
The officials spoke from nearly a decade's experience with enterprise zones that have operated under state laws while the federal government has debated and delayed adopting an economic development idea imported from England.
With the Los Angeles riots bringing new attention to enterprise zones, a Bush administration official said its proposal would in some cases couple tax incentives with funds for social services and law enforcement.
Currently, 36 states and the District have laws that have created more than 600 enterprise zones in urban and rural areas of the country, according to Richard Cowden, executive director of the American Association of Enterprise Zones, a private group of development officials formed in 1985. He said Massachusetts is the only urban industrial state lacking such a law.
The packages of incentives vary, Cowden said, but include offering new and expanded businesses located in economically distressed areas investment tax credits, sales tax exemptions, property tax abatements and tax credits for new hires. The level of public subsidy that these tax breaks represent for private business varies greatly, he said.
The term "enterprise zone" was coined in 1978 by Geoffrey Howe, a Conservative member of the British Parliament, according to "Enterprise Zones: Greenlining the Inner Cities," a 1981 book by Stuart M. Butler, a Heritage Foundation scholar.
In 1980, Parliament authorized the creation of enterprise zones as part of the conservative supply-side economics of then-Prime Minister Margaret Thatcher.
The Reagan administration advocated similar legislation, but congressional Democrats consistently rejected it. This year, Congress did approve $700 million to create 10 private projects in urban and rural areas -- a version of legislation pushed by Housing and Urban Development Secretary Jack Kemp. President Bush vetoed the tax bill that contained the provisions, but has revived a similar proposal with greater tax incentives in his urban package.
Cowden said states with the more successful enterprise zones have tried to "round out the original supply-side concept" by improving law enforcement, social services, job training and infrastructure in the targeted areas.
"If their program only consists of tax incentives, I think they're making a mistake," Cowden said.
Sara Bell, a development official in Kentucky, agreed. In 1982 it was one of the first states to approve enterprise zones, and has created 10.
"When we started out, enterprise zones was an island, and we were going to put these tax incentives in there and that was going to fix it up," Bell said. "I don't think anything will succeed with just a tax incentive."
One of Kentucky's zones covers 43 square miles in Louisville and adjoining Jefferson County. Mayor Jerry Abramson (D) said that since 1983 the zone has attracted more than $1 billion in private investment and created or saved 8,000 jobs.
"Our city has felt that it has been a success," Abramson said yesterday. He joined other mayors in lobbying House Democratic leaders for a large package of urban aid.
The state has provided exemptions to a 6 percent sales tax on building materials and equipment, reductions in a 6 percent tax on motor vehicles and a new jobs credit of $100 to $1,500 per employee.
The local government has provided additional financial incentives, such as low-interest loans and inventory tax abatements, as well as street, housing and summer youth programs, Bell said.
Neither the state nor local government could total the amount of their subsidies to the relatively large enterprise zone.
Earlier this year, the legislature expanded state monitoring and recordkeeping because some companies apparently had failed to live up to their hiring and expansion commitments.
Another mayor spoke less glowingly of another of the first zones in this country. Mayor Carrie Saxon Perry (D) of Hartford, Conn., rated the zone there "a 5 minus" on a scale of 10, saying it is too small, offers inadequate incentives and needs other public investments her city cannot afford.
"We have less than 50 businesses that started, and they are stumbling," Perry said. "The Republicans love talking about enterprise zones. . . . It's grossly ineffective and inefficient."
Despite her criticisms, Perry agreed with Abramson that additional federal tax incentives would be helpful. "The overlay of federal enterprise zones would be very beneficial to our community," Abramson said. "But it's not an end-all and be-all. It's an aspect of what needs to be provided."
Office of Management and Budget Director Richard G. Darman indicated the administration has recognized the limits of tax incentives acting alone.
Under Bush's urban package, Darman said, 80 percent of $500 million for "weed-and-seed" programs of law enforcement and social services would be targeted to enterprise zones.
States pressed ahead with enterprise zone legislation beginning in 1982.
Limited federal enterprise zone legislation was passed in 1987.
36 states and the District of Columbia now have enterprise zones.
Programs vary in scale, designation criteria, social welfare vs. economic orientation, number of zones per program, and legislative mandate.
Typical zones experienced additional investment of several new and expanding businesses. They had less success in stopping planned business closures.
New investments resulted in a median of 175 jobs gained per zone between the time of designation and early 1987.
Average job gain per establishment was 46 with a median of 10 jobs.
SOURCES: "Enterprise Zones: An Evaluation of State Government Policies," Pennsylvania State University, April 1989; American Association of Enterprise Zones.