But that bill is pretty interesting. It's called the "National Enterprise Zone Act of 2004," and it has an long pedigree. Enterprise zones, first proposed by the Heritage Foundation's Stuart Butler in the 1980s and embraced by HUD secretary (and Ryan mentor) Jack Kemp, are economically deprived areas, typically in inner cities, that the government designates for exemptions from certain taxes and regulations. For example, those investing in businesses located in an enterprise zone could be exempted from capital gains taxes, or those businesses could get a break on property taxes, or from zoning rules. "The idea is reviving deprived inner city areas by reducing the cost of enterprise within those areas," Butler explains.
The idea spread like wildfire, with over 40 states adopting enterprise zones in the 1980s, and President Bill Clinton signing into law a variant called "empowerment zones". The evidence on these programs is mixed. A review (pdf) of the literature on state enterprise zones conducted for the Minnesota legislature found that some elements of the zones are effective, such as property tax breaks and tax credits for jobs, but that sometimes the programs end up just subsidizing companies for buying equipment or hiring workers when they would have done so without the incentives. A recent study by economists Devon Lynch and Jeffrey Zax actually found that Colorado's enterprise zones program reduced employment, because it included investment incentives that led companies to spend more on building up capital and less on employing workers.
Butler acknowledges these findings, but points out that these programs often subsidized particular activities, which is antithetical to the original idea of enterprise zones. "You didn’t second guess what kind of business should be there, and you set up an environment where it was very easy for someone with a creative idea to go into the zone," Butler explained. "It was Hong Kong on the Hudson." Contrast that vision to the Clinton-era Empowerment Zones policy, where cities had to report to the federal government on what specific businesses the empowerment zone would encourage. Butler also points out that the original idea would have linked federal, state and local incentives, a degree of coordination that actually implemented enterprise zone programs have not achieved.
Ryan's 2004 bill is much more in line with the original proposals of Butler and Kemp, which is perhaps unsurprising given that Ryan worked for Kemp for two years at the latter's think tank, Empower America (which is now the Tea Party-affiliated FreedomWorks). Ryan's bill would have state governors (or the mayor of D.C.) nominate particular zones for approval by the HUD secretary. They would have to have a poverty rate two times the national poverty rate, a median household income less than 60 percent of the national median household income and an unemployment rate 2.5 times the national average unemployment rate.
Businesses and individuals in enterprise zones would then be able to pay a 17 percent flat tax on all income earned in the zone. Individuals would be able to deduct all savings, capital gains, and expenditures on inventory for a business. In effect, it would institute a 17 percent consumption tax on individuals in the zones. This is more dramatic than the tax plan Ryan has proposed in his latest budget plan, which does not exempt investment from taxation (though an earlier budget proposal did) and which creates two income tax rates at 10 and 25 percent. Then again, lower-income people living in enterprise zones would likely pay the 10 percent rate in Ryan's new plan, so the enterprise zone tax plan could actually amount to a higher tax.
The similarity between Ryan's proposed taxes for the poor and his proposed taxes for all touches on one criticism the conservatives often have of enterprise zones: if lower taxes and fewer regulations are good for poor areas, why aren't they good for the rest of the country? "Kemp always used to say there should be one enterprise zone and it should go from the Atlantic to the Pacific, or from Mexico to Canada," Butler jokes, but even he thinks there's a strong case for treating poor regions differently. "If you substantially reduced taxes throughout the country, you would not be getting the revenue needed to run even a minimal government," he explains.
Despite its free market structure, Butler argues that the zones ought to have bipartisan, and cross-ideological, appeal. Enterprise zones, he says, "rest on the notion that people in depressed areas actually are not stupid. You don’t have to treat them in a paternalist way. There are people on both the left and the right who think the poor need to be looked after."