February 20, 2006
posted online February 24, 2006
Track record of anti-poverty 'Enterprise
Zones' is mixed
By Mark Reutter,
CHAMPAIGN, Ill. — Since Ronald Reagan's presidency
in the 1980s, attempts to alleviate poverty have shifted away
from urban renewal and centralized government planning to
so-called "market-based solutions."
These efforts include Empowerment Zones and Enterprise
Communities, programs that seek to lift families out of poverty
through market expansion. As part of these programs, tax credits
are given to businesses that create jobs and spur development in
designated low-income areas.
But the verdict on these programs is decidedly mixed.
"Although economic growth has occurred within the targeted
areas, the beneficiaries of these initiatives have largely been
private businesses and investors who have taken advantage of the
tax incentives offered," Jennifer Forbes, a law student at
the University of Illinois, concluded.
The idea of enterprise zones originated in England in 1979
under Prime Minister Margaret Thatcher, Forbes wrote in the
latest issue of the University of Illinois Law Review. Modeled
after free-trade districts in Hong Kong, the zones were designed
to lure large and mid-sized corporations into abandoned
industrial and mining areas. Despite tax breaks and eased
restrictions on land use, few industries took up the
government's offer, and the program was considered a
The ideological underpinnings of tax credits nevertheless made
their way to the U.S., championed by the Reagan administration
and former Republican U.S. Rep. Jack Kemp. While Congress balked
at creating so-called "EZs" during the 1980s, nearly
all state governments implemented some form of low-tax zones for
depressed urban and rural areas.
The 1992 Los Angeles riots prompted the federal
government's entry into the enterprise business. Generous
tax incentives, which could be deducted from corporate-tax bills,
were offered to businesses that located or expanded in designated
zones and hired "qualified zone employees."
Examining the record of EZs in Baltimore, Chicago and
Philadelphia, Forbes reported that only the Baltimore program
generated positive economic growth. Between 1993 and 2003, the
zone posted a 108 percent increase in the number of local
residents employed and a 158 percent rise in the number of
locally run businesses.
"In spite of the noteworthy successes in Baltimore, it is
still unclear whether the progress is sustainable," the
article stated. Only half of the residents who were in
job-training programs sponsored as part of the program were still
working two years after the legislation creating nine national
EZs and 95 ECs (Enterprise Communities) expired in 2003.
Moreover, the growth rates within Baltimore's EZ were
uneven. In the southeast part of the city – largely white
and already undergoing gentrification – private investment
totaled $400 million, while only $50 million in private capital
was recorded in black West Baltimore. Whole blocks of the latter
were still boarded-up and derelict when the program ended.
President Bill Clinton signed the latest national effort,
known as the Community Renewal Tax Relief Act, into law on Dec.
21, 2000. So far, the program has offered $15 billion in tax
credits to private Community Development Entities (CDEs)
certified by the Treasury Department as providing "capital
or technical assistance to disadvantaged businesses or
Investors often have combined these tax credits with
historic-district tax credits because many U.S. historic
districts are located in impoverished inner-city census
"Under this 'twinned' tax approach,"
Forbes wrote, "the investor benefits from a greater New
Markets Tax Credits (NMTC) yield, and the historic tax credit
developments benefit from increased equity."
Many awards, for example, have been granted to the National
Trust Community Investment Corp., a for-profit subsidiary of the
National Trust for Historic Preservation, and to groups restoring
abandoned buildings, such as $767,000 for the Dia Beacon Art
Museum near Beacon, N.Y., and $9 million to rehabilitate the
Hippodrome Theater in Baltimore.
Forbes faulted the program's bias toward historic
preservation at the expense of offering low-income families
opportunities to improve their job skills and establish their own
"Residents of inner-city neighborhoods live in isolated
enclaves delimited by a history of residential segregation,
federally sponsored mortgage red-lining, racially disparate
zoning practices and spatially concentrated public housing,"
the article noted.
"By using low-income census tracts as boundaries to
target tax incentives, the NMTC programs reinforce this spatial
isolation without challenging the underlying structure that
creates these boundaries. Driven by capital investment and the
goals of economic development, the programs fail to promote the
social change necessary to support sustainable
NMTC-subsidized projects could be structured to create
financial incentives for investors to improve the "human
capital" of poor families. For example, projects that
offered job training or child care to residents could receive
more tax credits. "This would result in a greater return for
the investor, and residents will become invested in a project if
they can see how it will eventually benefit them," Forbes
She pointed to studies showing that minority-owned businesses
are more likely to hire minority residents than non-minority
businesses. But unless a minority-owned company is located in a
designated low-income census tract, it is not eligible for NMTCs,
even if it employs minorities from the census tract.
Her article is titled, "Using Economic Development
Programs as Tools for Urban Revitalization: A Comparison of
Empowerment Zones and New Markets Tax Credits."