Incentive Effects and Potential Use of Enterprise Zones
by James R. Landers
This paper analyzes the potential impact of land capitalization on the incentive effects of enterprise zones, and their potential for being pursued by rent seeking landowners through the local public policy process. Enterprise zones have become one of the primary economic development tools and development-oriented interventions employed by state and local governments. Enterprise zone programs typically emphasize the provision of tax abatements to businesses locating or expanding within the economically depressed areas encompassed by the zones. The tax abatements are aimed at creating production cost and profit differentials between enterprise zone business operations and non-zone business operations. These differentials represent the incentive for businesses to locate or expand within the zones. The model presented in this paper suggests that enterprise zone tax abatements will succeed in increasing the utilization of targeted production inputs by zone businesses. The model also suggests that enterprise zones and enterprise zone tax abatements may lead to increases in land values that undo the cost/profit differentials generated by the tax abatements and diminish the incentive effects of the zones. Moreover, the capitalization effect may provide the impetus for rather perverse behavior. Landowners and public officials may seek to implement enterprise zones inappropriately, merely to contrive rents in the interest of landowners rather than to facilitate economic development in the interest of the community.
Enterprise zones represent one of the primary economic development tools employed by state and local governments as a means of targeting economic development incentives, especially tax abatements, to businesses operating in economically depressed areas. Enterprise zones are geographic areas that are designated by law for special policy treatment due to the economic conditions that exist within the zones. Presently, at least 40 states have laws authorizing the establishment of enterprise zones or some equivalent (1). In many instances, enterprise zones are designated and established pursuant to economic distress criteria specified in authorizing statutes or administrative regulations. An overview of enterprise zone designation criteria by Erickson and Friedman (1991) indicates that the distress criteria typically involve measures of area unemployment, poverty, and blight.