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II. The efficacy of enterprise zones

A rather notable body of literature has developed over the years aimed at evaluating the investment and employment effects of enterprise zone programs operated in the United States (see, for instance, Wilder & Rubin, 1988; Erickson, et al., 1989; Rubin & Wilder, 1989; Erickson & Friedman, 1990; Rubin, 1990; Elling & Sheldon, 1991; Papke, 1991, 1993, 1994; Dowall, 1996). The literature has sought to estimate the change in local levels of capital investment and employment due to the existence of enterprise zones, and due to the tax abatements and other incentives employed by enterprise zone programs. In general, the empirical literature indicates that there is an association between enterprise zone programs and growth in business investment and employment levels. However, the empirical literature also reveals substantial intrastate and interstate variability in enterprise zone investment and employment effects.

Dowall (1996) found substantial variation in employment and investment change among enterprise zones in California. While all but one of California's enterprise zones experienced job growth from 1986 to 1990, the percentage change in zone employment varied from -2.1 percent to 81.6 percent, with an average change of 12.6 percent during that period. All but three of the enterprise zones experienced an increase in business establishments from 1986 to 1990. The average percentage change in business establishments was +3.7 percent, with a range of -7.7 percent to +57.7 percent.

Likewise, Elling and Sheldon (1991) and Erickson and Friedman (1990) found substantial interstate variability in enterprise zone investment and employment effects. Elling and Sheldon found substantial differences in job creation and job retention in 47 enterprise zones located in Illinois, Indiana, Kentucky, and Ohio. Performance in the enterprise zones observed ranged from one to 694 jobs created and zero to 3,362 jobs retained. Mean annual jobs created in enterprise zones for each of the four states ranged from 102 to 243, and mean annual jobs retained in enterprise zones for each of the four states ranged from 84 to 600. Elling and Sheldon also found substantial variability in business investment among enterprise zones in Illinois, Indiana, Kentucky, and Ohio. The number of firms investing in an enterprise zone in these states ranged from one to 69, and the value of investment within zones ranged from $700,000 to $218 million.

Erickson and Friedman (1990) examined 357 enterprise zones in 186 communities across 17 states. On average, 144.9 jobs were created annually within the enterprise zones and 216.2 jobs were retained annually within the zones. However, the standard deviations for the job creation and job retention measures (174.4 and 437.1 respectively) indicate substantial variation in job creation and retention levels across enterprise zones. Erickson and Friedman also found substantial variation in zone investment effects. On average, 5.6 new establishments and 6.3 expansions of existing establishments occurred per year in the observed enterprise zones. The standard deviations, however, were 8.0 for new establishments and 12.2 for expansions, respectively. Moreover, total investment within the observed enterprise zones averaged $10.9 million per year, with a standard deviation $47.3 million.

Due to the variability in performance of enterprise zones, several of these analyses examine the political and economic factors that explain this variation. With the exception of Papke (1993), however, this literature has overlooked the potential impact that capitalization of enterprise zone tax abatements (and other incentives) into zone land values may have on the efficacy of the zones. A capitalization effect would encompass the shifting of tax abatement dollars from recipient business establishments to landowners through rent or sales prices on enterprise zone property. Shifting of tax abatement dollars through enterprise zone programs could have substantial implications both for the efficacy of the programs and as a basis for local landowners to become rent seekers. Given its relevance in the context of enterprise zones, the next section contains a brief overview and discussion of the literature on property tax and public service capitalization.

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