This paper analyzes the potential impact of land capitalization on the incentive effects of enterprise zones and the potential for enterprise zone establishment to be pursued by rent seeking landowners through the local public policy process. The analysis presented in this paper provides a basis for several important conclusions relating to enterprise zone policies.
First, tax abatements and other incentives provided to businesses operating within enterprise zones will increase the amount of variable production inputs utilized by businesses within the zones. Regardless of the capitalization effect that may arise due to the enterprise zone, the shifting model suggests that enterprise zones will benefit from investment and employment in excess of what would otherwise occur. This result has definite implications for the workforce and suppliers in and around enterprise zones.
Secondly, enterprise zones, and the tax abatements and other incentives provided to businesses operating in them, may drive-up zone land values. The shifting model suggests that if the supply of enterprise zone business sites is inelastic and demand for sites is elastic, tax abatements and other incentives provided to zone businesses will be transferred to zone landowners through increased rental rates or sales prices. Nevertheless, if the supply of business sites is elastic and demand relatively inelastic, the shifting outcome suggested by the model is not expected to arise. Therefore, the capitalization basis for establishing enterprise zones merely to enrich local landowners would be absent in economically depressed communities. Also as a result, targeting enterprise zones to economically depressed communities may be the most effective means of preventing local landowners from pursuing rent seeking strategies.
Finally, the analytical results demonstrate the implications of tax abatement shifting for the efficacy of enterprise zone programs. The capitalization effect potentially could eliminate any cost or profit advantage a business might obtain by operating within an enterprise zone. The existence of the capitalization effect and its variation depending upon supply and demand elasticities for business sites may, in part, explain the substantial variability in investment and employment effects that have been observed in enterprise zones. Furthermore, the shifting model implies that capitalization will diminish the incentive effects of enterprise zones most in prosperous communities. Consequently, targeting of enterprise zones only to depressed communities should minimize, if not eliminate, capitalization effects related to enterprise zone establishment and improve the overall efficacy of the zones.