EZ Policy Blog

The headline given to Dan Walter’s column in yesterday’s Sacramento Bee was “Schwarzenegger’s job programs same old stuff.” In the piece Walters suggests:

Even when there are evaluations that question the efficacy of “job creation” subsidies, those who benefit from them resist any effort to erase them.

A case in point are the several dozen “enterprise zones” that local governments created with state permission. In theory, employers locating within the zones receive various tax breaks for hiring the unemployed. In fact, the loopholes cost the public treasury about a half-billion dollars a year, or just about what Schwarzenegger wants to spend on his new scheme.

Last year, the Public Policy Institute of California released a landmark study of California enterprise zones, saying that despite their cost, they generated “no statistically significant effect on employment.”

“The state can ill-afford to continue the enterprise zone program without clearer evidence of its benefits or a well-defined plan to make it more effective,” Jed Kolko, co-author of the PPIC study, said.

And what was the response? Schwarzenegger’s administration shortly thereafter authorized creation of new enterprise zones and the business community launched a public relations drive to support the program.

Here’s a novel thought: If Schwarzenegger and the Legislature want to give new subsidies to employers for jobs that would cost $500 million, why don’t they pay for it by erasing an enterprise zone program that already costs $500 million and isn’t working?

The choice of headline is ironic, since Walters himself is just repeating the “same old stuff.” Back on November 9 Walters wrote a piece using the PPIC study to blast the Enterprise Zone program. There was a good amount of reaction to this article: From USC Professor Chuck Swenson, in the Sacramento Bee by CAEZ President Craig Johnson, and from Deidre F. Kelsey, chairwoman of the Merced County Board of Supervisors in the Merced Sun-Star.

I’m in Sacramento this week, and it is very clear that folks in the Capitol read Dan Walters. It’s a shame that Walters doesn’t take his analysis seriously enough to deal with some of the very good points made on the other side of the argument.

Dan Dufresne, director of government relations for Epsilon Systems Solutions Inc., published the following Op-Ed in the San Diego Union-Tribune yesterday:

The state’s nonpartisan Legislative Analysts’ Office (LAO) just released some staggering figures: our state must address a deficit of $20.7 billion between now and the time the Legislature enacts a 2010?11 budget. What is perhaps even more frightening is the LAO prediction that California will have a deficit of around $20 billion each year for the next several years.

In the same report, the LAO also states that unemployment is expected to fall slowly as the unemployment rate usually peaks several quarters after a recession ends. “By 2015, unemployment is projected to be down to 7.3 percent – well above the pre-recession level,” the report says.

In the face of this ongoing fiscal crisis, the LAO recommends that lawmakers look for new sources of revenue and consider ending certain tax breaks for businesses.

Most unwisely, this includes the suggestion to reduce or eliminate the Enterprise Zone Program.

The mere suggestion of cutting back California’s only economic development tool when unemployment is not expected to drop for several years does not make any sense. The reality is that California’s economy will not recover on its own. Enterprise zones were created to revitalize distressed communities, entice business development in California and create jobs. The LAO’s own predictions about the state’s continued economic woes only highlight the need for the Enterprise Zone Program now more than ever.

In fact, the program is ultimately revenue generating as it creates more taxpayers – corporate and individual – paying more money back to the state. This is the type of program that will help get our state back on track and has already proven to reduce unemployment and poverty levels.

Other states such as New Jersey, Massachusetts and Oklahoma have embraced economic development in the midst of the recession. For example, the New Jersey Legislature enacted legislation creating a new $3,000 grant for each job created in that state during 2009, as well as another grant to offset 7 percent of new investment in plant and equipment costs. Massachusetts created a package of new programs intended to attract new investment from life sciences companies and Oklahoma is encouraging new higher wage jobs by offering a 6 percent incentive payment on payroll for new jobs that pay 150 percent of a company’s current average wage.

California needs to be able to compete with these and other states. Now is time to bolster our economic development initiatives and encourage participation in the Enterprise Zone Program so we can turn our state’s economy around.

Epsilon Systems Solutions Inc., which is headquartered in San Diego, has two locations in the San Diego Regional Enterprise Zone. Epsilon Systems’ National City location employs approximately 90 people and the Otay Mesa facility has 10 employees. Most of Epsilon Systems’ work is focused on offering technical support for government agencies such as the Department of Defense, Department of Energy and the Department of Homeland Security. More than 90 percent of the work performed at Epsilon Systems’ National City and Otay Mesa locations is performed by those in good-paying blue collar jobs, ranging from pipe fitting to welding to general laborer duties.

With a population of just over 60,000 people, National City has been especially impacted by this recession, with a 19.4 percent unemployment rate as of September 2009. Epsilon Systems – a growing company – just hired several people in the last month and a significant portion of them work at the company’s National City facility. Over the past few years, the company has hired a number of Vietnam veterans and recently discharged veterans, providing opportunities for those who often face barriers to employment.

The money that our company has saved by participating in the Enterprise Zone Program has allowed us to offer additional training for employees, hire more people, provide top-notch benefits and expand the National City facility.

While other companies are laying off workers or closing their doors, Epsilon Systems has remained competitive and continues to succeed in California’s depressed economy – and this is due, in part, to the Enterprise Zone Program’s valuable tools for business growth. The Enterprise Zone Program is crucial for businesses and residents not just in the San Diego area, but throughout California. It’s a program that California cannot afford to be without.

Deidre F. Kelsey, chairwoman of the Merced County Board of Supervisors, published a response to Dan Walters’ column in today’s Merced Sun-Star:

Contrary to Dan Walters’ column (“It’s time for a hard look at California tax dodges,” Nov. 9) enterprise zones create jobs.

Proof is in the numbers: Since the designation of the Merced County Enterprise Zone in December 2006, 577 new jobs have been created.

These jobs are a lifeline for residents in Merced, many of whom face barriers to employment.

Merced County and its cities have typically struggled to attract new businesses and is an area that has been hard hit by the economic downturn.
In September of this year, Merced County had a 15.7 percent unemployment rate, which is down from 20.2 percent in March 2009.

Our state desperately needs concrete economic development tools in order to remain competitive.

We cannot afford to be short-sighted; we should not cut back programs that will fundamentally help us grow our economy and recover from the recession.
Merced has seen first-hand the benefits of the enterprise zone designation.

Recent research has shown that enterprise zones increase employment, increase wage, salary and income levels, and decrease poverty rates. These are measurable benefits that are eagerly welcomed in our county.

The enterprise zone program represents an important investment in the future of Merced, and in the health of our state. We can no longer take for granted that businesses will locate in California and grow into a healthy and sustainable tax base.

We need to show that our cities and county are open for business, and the enterprise zone helps deliver that critical message.

The Sacramento Bee has printed a rebuttal to Dan Walters’ last column by CAEZ President, Craig Johnson:

Dan Walters’ Nov. 9 column, “It’s high time for hard look at tax dodges,” questions the effectiveness of “enterprise zones,” yet evidence to the contrary points to the continued success of the program. Business owners large and small face the challenges of the cost of doing business, meeting payroll and ensuring a return on investment in a state with the highest state sales tax, the second highest state income tax and the second highest workers compensation rates in the nation. Simply put, the enterprise zone program is an investment in our state’s future.

A 2006 report to the Department of Housing and Community Development revealed that poverty decreased 7.35 percent more in enterprise zones, unemployment rates fell by 1.2 percent, household incomes grew 7.1 percent faster, and the wages and salary levels grew 3.5 percent more than the rest of the state. Hardly the signs of a “tax dodge” designed to give employers an incentive to do business in California.
Looking beyond the numbers, there are countless stories of businesses that have remained or expanded their California operations because of the enterprise zone program. Most recently, the Bayer manufacturing facility in Berkeley was on its way to the East Coast, but the expansion of the Oakland enterprise zone to include Berkeley persuaded Bayer to keep its operations and its 1,300 employees in the East Bay. Bayer now will invest more than $100 million in plant upgrades to manufacture a new drug to treat hemophilia.

The value of enterprise zones is clearly understood by local governments – there were 15 applications submitted to the Department of Housing and Community Development for four openings in the most recent round of designations. Rather than being viewed as a drain on local budgets, cities and counties compete through a rigorous and costly application process for an enterprise zone designation that will bring measurable economic development benefits to their communities.

Enterprise zones encourage economic growth and job creation, resulting in higher revenues for state and local budgets. The program puts people to work who face the greatest barriers to employment, reducing the strain on overburdened social service programs.

In the face of deep spending cuts, it is short-sighted to suggest elimination of the enterprise zone program. It is the cornerstone of our state’s economic recovery strategy and will lead the way to economic growth and expanded business activity in California.

On Monday the Sacramento Bee’s Dan Walters published another attack on the Enterprise Zone program touting the PPIC’s critical study and dismissing a University of Southern California study charging that it had been “quickly re-released,” and that Dr. Charles Swenson’s “affiliation with a company, National Tax Credit Group, that advises firms on how to obtain government tax breaks,” had not been disclosed.

I asked Dr. Swenson to react to Walters’ column. He said that,

The Universities of Maryland and Southern California and my two esteemed colleagues, economists Dr. John C. Ham and Dr. Ayse Imrohoroglu, who performed all the analysis and write-up, would be astounded with an insinuation that my membership on the advisory board of NTCG could have had any influence on this study.

Dr. Swenson added,

These universities and researchers have only one agenda: doing good science. My role was primarily to generate the idea, and to provide some input as to how the various states’ EZ systems worked. I could not have influenced the analysis or conclusions on this paper, even if I had wanted to.

Dr. Swenson was also on hand at the annual conference of the California Association of Enterprise Zones last week in Fresno to present the findings of the USC/University of Maryland study. At that presentation he pointed to serious flaws in the underlying business data that PPIC relied on.

It seems that Mr. Walters is less interested in actual academic findings than in promoting a specific agenda.

The Sacramento Bee’s Dan Walters has a new attack on the Enterprise Zone program today:

Last June, the Public Policy Institute of California released a highly critical report on California’s “enterprise zone” program that provides big tax breaks to businesses for supposedly hiring workers in areas of high unemployment.

PPIC’s study of the 42 zones, which are created by local governments with approval from the state Department of Housing and Community Development, concluded that state and local governments were losing about a half-billion dollars in revenue each year without any discernible impact on joblessness.

“The state can ill-afford to continue the enterprise zone program without clearer evidence of its benefits or a well-defined plan to make it more effective,” said Jed Kolko, co-author of the PPIC study.

There were three reactions to the densely sourced study:

• The University of Southern California’s Marshall School of Business quickly re-released a study by Dr. Charles Swenson declaring that California’s enterprise zones had “statistically significant” positive impacts on employment and incomes of affected households – without revealing Swenson’s affiliation with a company, National Tax Credit Group, that advises firms on how to obtain government tax breaks;

• The state certified or recertified enterprise zones in Kern and Tulare counties and five cities; and

• The California Chamber of Commerce and other business groups ramped up a public relations campaign to defend the enterprise zone program.

As California’s fiscal crisis deepens, the competition for ever-scarcer public funds is growing more intense. Spending programs and tax breaks – “tax expenditures” in fiscal parlance – are facing closer scrutiny.

The PPIC study is potent ammunition – as it should be – for those who question whether enterprise zones and other corporate tax breaks should remain untouched while health, education and welfare programs face deep spending cuts.

Michael Bolden, a lobbyist for the American Federation of State, County and Municipal Employees, cited the PPIC study during a legislative hearing on enterprise zones last month.

“There hasn’t been any sort of proof that the enterprise zone program works,” Bolden said. “It’s been a boon for business, but we don’t necessarily see the return on investment coming back to the state.”

Like many loopholes enacted on the premise that they would enhance employment, including a new batch approved just this year, enterprise zones have received little objective evaluation on whether their purported benefits have materialized.

The dueling studies from PPIC and USC frame the vacuum. And if Gov. Arnold Schwarzenegger and the Legislature are serious about navigating through the sea of red ink now engulfing the state budget, they’ll divert the energy they now expend on dreaming up gimmicks to making some hard decisions on how taxpayers’ money is being spent – or squandered.

Andrew Myrick, manager of the new Salinas Valley Enterprise Zone, has an Op-Ed in the Californian:

…In the midst of this recession, other states are expanding their enterprise zone programs and are implementing incentives that are focused on attracting businesses from California. It is absolutely imperative that California have a meaningful and useful economic development program to fight back. The enterprise zone program is just that.

Professor Charles Swenson from the University of Southern California Marshall School of Business confirms that enterprise zones work. His research found that California’s enterprise zone program decreases unemployment rates, boosts wage, salary and household incomes and decreases poverty rates. Another study by the California Department of Housing and Community Development found that poverty rates and unemployment declined and incomes increased more in enterprise zones than in the rest of the state.

That is exactly why the city of Salinas and its partnering communities worked hard to obtain a designation as an enterprise zone. As part of our commitment to economic development, the Salinas Valley Enterprise Zone is partnering with the Monterey County OneStop Career Center to help match qualified employees with eligible businesses and put people back to work.

Additionally, the Salinas Valley Enterprise Zone will soon start aggressively marketing the benefits of the zone to existing businesses. A new entity, the Salinas Valley Economic Development Corporation, is being formed to attract new businesses to the area.

As our state looks for ways to solve its financial crisis, our decision makers should focus on increasing employment opportunities and growing our economy. Designating the Salinas Valley as an enterprise zone is a step in the right direction. Our entire region, and now the state, is committed to enhancing residents’ quality of life by revitalizing distressed communities and creating high-paying jobs.

By encouraging businesses to stay in the Salinas Valley and attracting new ones, the Salinas Valley will be able to diversify and grow its local economy and ensure that the region has a healthy economy.

From the Senator’s own blog:

It’s no secret that California is facing an economic crisis not seen since the Great Depression. Unemployment in the Inland Empire has now reached 13 percent, and the state is facing a $26 billion deficit.

While the entire nation is suffering during this economic downturn, I believe there is a direct correlation between California having the fourth highest unemployment rate in the Country and this state’s anti-business climate.

I’ve repeatedly referred to study after study, including from Forbes Magazine, Chief Executive Magazine and the American Legislative Exchange Council which show that California continues to rank as the most expensive place to do business. I believe these studies and California having the fourth highest unemployment rate in the nation are directly related and why businesses are fleeing California for nearby states that offer a more business-friendly atmosphere.

Companies of all sizes are being lured to Texas, Arizona, Nevada, Washington and Oregon. Nevada, for example, has rolled out the welcome mat and is aggressively recruiting businesses to not only with an advertising campaign but by keeping costs and regulations to a minimum that make our neighbors to the west a very attractive place for a struggling California businesses to succeed.

California is a major economic power, but we are losing our standing in the nation and world because of the unneeded and unnecessary regulations on businesses that are forcing them to leave. If we are going to ever turn around California’s economy it must come through the creation of private sector jobs.

Recently, I met with representatives from the San Bernardino Valley Enterprise Zone along with some of the zone’s businesses who traveled to Sacramento to talk about the value of the Enterprise Zone Program. This program is one of the only remaining incentive programs that California still possesses. I believe it must be maintained and protected, if not expanded, to continue the support of business growth in this state.

We talked about how this valuable program played a key role in keeping these businesses in the state. Without it, their businesses would be in financial jeopardy and they would be forced to leave creating an even worse business environment.

HCD has ranked all 15 applications for the new Enterprise Zones and the results have been with the Governor’s office since sometime last month.  Presumably, they are waiting for the right moment to announce the four new zones.

One of those applicants was the City of Oxnard in Ventura County. Bruce Stenslie, president and CEO of the Economic Development Collaborative of Ventura County and Steve Kinney, president of the Economic Development Corporation of Oxnard have published an Op-Ed in the Ventura County Star directly responding to Dan Walters’ recent editorial on the PPIC report.

Walters questioned the value and effectiveness of California’s economic-development policies. He took particular aim at California’s enterprise zones, which are intended to encourage employment and economic growth. Given our economic crisis, and the tough challenges in Sacramento and locally to identify investment strategies that will aid our recovery, it is critical we consider every option and strategy. We welcome Walters’ thoughts on the state’s economy, but think his recent comments lead us in the wrong direction.

We would like to join the debate about what investments make most sense for California and its local economies. We believe that if we educate The Star’s readers about how enterprise zones work, and who benefits, there would be widespread support.

Further, we think Walters has it wrong when he characterizes California as being burdened by ineffective economic-development programs, stacking up “in ever-growing layers.” In fact, the evidence suggests the opposite is true, that California’s recovery is harmed by its lack of economic-development investment, not by some imagined growth of programs to help business.

For fair disclosure, we are advocates for securing a new enterprise-zone designation for Oxnard. This is an uphill battle, as to establish a new enterprise zone, an existing zone must be dropped from the state’s program.

To understand why cities seek an enterprise-zone designation, and to evaluate its merits, it’s important to understand how it works. Enterprise zones are tied to areas that suffer higher-than-average unemployment and poverty. Businesses within an enterprise zone may receive tax credits for hiring new workers, but only for workers who reside within the enterprise zone or who face serious barriers to employment. The benefits for Oxnard are unique. We have high levels of joblessness in neighborhoods near the city’s industrial and commercial districts, but a disconnect between employers and residents. An enterprise-zone designation will place a premium on the skills developed by workers in the city, by rewarding business with a tax incentive for training and hiring local workers.

Stories that are critical of enterprise zones conveniently leave out or downplay this point about worker opportunity. The goal of an enterprise zone is not just to increase the bottom line of business, rather it is to incentivize opportunity for local workers, creating pathways for workers to benefit from business growth.

Those gains for workers decrease tax outlays for public supports. The single most serious impact of this recession is increasing unemployment. More than ever, we should be looking for ways to promote jobs, particularly for those hardest hit by the recession, and that’s exactly what enterprise zones do.

On the subject of whether California is doing enough to promote economic development, we draw readers’ attention to another study. June 23, the Milken Institute in Santa Monica published a report that documents how California is losing high-paying manufacturing jobs to other states, precisely owing to our lack of any proactive agenda to retain them. Our problem is not layers of programs for business, it’s that Sacramento has forgotten that workers don’t have a chance to win if business doesn’t have a chance to compete.

California’s economic future rests on our ability to retain business and promote entrepreneurship. When we become truly dedicated to and effective at that, we’ll create jobs and opportunity for California’s workers.

The Sacramento Bee’s Dan Walters cites both the PPIC and USC studies and concludes that since serious people can reach different conclusions we should just forget the whole thing.

Meanwhile, in the Modesto Bee, Bill Bassitt, CEO of the Stanislaus Economic Development and Workforce Alliance, writes that the Enterprise Zone is a success in Stanislaus County.  Bassitt also points out the extrememly competitive incentives being offered by other states and, “For this state to be business competitive, incentives of a comparable nature must be offered to companies who have a choice on their operational locations. The California Enterprise Zone program is one type of incentive that businesses can use to help calculate the bottom line cost of operating in this state.”

Kathleen Robles, manager of the San Bernardino Enterprise Zone, had an Op-Ed published in The Press-Enterprise this week:

I agree that California cannot afford to waste money on programs that do not work. However, contrary to claims made in The Press-Enterprise’s editorial “Tax-break waste” (Our Views, June 17), the state’s enterprise zone program has proven to deliver measurable benefits to our state.

Enterprise zones revitalize distressed areas and provide incentives for companies to hire disadvantaged individuals and expand their operations in California.

Reducing or eliminating the enterprise zone program would be extremely shortsighted. While our state is in the midst of its worst budget deficit and cuts are inevitable, the state’s most important economic development tool should not be put on the chopping block. By prioritizing economic growth and supporting successful economic development programs that create jobs and keep businesses in California, we can get our state back on track.

Recent research by Professor Chuck Swenson from the USC Marshall School of Business shows that the enterprise zone program reduces unemployment rates, boosts household incomes, and cuts poverty rates. These findings are in stark contrast to the claims made in the report from the Public Policy Institute of California.

According to Swenson, in order to evaluate the economic impact of the enterprise zone program, you need to look at a number of different outcomes such as job growth, unemployment rates, income levels, and business retention. The PPIC study analyzed much more limited data. After looking at all of these factors, Swenson found that the enterprise zone program reduced unemployment rates and increased the wages of enterprise zone residents.

Also, contrary to The Press-Enterprise’s editorial, evaluating enterprise zones is a critical issue to those in Sacramento. That is why AB 1550, which ushered in a new era of accountability standards for the enterprise zone program, was signed into law in 2006. AB 1550 requires additional review of a zone’s administrative support and an evaluation of financial commitments made in the zone’s application and memorandum of understanding.

The law also requires each zone to submit a biennial report to the Department of Housing and Community Development regarding progress made in achieving its goals and objectives. In addition, the application process for an area to be designated an enterprise zone is very competitive and no zone operates in perpetuity.

Areas that are designated as enterprise zones are struggling communities. The state has made a commitment to help these communities rebuild themselves. Enterprise zones help the people that are hardest hit in an economic downturn, and reducing the program’s benefits will have a disproportionate impact on low-income residents.

While there are many opinions on how the state should solve its budget crisis, eliminating the enterprise zone program is not the answer. Tax credits aimed at creating jobs and boosting business should be maintained because prominent research shows that they do work.

The Sacramento Business Journal published an article in today’s edition examining the claims of the negative PPIC study contrasted with view of program proponents.  Only an excerpt is available online:

An enterprising expansion is in the works as three local agencies team up to add 40,000 acres of industrial property to a new, joint enterprise zone.

Two of the region’s four enterprise zones expire this year, and Sacramento County and the cities of Sacramento and Rancho Cordova are applying together for an expanded zone across three jurisdictions.

Just as officials work to combine the zones, a new report says the subsidized business districts don’t do enough to generate jobs, their “primary purpose.”

But, an expanded zone would add “a substantial number of employers who could make use of the (tax) credits,” said Jim Pardun, a manager in the county’s economic development department.

Here is scan of the whole article.

I just received a press release issued by Assemblyman V. Manuel Perez addressing the PPIC study on Enterprise Zones:

(SACRAMENTO) — Assemblymember V. Manuel Pérez (D-Coachella), Chair of the Assembly Committee on Jobs, Economic Development and the Economy, made the following statement today in response to the newly released report, “Do California’s Enterprise Zones Create Jobs?,” released by the Public Policy Institute of California (PPIC):

“PPIC’s report advances what we know about the operation and impact of one of the state’s largest economic development programs. While the findings indicate that the enterprise zones have not affected business creation and job growth, the report also notes that improving community conditions by lowering poverty and unemployment are other EZ program priorities not evaluated by the study. The reforms of 2006, as noted in the report, shifted the EZ program into a more actively managed and accountable public program. I look forward to subsequent research to assess the impact of zones established under the new rules. This would be useful for community leaders and policymakers as we seek to ensure that our economic development programs are relevant and effective.

Understanding the economic dynamics of lower income communities is complicated. In the 80th district, there are three enterprise zones – the Imperial Valley Enterprise Zone, the Coachella Valley Enterprise Zone, and the Calexico Enterprise Zone. My own observation is that without the EZ program these communities would be experiencing further economic deterioration. I believe that the EZ program has provided opportunities for community leaders to work with the business sector to promote a more stable employment environment. I am aware that there are efforts seeking reform of the EZ program. Given the significance of the program to low income communities that have been hardest hit by this recession, I have called for interim hearings to thoroughly review the issues. This research from PPIC provides new information that will help my Committee with the hearings I have planned for the fall.”

Today is the day PPIC (re)releases its report critical of the Enterprise Zone Program. PPIC is presenting the report at a couple of venues today in Sacramento. Some news publications reported on their press release:

KPBS San Diego
Visalia Times-Delta
The Desert Sun

The Central Valley Business Times, published an article explaining some of the detractors’ positions, “Enterprise Zones refute PPIC report.”

This morning, one of the authors, Jed Kolko appeared with Craig Johnson, president of the California Association of Enterprise Zones, on the Forum radio program on KQED in San Francisco to discuss the study. Here is the audio from the program this morning:

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The Public Policy Institute of California is getting ready to re-release a report it did last year on the Enterprise Zones which will state, “The enterprise zone program, the state’s largest economic development effort, has failed to achieve its key goal: increasing jobs.”

But how does the PPIC know that the “key goal” of the EZ Program is to increase jobs?

According to the Government Code of the State of California in “The Enterprise Zone Act” (Section 7070-7089) this is not so cut and dry:

7070. This chapter shall be known and may be cited as the Enterprise Zone Act.

7071. The Legislature finds and declares as follows:

(a) The health, safety, and welfare of the people of California depend upon the development, stability, and expansion of private business, industry, and commerce, and there are certain areas within the state that are economically depressed due to a lack of investment in the private sector. Therefore, it is declared to be the purpose of this chapter to stimulate business and industrial growth in the depressed areas of the state by relaxing regulatory controls that impede private investment.

(b) It is in the economic interest of the state to have one strong, combined, and business-friendly incentive program to help attract business and industry to the state, to help retain and expand existing state business and industry, and to create increased job opportunities for all Californians.

(c) No enterprise zone shall be designated in which any boundary thereof is drawn in a manner so as to include larger stable businesses or heavily residential areas to the detriment of areas that are truly economically depressed.

(d) Nothing in this chapter shall be construed to infringe upon regulations relating to the civil rights, equal employment rights, equal opportunity rights, or fair housing rights of any person.

I could not identify any part of their study that addresses measuring the relaxation of regulatory controls that impede private investment within Enterprise Zones.

In fact, no part of the Act explicitly states that increasing jobs is the purpose of the program. A goal of increasing job opportunities is not even necessarily the same thing as increasing job counts. But even if that is a goal, it is certainly not the only or primary goal of the program as stated in law.

I previously linked to a press release on the University of Southern California’s website describing a new study on Enterprise Zone programs that found a positive effect, “A new study by USC professors John Ham, Ayse Imrohoroglu and Charles Swenson reveals that these programs are indeed bright spots in areas lagging in economic development and employment in California and the rest of the nation.”  Dr. Swenson recently contacted me to let me know that the full study is now available online: http://www.marshall.usc.edu/assets/094/17857.pdf.

This new study differs with the other recently published study by David Neumark and Jed Kolko (see here) which criticized California’s program for failing to produce measurable increases in employment.

I asked Professor Swenson how, given that these two studies arrive at opposite conclusions, did the studies differ in methodology?  Dr. Swenson responded with the following points:

• We consider (and control for) national trends (Neumark and Kolko do not).
• I think we use more powerful econometric (statistical) methods.
• N&K examine just CA; we look at all states’ EZ programs. Despite huge differences in how states structure their programs, they all seem to work. When you see systematic evidence across a variety of settings, there is a more compelling argument that these programs are effective. In contrast, when you examine only one state, it’s difficult to generalize the findings more broadly.
• N&K examine only employment; we examine employment, unemployment rates, poverty rates, and fraction of households with wage and salary income.

He also supplied me with a copy of an additional paper focused more specifically on the California program, “On the Effectiveness of the California Enterprise Zone Program.”  This paper makes the argument that, “just looking at employment is an incomplete measure of the efficacy of the CA EZ program. The broader measures include wage increase for EZ employees; increased capital investment; increased profitability, business retention, etc.”

Last month I found an article in La Prensa San Diego discussing the positive impact on the City of Chula Vista as a result of inclusion in the San Diego Enterprise Zone.  That article was a preview of a new study conducted by the National University System Institute for Policy Research released on February 12.  Here is a link to a PDF of the Executive Summary of that report entitled “A Powerful Engine For South Bay: Chula Vista and the San Diego Regional Enterprise Zone.”  The following is the text of the Institute’s press release:

FEBRUARY 12, 2009, SAN DIEGO – An economic analysis released today by the National University System Institute for Policy Research found that Chula Vista’s participation in the San Diego Regional Enterprise Zone created hundreds of jobs and greatly benefited local companies, namely small businesses. The analysis found that in 2008, Chula Vista’s participation in the San Diego Regional Enterprise Zone produced an estimated total economic impact of $11.57 million.

The Enterprise Zone has created hundreds of jobs for Chula Vistans – more than 650 hiring credit vouchers have been issued throughout Chula Vista’s participation in the Enterprise Zone program. The benefits are concentrated to those most in need – small businesses and local residents. In Chula Vista 65% of companies receiving hiring credit vouchers have less than 50 employees, and 90% of the hiring vouchers were for those residents living in the “targeted employment area” of the city’s designated west side.

“The EZ program encourages businesses to hire and retain more low-skilled employees, which is important in today’s economic downturn,” said Vince Vasquez, Senior Policy Analyst at the Institute. “These jobs may often be the first opportunities for employment these individuals have after reentering society, such as the case may be with an ex-offender or military veteran, and thus it provides a critical first opportunity to learn new skills that will enable them to reach for higher-paying skilled positions.”

California has 42 Enterprise Zones throughout the state, which are designed to increase jobs and investment opportunities within a limited, economically-distressed and high unemployment area. The Enterprise Zone program has successfully used tax breaks and other incentives to help retain businesses in some of the state’s most down-trodden areas through two recessions, spurring greater capital expenditures, and expanding workforce opportunities for disadvantaged and economically-challenged Californians.

Since 1986, California’s EZ program has been a net gain for San Diego’s economic climate – assisting in the creation and retention of more than 25,000 area jobs, and spurring nearly $1 billion in private investment. 

This article is linked right on the front page of USC.edu:

At a time when California is still trying to pass its budget, enterprise zone programs may be on the chopping block as lawmakers debate whether these programs are working.

A new study by USC professors John Ham, Ayse Imrohoroglu and Charles Swenson reveals that these programs are indeed bright spots in areas lagging in economic development and employment in California and the rest of the nation.

“If you’re going to eradicate a program, you need to evaluate it on the number of outcomes and we found these programs had a positive impact,” said Swenson, a professor at the USC Marshall School of Business and Leventhal research fellow, who is an expert on state taxation. “It’s the only program we have that gives tax breaks and in a time of economic downturn. The last thing you’d want to do is cut a program that increases jobs and decreases poverty.”

Ham, Imrohoroglu and Swenson’s just-released study points to evidence showing that enterprise zone programs foster growth by creating jobs and increasing incomes, as well as reducing poverty and unemployment rates in these areas.

Based on research Imrohoroglu and Swenson reported in 2006, the new study includes complete data on both state and federal enterprise zone programs from 1980 to 1990 and 1990 to 2000. The precise data, taken from census reports and correlated to show the differences between enterprise zones and adjacent non-enterprise zones, looked at jobs, family income, unemployment rates, percent of households with wage income and poverty rates.

The new study also controls for county and national effects, and for the effects of some overlapping federal tax zones. In both studies, the professors found that for all criteria, enterprise zone programs had a statistically significant impact.

“For California, we found that enterprise zones increased employment by 2.2 percent and increased the fraction of houses with wage and salary income by 2.1 percent,” said Swenson, adding that the programs have had a positive effect for all categories in all states that have them.

An enterprise zone is an area defined by a state that is behind in economic development and employment opportunities while meeting a number of poverty criteria.

The state gives tax breaks to qualified companies within the zone to encourage economic development. Enterprise zone programs encourage job growth, job tax credits and capital formation with lender net interest deduction and sales/use tax credits for certain machinery and equipment. These zones have been criticized in the past as states have pumped billions of dollars into the programs.

Swenson noted that a recent study that claimed California’s enterprise zones aren’t working examined only jobs and was not able to detect growth as had the USC study.

The professors’ previous study, published in 2006 and commissioned by the California Department of Housing and Community Development, found that when compared to the rest of the state, enterprise zones had a 7.35 percent drop in poverty rates; a 7.1 percent increase in household incomes; and a 3.5 percent increase in salaries. Their work was cited by Gov. Arnold Schwarzenegger shortly after it appeared.

Ham is an economics professor at USC College. Imrohoroglu is chair of the Department of Finance and Business Economics at the USC Marshall School.

Next, Swenson and his colleagues would like to look at the effects of enterprise zones on business retention in California as well as firm profitability and capital expenditures. “The wage credit of the program should affect all of these; looking at say, just employment rates, is only a part of the picture,” he said

The Legislative Analyst’s Office has just released a new report on revenue in the 2009-2010 budget.  They basically repeat verbatim what we have seen from them in the past regarding the Enterprise Zone program:

Background. State law provides targeted hiring credits, wage credits, credits for sales taxes paid on certain machinery, and other tax benefits to businesses operating in designated “enterprise zones.” Currently, 42 zones are authorized by state law to promote economic growth in depressed areas of the state. Some zones have been in existence for more than 20 years.

Proposal. Cancel zones authorized by the state in 2006 and eliminate the remaining zones as their current designations expire. Revenue gain of about $100 million in 2009–10 and $120 million in 2010–11.

Rationale. Most studies conclude that enterprise zones typically have little impact overall on new investment and do relatively little to improve the job prospects of the residents of these zones. Additionally, it is not evident what additional benefits would be gained by extending the same benefits in zones that have been in place for two decades. (Please see our 2008–09 P&I and our 2003 report An Overview of California’s Enterprise Zone Hiring Credit for more on this issue.)

The recent negative report on EZs gets more play in this OC Register commentary.  But why are Enterprise Zones now “so-called ‘enterprise zones’”?