Empowerment Zone’s Glory Is Mostly Political

At the mayor’s request, the Los Angeles City Council recently approved another reduction of city business taxes in the local empowerment zone, which includes part of Pacoima.

By the mayor’s office’s own estimate, the move could cost the city up to $400,000 per year, amounting to an average subsidy of $95 per firm.

Promoting the measure as a local contribution to creating “tax-free” empowerment zones, the mayor’s office called it “a new tool” to attract firms to the zone. But are such tax breaks the wisest use of city funds?

The family of zone programs--variously called enterprise, revitalization or empowerment zones--that creates tax breaks and other incentives for specific geographic areas was promoted by Jack Kemp when he was secretary of Housing and Urban Development as incubators for small firms and new entrepreneurs to free them from government regulation.

Instead they have been used across the United States as mechanisms to subsidize firms that local governments are trying to lure from elsewhere or keep from moving away.

Virtually all studies of zone programs conclude that they have little impact. The most careful study of California state enterprise zones, conducted by David Dowall at UC Berkeley, found no empirical evidence that the programs themselves had created jobs.

Businesses “that had relocated into or expanded within a zone or area were nearly unanimous in asserting that their business had not located where it had because of any program benefits” according to the Dowall study.

Researchers agree that most state tax breaks are too small to have an impact, and the city’s tax breaks are even smaller.

Why then is the zone approach popular, given the lack of evidence that it works?

Politicians like zones because they give the impression that something is being done about unemployment and poverty. Hence, former Deputy Mayor Gary Mendoza’s plea to the City Council to “join this effort and help send an important message to the people who live in these economically disadvantaged areas that the city stands united in its commitment to revitalize all parts of Los Angeles.”

But who really believes that a $95 tax break is going to cause any business to do anything other than thank the local politicians for their generosity?

The problem with this symbolic approach to economic development is that it costs real money. The new tax break plus an earlier one for zone firms together total almost $4 million a year in foregone city revenue which could otherwise be spent to fix sewers or provide more training to the poor and unemployed who supposedly are the reason for creating the zones.

Furthermore, to the extent that firms really can be lured by subsidies, these breaks only work if neighboring cities don’t retaliate by offering an even better deal. Cities can end up racing each other to the bottom, undermining tax revenue sources and losing their ability to invest in infrastructure and a qualified work force.

How can we ensure that subsidy programs achieve their stated purpose? We offer four guiding principles:

* Strategy: Assistance to private businesses should contribute to a comprehensive and consistent economic development strategy for the city and region. Why subsidize sweatshops and burger joints just because they appear inside a circle someone drew on a map? We should subsidize industries that create high-wage jobs or with a ladder up to better jobs for the poor and unemployed.

* Efficacy: Subsidies should be targeted to programs that have been shown to work, such as training for jobs that exist, technical assistance to small businesses, infrastructure or revolving loan funds. Minor tax breaks have never been shown to accomplish anything in terms of job creation.

* Evaluation: Programs should be required to generate publicly accessible data that allow government and researchers to evaluate costs and benefits. Without explicit evaluation requirements, tax incentives in particular are invisible to public review because tax records are confidential.

* Accountability: Any subsidy or tax break benefiting private firms should have enforceable eligibility and performance requirements. Whether it is a living wage, job creation or local hiring goals, we should not be ashamed to ask businesses for public benefits in exchange for public subsidies.

Government should have to show a return on its subsidy investment, just as any business would.