Enterprise Zones

Enterprise Zones (EZs)

Enterprise zones (EZs) are geographic areas in which companies can qualify for a variety of subsidies. The original intent of most EZ programs was to encourage businesses to stay, locate, or expand in depressed areas and thereby help to revitalize them. EZ subsidies often include a variety of corporate income tax credits, property tax abatements, and other tax exemptions and incentives to encourage businesses to locate in low-income areas of a city or county. Zones range in size from hundreds to several thousand acres.

Most states and the federal government have their own versions of enterprise zones. State zone programs are usually called “enterprise zones,” or “empowerment zones,” but some states have their own names such as New York's "Empire Zones" or Michigan's "Renaissance Zones." States began enacting enterprise zones in the U.S. in the early 1980s.

The federal Empowerment Zones, Enterprise Communities, and Renewal Communities (EZ/EC/RC) program, enacted in 1994, is similar to state enterprise zones in terms of the kinds of subsidies it provides to companies. However, the federal program varies in two important ways: it includes substantial amounts of training funds and other monies for social services to help targeted workers with family needs outside the workplace; and it requires community participation. These additions are intended to improve zone results by increasing the chances that zone workers will keep their jobs and by getting more community institutions involved.

How state EZs work

State law sets out the criteria an area must meet to be designated an enterprise zone. Each state's EZ program is slightly different. In order to qualify as an enterprise zone, an area typically has to meet a state's definition of distress or blight, usually defined as having a relatively high rate of unemployment and/or job loss. Other common criteria include low income or education levels, population decline, high vacancy rate of buildings, or high proportion of old housing stock.

Legislatures frequently specify the maximum number of zones for the state and may limit the number that can be created each year. Many states have designated whole counties or cities as zones. Three states – Arkansas, Kansas and South Carolina – have even extended zone benefits to businesses throughout the state, in effect making the entire state into an enterprise zone.

Many states require companies to meet performance standards to qualify for zone incentives. In addition to being located within the zone's boundaries, a company may be required to create new jobs or make a substantial capital investment within a zone. Some states mandate that to collect credits, a certain percentage of the company's new hires must be zone residents and/or be paid above a certain wage. Some encourage companies to hire "disadvantaged" workers and provide tax credits in return.

Enterprise zones offer businesses a bundle of state and local incentives. EZ subsidies are entitlement subsidies – that is, any company that meets the qualifying criteria is eligible to collect them. Common subsidies for which an EZ company may qualify include:

  • Property tax abatements
  • Investment tax credits (against corporate income tax)
  • Job creation tax credits (against corporate income tax)
  • Inventory tax exemption
  • Sales, franchise, and use tax exemptions or reductions
  • Lower utility rates
  • Financial assistance through low interest loans and/or bond financing
  • Training grants

State EZs are administered and monitored by a local zone association or central zone-coordinating agency that may help select the designated zones, produce periodic reports, and supervise the financing of the program. Each zone also has local governance. In some states, local zone administrators are given discretion over the choice of benefits offered, while in others only state-level incentives may be provided.

How federal EZs work

Cities receive EZ, EC, or RC designation from the federal government. Each designation has a different set of requirements companies must meet to qualify for incentives, and each program varies somewhat in the specific incentives offered.

The EZ/EC/RC programs all provide access to a very wide array of subsidies, including:

  • Employment credits (enterprise zone hiring credits - for hiring zone residents only; Welfare-to-Work Credit, Work Opportunity Tax Credit, and Indian employment tax credit - the last three are not specific to EZ/EC residents);
  • Business expansion subsidies (EZ facility bonds - issued by state or local government; environmental cleanup costs/brownfields - not specific to EZ/EC; capital gains tax exemption - EC only; and special accelerated depreciation for small businesses - EZ only);
  • Qualified Zone Academy Bonds (QZAB) (education bonds specific to EZ/EC); and
  • Low-income housing tax credits (not specific to EZ/EC).

For details on EZ/EC/RC subsidies, see HUD's Tax Incentive Guide for Businesses in Renewal Communities, Enterprise Zones, and Enterprise Communities, online at
http://www.hud.gov/utilities/intercept.cfm?/offices/cpd/economicdevelopment/library/taxguide2003.pdf.

Accountability and outcomes

State enterprise zones have been studied extensively by academic researchers, other evaluators, and by government agencies such as the General Accounting Office. The results are not encouraging. They show that zones generally induce little new economic activity, and that even when zone employment increases, job gains for zone residents are quite modest (see Peter Fisher and Alan Peters, Tax Incentives, Enterprise Zones, and Job Redistribution 1990-1997, University of Iowa Graduate Program in Urban and Regional Planning, 1998).

In the few positive findings, successful zones seem to have two characteristics: 1) they are good places to do business (i.e., the designated zones are distressed, but they also include areas with genuine development potential); and 2) they are actively managed by people with good entrepreneurial skills (see Edith Brasheres, "Empowerment Zone Tax Incentive Use: What the 1996 Data Indicate," Statistics of Income Bulletin, June 22, 2000).

EZ subsidies cost state and local treasuries a lot of lost revenue, and like many subsidy programs, it is often unclear whether the developments would have happened in the area anyway. Critics of enterprise zones fault the program for failing to create new jobs; if companies do come to an area, they typically relocate existing jobs from one site to another.

Another criticism of enterprise zone programs is that they are not targeted enough to help distressed areas attract investment. Many states have loosened their zone criteria to the point that virtually any area in the state can qualify, and the zones no longer serve their original anti-poverty intent (see Good Jobs First's report Straying from Good Intentions for more on the loosening of blight requirements for state EZ and TIF programs). Rather than targeting the neediest neighborhoods and encouraging new investment, the designation of the zone's geography often involves political favoritism and gives subsidy windfalls to companies that were already there.

Researching EZs

Information on enterprise zones may be obtained by reviewing state zone regulations, interviewing the zone association director, reading the zone association's annual reports, and talking to academics, legislators and state agency officials who are familiar with the process. Most states provide detailed information on enterprise zones on their websites, including criteria for eligibility, benefits offered, and relevant statutes.

State enterprise zones generally require a public review process at the time they are created. Before a zone may be designated, a local government must submit an application to a state development agency. In some states, there must be a notice and a public hearing, followed by adoption of a local ordinance before the application can be submitted. The state agency then determines if the area meets the criteria laid out in the enterprise zone law.

Information about the activities of private companies located in EZs is often harder to come by. Facts about some subsidies, including local tax abatements, direct loans, or industrial revenue bonds from a municipal or state entity, are part of the public record. Details about these subsidies can be collected by contacting the granting agency.

Records about federal and state tax credits are not usually available to the public unless voluntarily reported by the company. It is sometimes possible to ascertain the amount of tax credit a company qualifies for, but not how much of it was actually claimed. Few states disclose wage and employment data collected from EZ companies; if it is collected at all, it is often considered proprietary and published only in aggregate figures.

For federal EZs, there are several points at which citizens may gain access to information:

  • First, cities apply to the federal government for EZ/EC designation by submitting information about their economic condition and how they would use the money. For example, applications for the federal designation may contain specific language about how the funds will benefit low- and moderate-income residents. Copies of the application should be public record.
  • Second, once a jurisdiction is selected, it must provide HUD additional detail about the projects. Information may be obtained by requesting the Memorandum of Agreement between HUD and the designated area, and the Benchmarks and Activities Form, which lays out specific targets for the first two years of the program. These are both public record and should be available from the city's economic development department (or from HUD).
  • Third, companies that are located in or move into EZ/EC areas apply to the relevant local, state or federal agencies for the available subsidies (e.g., property tax abatements, state investment tax credits, federal WOTC, etc.). In some cases, copies of those applications are public record.

Additional resources

For more information on the weakening of requirements of state enterprise zone programs, see Alyssa Talanker and Kate Davis, Straying From Good Intentions: How States Are Weakening Enterprise Zone and Tax Increment Financing Programs, Good Jobs First, 2003.

More information on the federal Empowerment Zone, Enterprise Communities, and Renewal Communities programs can be found on HUD's Community Renewal Initiative homepage at http://www.hud.gov/offices/cpd/economicdevelopment/programs/rc/index.cfm.