New Study Shows Enterprise Zones Work

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.