By Jacob Zax
Every year, Colorado extends around sixty million dollars in targeted tax credits to businesses operating in specially designated regions called enterprise zones. Politicians, enabled by business interests, encourage enterprise zones as a way to promote economic growth by encouraging businesses to locate in underdeveloped areas and hire more workers. Although targeted enterprise zones might have been worth trying, they are not working well in Colorado. Statistical analysis demonstrates that enterprise zones have a minimal effect on employment, businesses, and the larger economy, and instead mostly benefit private property owners.
So why don’t lawmakers pursue equitable policies to help make the entire state of Colorado, rather than “specially designated regions,” an enterprise zone?
A 2005 report by the state of Minnesota that reviewed both the economic theory and empirical evidence on enterprise zones states, “Most of the more sophisticated studies (conducted on the subject) show no increases in employment or per capita income.”
How is it possible that considerable tax credits designed to encourage hiring are so ineffective?
The surprisingly trivial influence of enterprise zones on employment is the result of tax credits that reward the use of capital. Businesses in the special zones get tax credits for hiring workers; but they often use that money to buy more machinery in order to replace other workers. The net result is a negligible increase in employment. In the United Kingdom, the first country to implement enterprise zones and the model for current systems, a government-commissioned study published in 1987 determined that the 300 million pounds spent on enterprise zones from 1981-1986 produced an embarrassing net total of just 13,000 jobs. A 1989 Congressional Quarterly report concluded that each new job cost the United Kingdom 250,000 dollars.
Furthermore, the few employees that are hired because of enterprise zone credits don’t necessarily receive higher wages. Businesses profit from the subsidies regardless of the new worker’s salaries; because of the competitive nature of the labor market, prospective employees will always end up working for whatever is the normal wage rate that is paid outside the enterprise zone.
But if employees and the public aren’t profiting from enterprise zones who is? Surprisingly, it’s not businesses. It’s private land owners.
When an enterprise zone is established, property values within the area skyrocket. Previously unappealing lots suddenly attract serious interest because businesses are willing to pay a premium to relocate into the area and take advantage of the tax credits. Furthermore, because the benefits are solely predicated on location, all companies, including those already doing business in Colorado, are eligible and, therefore, interested in relocating into the zone.
The resulting demand for limited space creates the ultimate sellers’ market as businesses bid against one another for space. In the end, businesses are willing to pay so much to move into the region that the tax credits they eventually receive barely offset the initial cost of procuring the property.
In other words, businesses are not the ultimate beneficiaries of enterprise zones. By providing region-limited tax credits, the government is effectively giving a boost to some private landowners to the detriment of other landowners.
In a July speech at the Rocky Mountain soda company, Denver mayor and democratic gubernatorial candidate John Hickenlooper stated that he was “absolutely interested” in strengthening and expanding the use of enterprise zones in Colorado.
In his speech Mr. Hickenlooper also said on the issue of enterprise zones: “This is the 21st century, the key to all of these issues is how you measure them.”
But by almost every statistical and empirical measure, enterprise zones have failed. In the 2010 Colorado legislative session, State Representative Joel Judd (D, Denver) proposed a bill that would have eliminated enterprise zones in Colorado. The measure was largely condemned by politicians of both parties, including Don Marostica, the state’s economic development director, who opposed the measure by arguing that subsidies bring businesses to Colorado.
While that is probably true, it ignores the point that Coloradans do not profit from the relocation of those businesses. There are no long term benefits from the slight increase in jobs, and businesses fail to realize greater profits which might strengthen to the larger economy.
So should the government be funneling close to 60 million dollars a year in tax credits based solely on geography towards private land owners?
Considering the current budget deficit, the Colorado Legislature cannot afford to waste more money either maintaining or expanding enterprise zones, but rather should concentrate on fostering a business-friendly tax and regulatory environment throughout the state.
Jacob Zax is a summer intern at the Independence Institute. He attends Washington University in St. Louis.