lessons and limits - brookings institution€¦ · 08/08/2006 · extract lessons that can be...

Introduction

Hurricane Katrina damaged thou-sands of homes and businesses,wrecked public infrastructure,and displaced hundreds of thou-

sands of Gulf Coast residents. In theaftermath of the storm, the nation wasshocked by the privation and distress it wit-nessed in New Orleans as flooding madelarge portions of the city uninhabitable. Forseveral days, thousands of people, most ofwhom were poor and black, were stranded indesperate need of assistance. Indeed, a recentstudy by sociologist John Logan based onFederal Emergency Management Agencystorm damage data confirmed that Katrina’seffects were “disproportionately borne by theregion’s African-American community, bypeople who rented their homes, and by thepoor and unemployed.”2

The federal government is providing directaid to individuals who suffered uninsured

property losses due to the storm and grants tostate and local governments to restore andrebuild local infrastructure such as roads,levies, bridges, and schools. In addition, Con-gress has enacted legislation to provide taxrelief to storm victims and to create GulfOpportunity Zones (or GO Zones). The Kat-rina GO Zone is composed of the localities inAlabama, Louisiana, and Mississippi that suf-fered the most severe and extensive stormdamage. Special tax incentives have been cre-ated in these areas to encourage investment,job creation, and economic growth.

Although the scope of Katrina’s destructionmakes rebuilding Gulf Coast communities achallenging national problem, the federalgovernment has significant experience inredeveloping distressed communities. Despitethis experience, little is known about theeffectiveness of past federal efforts and whatis known has not been reflected in policydebates about the Katrina recovery effort.Several past programs, including state enter-

1

“Though many

studies have been

done to evaluate

the effectiveness of

federal and state

tax-based efforts

to redevelop

distressed areas,

none of that learn-

ing has been

reflected in policy

debates about the

Katrina recovery

effort.”

M e t r o p o l i t a n P o l i c y P r o g r a m

The Brookings Institution

Lessons and Limits: Tax Incentives and Rebuilding theGulf Coast after KatrinaRobert P. Stoker and Michael J. Rich1

AUGUST 2006 • THE BROOKINGS INSTITUTION • SURVEY SERIES

In the wake of the devastation wrought by Hurricane Katrina, Congress enacted legislationcreating Gulf Opportunity Zones (GO Zones) in localities in Alabama, Louisiana, and Missis-sippi that suffered the most extensive storm damage. Special tax incentives created in theseareas are designed to encourage investment, job creation, and economic growth. While manystudies have been done to evaluate the effectiveness of federal and state tax-based efforts toredevelop distressed areas, none of the learning has been reflected in policy debates about theKatrina recovery effort. The evidence suggests that tax incentives alone are not enough—theywork better when combined with good planning, local capacity-building, and good gover-nance across sectors. This paper will summarize the purpose of the Gulf Opportunity Zone taxprogram and explain how this latest endeavor reflects the 25-year evolution of federal efforts touse tax incentives as a core tool for revitalizing distressed areas.

prise zone programs, the NationalRural Development Partnership, andurban and rural Empowerment Zones,offer valuable lessons about the poten-tial and limitations of encouragingeconomic revitalization through taxincentives. The evidence suggests thattax incentives alone are not enough—they work better when combined withadditional policy tools that are man-aged by an effective process ofcross-sector, collaborative governance.Effective governance is especiallyimportant to assure that needy resi-dents benefit from redevelopmentefforts. The combination of tax incen-tives and effective governance hasbeen demonstrated to be a robuststrategy to encourage economicgrowth and job creation.

This paper will summarize the pur-pose of the Gulf Opportunity Zone taxprogram and explain how this latestendeavor reflects the 25-year evolutionof federal efforts to use tax incentivesas a core tool for revitalizing distressedareas. It will then review the academicliterature about the impact of similarfederal and state economic develop-ment programs, such as stateenterprise zones and the federalempowerment zone program, toextract lessons that can be applied tothe ongoing efforts to rebuild the GulfCoast region. The paper will thenclose with a proposed strategy toenhance Gulf Coast redevelopmentefforts.

A Daunting Challenge in theGulf Coast

Three factors heighten thechallenge of economic rede-velopment in the wake ofHurricane Katrina. First, as

Figure 1 shows, the scale of the dam-age is vast, as the storm createdwidespread destruction in Alabama,Louisiana, and Mississippi. Second,many residents were displaced fromtheir homes, and in particular pocketswhere the damage was quite severe

(such as low-lying areas in NewOrleans) few have been able toreturn.3 Third, the economic health ofGulf Coast communities varied signifi-cantly before the storm, suggestingthat the challenges of creating eco-nomic vitality in communities thatwere already distressed should be dis-tinguished from the efforts to restoreeconomic vitality in communities thatwere previously robust.

New Orleans is one place whereKatrina exposed social and economicproblems that existed long before thestorm.4 Census Bureau estimates showthat in 2004 large numbers of NewOrleans residents were already strug-gling to cope with poverty andidleness. Many residents were notworking: 37.2 percent of the popula-tion over age sixteen was not in thelabor force and the unemploymentrate among those in the civilian laborforce was 11.8 percent. Low educa-tional achievement or lack oftransportation were likely barriers towork, as 17.7 percent of people over

age twenty-five had not completedhigh school and 21.2 percent ofhouseholds had no vehicle for trans-portation. Median household incomein New Orleans was only $31,369 and23.2 percent of residents lived inpoverty, a number that climbed to 41.1percent among female-headed house-holds with children. Finally, only 46.8percent of New Orleans residentsowned their home.5

By contrast, the 2004 Census pro-file of the Metropolitan StatisticalArea (MSA) composed of Biloxi, Gulf-port, and Pascagoula, Mississippi is farmore positive, owing in part to the factthat it is a combination of urban areasand more affluent suburban areas.Although 18.9 percent of residentsover the age of sixteen had not com-pleted high school and 35.6 percentwere not in the labor force, medianfamily income was $43,979, only 4.4 percent of households had novehicle for transportation, and 67 per-cent of homes were owner-occupied.Unemployment in the Biloxi-Gulfport-

2 AUGUST 2006 • THE BROOKINGS INSTITUTION • SURVEY SERIES

Source: U.S. Government

Figure 1. Gulf Opportunity Zone

Pascagoula MSA was 8 percent and16.1 percent of residents were poor.Among female-headed householdswith children, the poverty rate was28.6 percent. Compared to NewOrleans, in the Biloxi-Gulfport-Pascagoula MSA, household incomewas 17.4 percent higher and the homeownership rate was 43 percent higher,while poverty was 31 percent lowerand unemployment was 32 percentlower.

Despite the wide social and eco-nomic differences that existedbetween communities hard hit by thehurricane, the federal governmentresponded by establishing GO Zonetax relief that treats all of the impactedcommunities in the same way. Specifi-cally, GO Zones offer the same set oftax incentives to encourage redevelop-ment regardless of the local conditionsthat existed before the storm. In addi-tion, because GO Zones in theirpresent form rely exclusively on taxincentives, they limit the tools avail-able to encourage economicdevelopment; they do not provide amechanism for coordination within oracross local jurisdictions (e.g.,between Orleans Parish and St.Bernard Parish); and they make noprovisions for the participation of dis-placed residents in the recoveryprocess.

The Recovery Strategy: GulfOpportunity Zones

President Bush presented hisproposal to rebuild the GulfCoast in a nationally tele-vised speech from Jackson

Square in New Orleans on September15. The president sounded popularobjectives: create jobs and opportunity,break the cycle of poverty, fosterminority business ownership, andencourage homeownership.6 He pro-posed three programs. The first wouldtarget business growth and job cre-ation through tax incentives and loansor loan guarantees. The second would

help workers to participate and com-pete in the job market by providing upto $5,000 in support for education andtraining or childcare. The third was an“Urban Homesteading” program thatwould assist and encourage low-income homeownership by donatingfederal lands to be used as buildingsites. Since then, Congress has passedlegislation to provide tax relief forstorm victims and has created GOZones, but has not yet acted on thePresident’s other proposals.

President Bush proposed a federal,state, and local partnership to rebuildpublic infrastructure and anticipatedthe need to revise zoning laws andbuilding codes in the wake of thestorm. However, when it came to theredevelopment of the region’s eco-nomic vitality, the presidentemphasized the role of entrepreneurs,not government: “It is entrepreneur-ship that creates jobs and opportunity;it is entrepreneurship that helps breakthe cycle of poverty; and we will takethe side of entrepreneurs as they leadthe economic revival of the Gulfregion.”

After the president’s speech, Con-gress enacted two laws to structure theredevelopment effort. First, the “Kat-rina Emergency Tax Relief Act of2005” was enacted (on September 21)to provide tax relief for storm victimsand to put into place some pieces ofthe redevelopment effort. Subse-quently, Congress passed the “GulfOpportunity Zone Act of 2005” (onDecember 16) to create GO Zones andprovide tax incentives for the redevel-opment of the Gulf Coast region.Although 453 counties in five states(Alabama, Florida, Louisiana, Missis-sippi, and Texas) are eligible forfederal disaster assistance because ofHurricanes Katrina, Rita, and Wilma,the Katrina Gulf Opportunity Zone iscomposed of a subset of that areaaffected by Hurricane Katrina thatPresident Bush specifically designatedas eligible for individual or individualand public assistance under theRobert T. Stafford Disaster Relief and

Emergency Assistance Act (Figure 1).The legislation also created GO Zonesfor similar areas affected by Hurri-canes Rita and Wilma.

The “Katrina Emergency Tax ReliefAct of 2005” provides a variety of taxbenefits to encourage the economicrecovery of the Gulf Coast.7 First, theWork Opportunity Tax Credit and anemployee retention tax credit (target-ing small- and medium-sized firms)provide tax benefits of as much as$2,400 per year per employee to busi-nesses in the core disaster area.Second, capital gains taxes arereduced through an extension of thenon-recognition period from two tofive years on the “involuntary” conver-sion of property.8 Third, limitations oncharitable giving by corporations arelifted to encourage charity and reducebusiness taxes. Fourth, personalincome taxes are reduced by specialrules for withdrawals and loans fromretirement accounts, suspension oflimitations on charitable giving, cre-ation of a special $500 exemption forpersons displaced by the storm, exclu-sion from income of charitablemileage reimbursement, exclusion ofcancelled debts from gross income,and suspension of limits on PersonalCasualty Loss. In addition, somemeans-tested personal income tax ben-efits are subject to special look-backrules that allow the use of the prioryear’s income as the basis for calculat-ing the Earned Income Tax Credit andthe Refundable Child Credit. Finally,rules governing tax-exempt bonds areliberalized; several existing restrictionson Mortgage Revenue Bonds arewaived; states are authorized to useGO Zone bonds for “private activities;”and Alabama, Louisiana, and Missis-sippi are permitted to make advancerefunds on state-issued bonds.9

The “Gulf Opportunity Zone Act of2005” created Gulf OpportunityZones, expanded and codified selectedprovisions of the “Katrina EmergencyTax Relief Act of 2005,” and addedadditional tax benefits to encourageGulf Coast redevelopment.10 The areas

3AUGUST 2006 • THE BROOKINGS INSTITUTION • SURVEY SERIES

that have been designated as GOZones represent about half of the totalarea affected by Hurricane Katrinaand contain more than sixty thousandsquare miles of territory in eighty-ninecounties and three states (Alabama,Louisiana, and Mississippi), with anestimated population (in 2003) ofmore than 5.7 million people. (Foradditional information about the GO Zone, see the Appendix). Theemployee retention credit provided bythe “Katrina Emergency Tax Relief Actof 2005” is expanded to include allfirms, regardless of size. Businesstaxes are reduced by a variety of spe-cial rules that allow 50 percent of thecost of new equipment to be expensedin the first year; double small businessexpensing limits to as much as$200,000 annually; expand the netoperating loss carry-back from two tofive years; allow 50 percent of demoli-tion and clean-up costs from stormdamage to be expensed; allow expens-ing of brownfields and petroleumcontamination clean-up costs; andallow increased expensing of somereforestation costs. The act alsoincreases the normal allocation ofLow-Income Housing Tax Creditswithin GO Zones by a factor of three.One billion dollars in New MarketsTax Credits are made available to non-profit firms that are involved in therebuilding efforts within the GOZones. And, personal income taxes arereduced by a provision that shields GOZone bond income from the Alterna-tive Minimum Tax.

Looking Back: A History ofTax Incentives as an Eco-nomic Development Tool

President Bush’s proposal tocreate Gulf OpportunityZones reflects the belief thatopen, competitive markets—

and the use of incentives to motivatemarket actors—are the most effectivemeans of stimulating targeted eco-nomic development. This idea has

deep roots, reflecting policy trendsemployed in the United States as farback as the early 1980s. Since then,tax-oriented tools have become a pop-ular form of federal assistance todistressed communities, emerging firstas a common feature of state enter-prise zone programs and later as a corecomponent of the federal empower-ment zone and renewal communitiesprograms.

Enterprise Zones The idea to use tax incentives to spurtargeted economic development origi-nated in Great Britain in the late1970s. Sir Geoffrey Howe—a leadingmember of the Conservative opposi-tion in Great Britain—proposed thecreation of “enterprise zones” to com-bat blight in British cities. He arguedthat what was needed was not anothergovernmental program, but rather, theremoval of as much government aspossible, and predicted that jobs andinvestment would flourish in dis-tressed urban areas if taxes andgovernment regulations were elimi-nated.11 Howe translated his ideas intopolicy during his service as Chancellorof the Exchequer under Prime Minis-ter Margaret Thatcher, and two dozenenterprise zones were created through-out England during the 1980s.

Howe’s ideas were soon transportedacross the Atlantic. In 1979, the Her-itage Foundation published a reportthat called for the adoption of similarpolicies in the United States.12 In1980, Congressman Jack Kemp (R-NY)introduced legislation detailing anAmerican version of enterprise zonesand Ronald Reagan embraced the con-cept during his presidential campaign.The British envisioned enterprise zonesas a strategy to redevelop vacant andabandoned industrial areas. In con-trast, the United States recastenterprise zones as a community devel-opment tool to revitalize depressedinner-city neighborhoods. Enterprisezones were promoted as an alternativeto conventional government pro-grams—e.g., urban renewal, Model

Cities, Community Development BlockGrants, and Urban DevelopmentAction Grants—that sought to reviveinner-city neighborhoods through theinvestment of public funds. ReflectingHowe’s ideas about governments andmarkets, these proposals were intendedto get government out of the way inorder to allow markets to flourish. Itwas expected that tax and regulatoryrelief would reduce business costs andincrease profits, thereby attractinginvestment and creating jobs in dis-tressed urban areas.

Although the Reagan administrationvigorously promoted the idea, supportin Congress for enterprise zones waslacking, particularly among HouseDemocrats. Three objections to theidea were raised. First, opponentsargued that the location and expansiondecisions of business firms dependedon a variety of factors other than taxincentives. Consequently, revitalizingdistressed areas required a broaderstrategy that also included additionaltools to create infrastructure, improvepublic safety, and enhance humancapital. Second, opponents were con-cerned that low- and moderate-incomezone residents might not benefit fromtax incentives and regulatory relief.Thus, enterprise zone opponentsbelieved government’s role needed tobe enhanced, not eliminated. Third,opponents were concerned that enact-ing federal enterprise zones mightjeopardize existing federal urban pro-grams for distressed communities.

While Washington remained dead-locked, the idea was gaining popularityin the states. By 1983, nearly half ofthe states had established enterprisezones; 10 years later, forty states andthe District of Columbia had desig-nated more than 3,000 zones.However, the state programs deviatedfrom what had been proposed origi-nally at the national level. Accordingto Michael Wolf, “the paradigmderived from Butler, Kemp-Garcia,and Reagan comprised a federal, sup-ply-side, antiregulatory,conservative-Republican program to


attract new, small businesses to theinner city.” However, as enterprisezones moved from theory to practice, anew paradigm emerged: “Zones attheir most effective are state and local,public-private, reregulatory partner-ships, passed and endorsed by liberals,moderates, and conservatives of bothparties, designed not only to attractsmall, moderate, and larger employers,but also to retain existing businesses inurban, rural, and suburban areas.”13

Rather than viewing enterprise zonesas free market sectors, the statesviewed tax and regulatory relief as twotools within a larger kit to encourageeconomic redevelopment through pub-lic-private partnerships.

Today, state enterprise zone pro-grams vary widely in terms ofgeographic scope and the tax incen-tives and other inducements offered.In Arkansas, for example, the entirestate is designated as an enterprisezone. By contrast, Connecticut, thefirst state to establish enterprise zonesin the United States, presently hasseventeen separate zones spreadacross the state. Connecticut desig-nates areas as enterprise zones on thebasis of high poverty, high unemploy-ment, and receipt of public assistance.Although most of the incentivesoffered through state enterprise zoneprograms involve tax abatements orcredits for various state and local taxessuch as property taxes, corporateincome taxes, sales taxes, and a varietyof excise and licensing taxes, somestates also include wage tax credits foremployers, and a handful of stateshave extended tax credits to individu-als employed by enterprise zonefirms.14 Many state programs alsoinclude capital financing (direct loans,venture capital funds, and capitalmade available through industrialdevelopment authorities and/or taxincrement financing districts). Abouthalf of the states offer some type ofregulatory relief for zone firms. And afew states also provide funds for infra-structure improvements, job training,and technical assistance.15

Despite these differences, RoyGreen and Michael Brintnall concludethat the one common feature of stateenterprise zone programs is “the part-nership of public and privateenterprise to engineer growth.” Theyadd that this theme “has raised aworld of confusion in analysis ofenterprise zones, because some ‘pure’models have presumed the programwould operate with no public interven-tion at all, and because someproponents have asserted that the‘government-free’ nature of zones isone of its greatest virtues.”16 However,“the degree and style of this govern-ment engagement with the programappears to make a difference in theperformance of zones.”17

From Enterprise to EmpowermentIt wasn’t until the early 1990s thatHowe’s idea to encourage businessand job growth in distressed communi-ties through tax incentives andregulatory relief gained real traction atthe federal level.

By 1989, many key state and localgovernment organizations, includingthe U.S. Conference of Mayors, theNational League of Cities, theNational Association of Counties, theNational Governors Association, andthe National Conference of State Leg-islatures had endorsed the concept ofa federal enterprise zones program.However, these groups called for amore expansive program to revitalizedistressed communities that wouldcomplement—not replace—existingfederal efforts. The U.S. Conferenceof Mayors, for example, supported theconcept of enterprise zones, but alsocalled for a variety of social programssuch as job training, adult education,childcare, school improvements, pub-lic safety, and anti-drug initiatives aspart of the overall zone package.18

Despite the endorsement of stateand local leaders, efforts to create afederal enterprise zone initiative con-tinued to stall out in Washington overthe next few years, as Democrats and

Republicans could not reach agree-ment on the mixture of policy tools toinclude and the level of funding tosupport the effort. While the riots thaterupted in South-Central Los Angelesin April 1992 kept the conversationover enterprise zones alive, key stick-ing points remained. When PresidentGeorge H. W. Bush announced a six-point proposal to respond to the needsof Los Angeles and other distressedinner city areas—the centerpiece ofwhich was the enactment of a federalenterprise zones program—Democra-tic leaders in the Congress counteredthat the proposal was nothing morethan a warmed-over version of policyideas that had been proposed beforeand called for nearly $9 billion in newspending for a wide variety of existingfederal programs.

Although administration and con-gressional leaders pledged to worktogether to reach consensus on anurban aid bill, partisan differences, fis-cal stress, and posturing for strategicadvantage for the 1992 presidentialelection proved to be too many obsta-cles to overcome. No urban aidpackage was enacted. While Congresspassed an Urban Aid Tax bill in Octo-ber 1992 that provided $2.6 billionover five years for the creation of 50enterprise zones—as well as author-ized $2.5 billion over five years fornew spending for job training, educa-tion, health, housing, and lawenforcement programs in the zones—President Bush vetoed the bill the dayafter he lost the election to Bill Clin-ton. Since Congress had adjourned,there was no possibility to override thepresident’s veto.19

Six months later, in May, 1993,President Clinton unveiled a proposalthat revisited and expanded the con-cept of enterprise zones, calling for thecreation of ten empowerment zonesand 100 enterprise communities.Under this plan, about two-thirds ofthe zones would be located in urbanareas and all of the zones wouldreceive tax incentives and priority con-sideration for funding for federal


assistance for community developmentbanks, community policing, employ-ment and training programs, andeducation reform.

Though Republicans initiallyopposed Clinton’s proposed initiativeand Democratic support for it wasweak, the administration did find oneimportant ally in Congress, Represen-tative Charles Rangel (D-NY), whosedistrict included Harlem, a severelydistressed area in New York City.20

Rangel, who was one of the Housebudget conferees, not only insistedthat provisions to create empowermentzones and enterprise communities beincluded in the final budget bill, healso succeeded in getting the confer-ees to agree to a $1 billion line itemfor direct federal outlays for communi-ties participating in the program; thisfunding was to be provided throughthe Title XX Social Services BlockGrant (SSBG) program administeredby the Department of Health andHuman Services. The conferencereport was cleared by the narrowest ofmargins: the House of Representativespassed the report by one vote and VicePresident Gore cast the decisive, tie-breaking vote in the Senate. PresidentClinton signed the legislation (PL103-66) on August 10, 1993.

Thus, after more than a decade ofdebate and deliberation, a federalenterprise zone program was finallycreated. The final form of the legisla-tion was a compromise: While theinitiative contained many features sim-ilar to those in the Kemp-Garcia bill(tax incentives earmarked for a limitednumber of distressed areas), it also metthe demands raised by many Democ-rats that an enterprise zone approachmust go beyond tax incentives toinclude direct federal assistance forcommunity development and socialprograms. Many of the initiative’sdetails also reflected the influence ofexisting programs in localities such asAtlanta, Baltimore, Boston, Cleveland,and Oakland, where comprehensivecommunity building programs werealready underway.

Federal officials who spoke duringthe regional workshops conducted in1994 to promote the new Empower-ment Zones and EnterpriseCommunity (EZ/EC) initiative contin-ually emphasized that it “is not atypical federal program.” The intellec-tual framework for the EZ/ECinitiative was based on four key princi-ples: economic opportunity,sustainable community development,community-based partnerships, andstrategic vision for change. These prin-ciples also served as the key criteriathat were to be used in evaluatingapplications. According to the applica-tion guide, “the first priority inrevitalizing distressed communities isto create economic opportunities—jobs and work—for all residents,” agoal consistent with previous enter-prise zone proposals.21 But the EZ/ECinitiative’s second principle, sustain-able community development, pushedthis idea further, maintaining that eco-nomic development efforts can only besuccessful when they are grounded ina broader revitalization strategy thatcoordinates efforts in the areas of eco-nomic, physical, environmental,community, and human development.In addition, the EZ/EC initiative rec-ognized—as reflected in its thirdprincipal—that successful communityrevitalization must be driven by broadparticipation from all segments of thecommunity, including federal, state,and local government, the private sector, nonprofit agencies, commu-nity-based organizations, andresidents. The fourth element of theEZ/EC initiative was the creation of acommunity-based strategic plan thatnot only articulated a vision but alsoincluded goals and benchmarks tomeasure progress.

The type and level of benefits ofdesignation depended upon whether acommunity was selected as anEmpowerment Zone (EZ) or an Enter-prise Community (EC). The six citiesdesignated as urban EZ communi-ties—Atlanta, Baltimore, Chicago,Detroit, New York, and Philadelphia/

Camden—each received a $100 mil-lion Social Services Block Grant(SSBG). These funds could be usedover a ten-year period to support abroader range of activities than wasnormally permitted under the Title XXSSBG program and were designed tohelp communities carry out activitiesidentified in their strategic plans. EZcommunities also received $150 mil-lion in federal tax credits. ECdesignees received $3 million in blockgrant funds, but no tax credits. BothEZ and EC cities were eligible to applyfor new federal tax-exempt privatefacility bonds and for waivers of fed-eral regulations and programrequirements. Both types of communi-ties were also to receive specialconsideration for any pending or sub-sequent applications for federal aidtied to an EZ/EC activity.

From Empowerment Zones to GO ZonesIn the years since the original federalEZ/EC initiative was launched, federalinitiatives designed to revitalized dis-tressed communities have increasinglyrelied on tax-oriented tools, while thedeployment of grants and loans hasdeclined.

As noted above, each of the Round IEZ communities received intergovern-mental grants that could be used overthe ten-year designation period. Theblock grant was an essential part of EZprogram design, funding local activi-ties such as governance, planning,community mobilization, and theadministration of EZ activities, as wellas economic development programs toencourage business growth and jobcreation. EZ block grant resourcescould also be used to fund activitiesthat support economic development,such as community policing, afford-able housing, literacy training, humanservices, and public works and facili-ties. The combination of block grantfunding with tax-oriented tools was adistinctive feature of the Round I EZprogram.

The allocation of intergovernmental


grants as a tool to assist distressedcommunities declined in subsequentrounds of EZ designation, however.Although Round II EZs—designatedin 1998—were authorized to receiveas much as $100 million in grant sup-port, the funding was to come fromHUD, rather than SSBG grants, and itwas subjected to the annual appropria-tions process, rather than authorizedin one bill.22 While Round II urbanEZs anticipated grants of $10 millionper year throughout their 10 year des-ignation period, the actual amountappropriated was far less, with eachEZ receiving only about $24 millionbetween 1999 and 2003.23

By Round III—authorized in2000—EZ designees did not receiveany grant funding as part of the pack-age of zone benefits. Nor did the newRenewal Communities (RCs), estab-lished the same year. Like EZs, RCswere provided with employment taxcredits, capital gains tax cuts, andbusiness tax breaks. The benefits differhowever: The employment creditsavailable to RCs have only half thevalue of the credits provided to EZs,

while the capital gains tax credits aremore generous.24

Five years later, the federal govern-ment continues to focus on tax breaksas a means for community revitaliza-tion, with intergovernmental grantfunds conspicuously absent from theGO Zone legislation. Although Con-gress provided grants for infrastructureredevelopment and housing recon-struction, and authorized more flexibleuses for supplemental CommunityDevelopment Block Grant (CDBG)funding for disaster assistance, thesegrants were not coordinated with theGO Zone economic redevelopmenteffort. GO Zones will offer a substan-tial array of tax incentives, however.Businesses and residents located inGO Zones will be able to take advan-tage of many of the same, or similar,benefits available to EZs and/or RCs,including employment tax credits (thevalue of which falls between that pro-vided to EZs and RCs); tax-exemptbond financing (which, in addition tofinancing business development, canbe used for home repairs); andincreased Section 179 deductions that

allow investments in new equipmentto be deducted more quickly.25 GOZones also feature a variety of otherbusiness tax reductions—including theextension of tax deductions forcleanup and restoration of storm dam-age—that reflect federal policymakersfaith in this tool. Finally, the KatrinaEmergency Tax Relief Act reducedcapital gains taxes by extending thenon-recognition period on convertedproperty in the areas designated as“Hurricane Katrina disaster areas” byPresident Bush.

In addition, GO Zones increase theallocation of Low-Income Housing TaxCredits and New Markets tax credits.Although EZs and RCs also were eligi-ble for these credits, Congress createdadditional benefits specifically for GOZones to combat the unique and wide-spread challenges there. Peopleresiding in GO Zones, as well as peo-ple residing in the larger disaster areaaffected by Hurricane Katrina, are alsoeligible for a variety of personalincome tax reductions, which were notpart of the federal package provided toEZs or RCs.


Table 1. The Evolution of Policy Components in Tax-Based Federal Economic Revitalization Programs

Before Katrina After KatrinaRound 1 Round II Round III Gulf

Empowerment Empowerment Empowerment Renewal Katrina Tax OpportunityPolicy Tools Zones Zones Zones Communities Relief Act Zone Act

Intergovernmental Grants X X

Employment Tax Credits X X X X X

EZ Facility Bonds X X X

Capital Gains Tax Reductions X X X X X

Business Tax Reductions X X X X X

Bonds for private use and X

home repair

Increased funding for low-income X

housing tax credits

Funding for New Markets Tax Credits X

Personal income tax reductions X

Special rules for means-tested X

Personal income tax programs

In sum, as federal policy movedfrom Empowerment Zones to RenewalCommunities, intergovernmentalgrants were dropped from the federaltool kit. And like in RCs, Congress isrelying solely on tax incentives toencourage economic revitalization inGO Zones. These changes have severalimportant implications. First, the EZblock grants required preparation of acomprehensive strategic plan outliningthe proposed uses of federal and otherleveraged funds and provided modestfinancial support for local planningand program administration. As blockgrants were dropped in favor of taxincentives, local planning and admin-istration were de-emphasized. Second,the EZ/EC program required commu-nity participation in the planning andimplementation of the programsintended to renew distressed commu-nities and EZ block grant funds couldbe used to support a variety of com-munity mobilization activities.Without such directives and fundingcommunity participation is less likely.Finally, block grants funded the cre-ation of a variety of different economicdevelopment tools that local commu-nities could tailor to meet their needs.The reliance of GO Zones on taxincentives implies a “one size fits all”orientation in which local communi-ties are given the same limited set oftools to encourage economic develop-ment regardless of local conditions.

Lessons Learned

Gulf Opportunity Zonesreflect the latest incarna-tion of the belief thatdistressed economies can

be jumpstarted by tax incentives. Butthis belief is not necessarily supportedby evidence from earlier programs inwhich tax incentives were offered as ameans to promote economic revitaliza-tion. This section summarizes severalkey lessons that emerge from a wide-ranging set of studies that evaluate

state enterprise zone programs, fromU.S. Department of Housing andUrban Development (HUD) and Gen-eral Accounting Office (GAO) reportson the federal EZ program, and from arecent evaluation of federal efforts tospur rural development. These lessonsimply three primary conclusions.

• Tax incentives alone are unlikelyto be an effective means to attractinvestment, create jobs, and assistdisadvantaged workers

• Effective revitalization of dis-tressed communities requires abroad array of policy tools thatinduce firms to locate (or expand)in targeted neighborhoods andalso provide programs to improvethe business environment (such asprograms to reduce crime, elimi-nate blight, and improve the skillsof potential workers)

• Although government participa-tion is no panacea, an effectiveprocess of cross-sector, collabora-tive governance can enhance theeffectiveness of tax incentives andimprove the prospects for eco-nomic growth and job creation

Lesson 1: Tax incentives areunlikely to promote economicinvestment or create jobs becausefew businesses utilize them. The use of tax incentives to spur eco-nomic growth and create jobs impliesthat governments can influence thelocation and expansion decisions firmsmake with financial incentives thatlower the firm’s costs of operating inparticular communities, such as thosedesignated as enterprise zones. How-ever, if firms are not aware that theseincentives exist, or if they perceivethey are unlikely to affect their cost ofdoing business, the effect of the incen-tives on business growth andemployment is likely to be negligible.

The empirical evidence after nearlyfive decades of research on the effectsof tax incentives on business locationdecisions is inconclusive. Severalreviews of this literature note that

there is scant proof of a statisticallysignificant effect of public policiesthat provide tax and fiscal incentivesto encourage job growth. Though theconventional wisdom that taxes arenot a very important determinant ofbusiness location decisions has beenchallenged by some recent studies,most reviews conclude that publicpolicies that lower tax rates to encour-age business investment or providefirms with a tax abatement end upsubsidizing employment that wouldhave occurred even in the absence ofthe subsidies.26 As Alan Peters andPeter Fisher concluded in a recentreview of the literature, “the most fun-damental problem is that many publicofficials appear to believe that theycan influence the course of their stateor local economies through incentivesand subsidies to a degree far beyondanything supported by even the mostoptimistic evidence.”27

One possible explanation for thelack of evidence regarding tax incen-tives on economic growth is that thereis little variation in tax burdens acrossthe states. Indeed, one of the argu-ments made in favor of federalenterprise zones legislation during theearly 1980s was that the federal taxincentives would significantly ratchetup the value of business incentivesavailable to firms that opt to locate infederally designated zones, thus differ-entiating these zones from other areas.Though the federal government neverdid enact a federal enterprise zonesprogram, the EZ/EC initiative markedthe first time the federal governmentauthorized a package of federal taxincentives to encourage investment indistressed communities.

As part of their interim assessmentof the EZ/EC initiative, Abt Associatesconducted a survey of business estab-lishments in the six communitiesdesignated in the Round I urban EZs.Approximately 1,800 businesses weresurveyed—300 firms per zone— dur-ing two waves, one in late 1997 andthe second in 2000. The surveys found


that business awareness of EZ taxincentives was low and that few estab-lishments actually utilized theincentives. Overall, utilization of theEZ Wage Tax Credit increased fromnine percent of zone businesses in1997 to 11 percent in 2000; utilizationof the Work Opportunity Tax Creditremained flat at three percent; and thepercentage of zone businesses utilizingthe Section 179 special expensing pro-visions actually declined by half, fromeight percent to four percent from1997 to 2000.28 Despite efforts bymany EZ cities to inform businessesabout the tax incentives, awarenessremained low. According to the Abtstudy, “Almost half (49 percent) ofestablishments were unaware of theEZ Wage Tax Credit, while fully 69percent were unaware of the Section179 Expensing Provision and 71 per-cent were unaware of the WorkOpportunity Tax Credit.”29

The findings of the Abt study wereconsistent with a 1999 GAO report onthe uses of EZ tax incentives, whichalso found that few businesses claimedthe tax breaks. This report was basedon the results of a mail survey of2,400 large (50 employees or more)and small businesses in the nine origi-nal EZs (the six urban and three ruralzones designated in Round I). Thepurpose of the survey was to gatherinformation about these businesses’use of three tax incentives—theemployment credit, enhanced depreci-ation for business property, andtax-exempt facility bonds. Generally,the report concluded that small urbanbusinesses were the least likely type ofbusiness to claim any one of the threetax credits. Among all types of busi-nesses, the employment credit was theone used most frequently. However,the employment credit was most oftenused by rural and large urban busi-nesses: 42 percent of large urbanbusinesses and 32 percent of ruralbusinesses claimed this credit, whileonly 6 percent of small urban busi-nesses did so. The enhanceddepreciation for investments was used

by only 9 percent of large urban busi-ness, 4 percent of small urbanbusinesses, and 8 percent of ruralbusinesses. And only ten businessesreported the use of the tax-exemptfacility bonds.30

The GAO report also tried toexplain why businesses did not claimthe tax benefits that were available tothem. Most of the respondents thatdid not use the employment creditexplained that they were not eligiblefor the credit because their employeeslived outside the zone or they did notknow about the credit. Most of therespondents that did not take advan-tage of the enhanced deductions forbusiness investments said they did notknow about it or they had not madeany qualifying investments. The over-whelming reason businesses did notuse the tax-exempt bonds was thatthey did not know about them.

A subsequent GAO report notedthat the number of corporate returnsclaiming the EZ Wage Credit (and thedollar volume of credits claimed)increased steadily between 1995 and2001. The GAO estimated that corpo-rations and individuals claimed a totalof $251 million in EZ Wage Tax Cred-its during this period. The report alsopointed out that state and local gov-ernments between 1995 and 2001issued a total of $315 million in tax-exempt EZ facility bonds. But thestudy also noted that the obstacles tothe utilization of EZ tax incentivesreported by zones businesses in theirearlier report—lack of awareness,complicated requirements, ineligibility,not having a federal tax liability—remained, particularly among smallerbusinesses.31

Lesson 2: Tax incentives have notbeen an effective means to attractfirms to start-up or relocate instate enterprise zones. The original motivation in GreatBritain for enterprise zones was tospur job growth in distressed industrialareas. Evaluations of the British expe-rience with enterprise zones have

reached two broad conclusions. First,there was a large gap between thecomposition of enterprise zones in theory and in practice. Many key pro-visions of the original proposal, suchas administrative relief, regulatoryrelief, and certain fiscal incentives,were not included in the zones asimplemented. Second, the Britishzones produced “relatively small numbers of really new jobs, and atappreciable—but perhaps not exces-sive—cost.” As Peter Hall concludes,“this doubtless, lay behind the deci-sion of the Thatcher government notto extend the experiment.”32 MarilynRubin, in her review of the evaluationsof the British zones, concluded, “thelesson for the United States from theBritish experiment is that free-marketincentives by themselves should not be expected to revitalize urban com-munities.”33

Evaluations of the effectiveness of tax incentives in state economicdevelopment programs in the U.S.have been largely inconclusive. This isespecially so for evaluations of stateenterprise zone programs, where widevariations in their design have exposedmethodological challenges and a gen-eral absence of reliable data. Althoughmany of the early studies found posi-tive results regarding the effects ofstate enterprise zone incentives onbusiness growth and employment,34

in a recent review of the literature,Alan Peters and Peter Fisher write “theconclusions of the extant literature dopoint in quite contrary directions;however, the vast majority of therecent literature suggest that enter-prise zones have little or no positiveimpact on growth.”35

In 2002, Peters and Fisher evalu-ated 75 state enterprise zones inthirteen states and found that taxincentives were unlikely to be aneffective means to promote economicgrowth and job creation. They devel-oped a simulation and statisticalmodels to estimate the value of zoneincentives to individual firms, focusingprimarily on firms in the manufactur-


ing sector. They concluded that taxincentives are unlikely to attract manyfirms or create many jobs because thevalue of the tax incentives was equiva-lent to only about a 1.6 to 7.1 percentreduction in wages, an incentive thatcould easily be offset by a small wagepremium. They found “no evidence ofa strong positive impact of enterprisezone incentives on growth: zonesoffering larger incentives (or a lowernet tax rate) for firms in a given sectordid not attract significantly morebirths and in-migrations of establish-ments in that sector than zones with aless attractive tax and incentiveregime.” As a result, they expect taxincentives to be insufficient to createeconomic growth. Peters and Fisherattribute the ineffectiveness of zoneincentives to “the fact that many zonesare in older, distressed, inner-cityneighborhoods. Such places sufferfrom a number of important locationaldeterrents—high levels of crime, poorinfrastructure, poorly skilled workersand so on —and it is unlikely that taxincentives alone, small as they usuallyare, will make up for these nega-tives.”36

Lesson 3: Tax incentives are morelikely to benefit new rather thanexisting firms. Research has shown that state enter-prise zone tax incentives are generallymore useful to new, as opposed toexisting, businesses. A 2004 study byRobert Greenbaum and John Engberganalyzed the impact of enterprisezones on manufacturing activity in sixstates and concluded that the pro-grams had little effect, on average, onseveral economic indicators, includingemployment, the number of businessestablishments, the value of goodsshipped, payroll, and capital spending.However, establishment level data theyanalyzed indicated that the effects ofstate enterprise zones had a positiveeffect on new establishments and anegative effect on existing establish-ments. Their evidence, in conjunctionwith their analysis of state enterprise

zone benefits, suggests that such pro-grams may be inherently biased towardassisting new businesses.37

The results Greenbaum and Eng-berg report are consistent with thetheory underlying the use of tax cred-its to spur economic growth.Investment tax credits or accelerateddepreciation of the value of newequipment are likely to be more valu-able to new firms because they requirecapital investment in order to createthe means of production. By defini-tion, established firms already have aphysical plant required to producegoods or services. Consequently, estab-lished firms are less likely to utilize taxincentives; they may not need addi-tional equipment because they haveunused capacity or because the exist-ing equipment is sufficient to meetstheir needs. When tax incentives aredesigned to reduce the costs of capitalinvestments, it stands to reason thatnew firms are likely to enjoy greaterbenefits than established firms.

Wage tax credits are also more likelyto benefit new firms. Established firmshave an existing workforce, while newfirms are recruiting and hiring newemployees. As a result, new firms canmore easily take advantage of wage taxcredits, for two reasons. First, they canorganize their recruitment efforts totarget potential employees who are eli-gible for the credit. In many cases,employer eligibility to receive the wagetax credit is contingent upon recruit-ing disadvantaged workers or peoplewho live in designated areas. Second,many wage tax credits are limited to“new hires” to avoid the “windfall” thatemployers would receive (a tax creditfor no net gain in employment) in theabsence of such provisions. Conse-quently, wage tax credits are also morelikely to benefit new rather than exist-ing firms.

Lesson 4: The net benefits of stateenterprise programs for state andlocal governments may be smallor may not always exceed costs. Several studies have assessed whether


“Tax incentives

alone are

unlikely to be

an effective

means to attract

investment,

create jobs, and

assist disadvan-

taged workers.”

state enterprise zones are cost effec-tive, with mixed results. MarilynRubin studied 976 firms in urbanenterprise zones in New Jersey andconcluded that zone benefits exceededthe costs. When she examined onlythe 315 firms that stated that the pro-gram’s incentives were the primaryreason for expanding or locating in thezone, the local tax benefit was seventycents per dollar of program cost. How-ever, when the multiplier effect of jobcreation was considered, Rubin esti-mated benefits of $1.90 per dollar ofprogram costs.38 Kala Sridhar alsoargued that state enterprise zones arecost effective. Sridhar compared thenet benefits and costs from jobs cre-ated or relocated as a result of stateenterprise zones in Illinois and con-cluded that the benefits of theprogram outweigh the costs, suggest-ing that targeted developmentincentives are beneficial for the locali-ties that adopt them.39

But Peters and Fisher also assessedthe cost-effectiveness of state enter-prise zone programs and arrived at adifferent conclusion: “T]he direct rev-enue effects of enterprise zoneincentives on state and local govern-ment combined are very likely to benegative, and rather strongly so.”40

This result follows from their estimatethat the jobs that can be attributed tothe enterprise zone incentives result ina net present value to state and localgovernments of $7,200 over twentyyears. However, many more jobs arealso subsidized by zone incentives thanwould have been created even in theabsence of the incentives. They esti-mate that state and local governmentslose about $3,200 for each such job.The net result of this tradeoff is anestimated loss of $7,130 to state andlocal government per job created bythe zone’s incentives.

Lesson 5: Good governanceenhances the effectiveness of taxincentives and overall economicrevitalization efforts. Effective governance is built upon col-

laboration among residents, commu-nity-based and nonprofitorganizations, the public sector, andlocal businesses. As Robert Chaskinand Sunil Garg explain, “governanceentails the creation or adoption ofmechanisms and processes to guideplanning, decision making, and imple-mentation as well as to identify andorganize accountability and responsi-bility for action undertaken. Thusgovernance is both process and struc-ture.”41 The form and process ofgovernance are important considera-tions when trying to enhance theprospects for economic development.

Effective governance contributes toeconomic development in two ways.

First, a collaborative, cross-sectorsystem of governance can help putinto place a comprehensive plan foreconomic development. Many differ-ent state, local, and regional actorscontrol resources that are vital to eco-nomic development. For example, arecent study by the Initiative for aCompetitive Inner City noted, “in1996, the Federal government spentapproximately $16 billion on programsthat affect urban business develop-ment, roughly $9 billion of whichaffected inner cities.” These fundswere distributed through more than 90programs administered by 14 differentfederal departments and agencies and75 percent of these federal funds ini-tially flowed through state and localgovernment agencies. In addition, thereport pointed out that nonprofit andfor-profit intermediaries such as com-munity development corporations playa critical role in service delivery and indetermining how federal resources areused. In Boston, for example, morethan 130 intermediaries—including59 nonprofits, 38 for-profits, 27 aca-demic institutions, and 5 tradeorganizations—were involved in theimplementation of federally-fundedbusiness development programs in1996.42

Governing arrangements can bringthese participants together, coordinatetheir actions, and create and sustain

support for a revitalization plan. TheICIC report maintains, “a coordinatedstrategy both at the Federal and locallevels as well as across the for-profitand nonprofit sectors needs to be inplace to maximize the impact of exist-ing Federal investments.” Among thereport’s recommendations is a call forthe federal government to “providegrants and incentives to catalyze localgovernment efforts that engage leadersfrom across public and private sectorsto coordinate local inner-city eco-nomic development initiatives.”43

Second, effective governance canmake various aspects of the economicdevelopment program work better.Governance systems can coordinateprograms, increase the number ofredevelopment tools available to stim-ulate business and job growth,enhance services, inform businessesabout redevelopment incentives, solvecollective action problems, andaddress market failures, all in a con-text tailored to reflect the distinctiveneeds and opportunities that existwithin local communities.

A look at evidence of job growth andanti-poverty effectiveness among theRound I urban EZs helps illustratehow good governance affects programoutcomes. (Table 2) Three of six zones(in Atlanta, Chicago, and New York)did not experience positive job growthbetween 1996 and 2004. However, theother three zones (in Baltimore,Detroit, and Philadelphia) experiencedgrowth in total employment that out-paced growth achieved in thecomparison census tracts and city-wide.44 Based on several economicmeasures, Baltimore’s EZ was clearlythe most successful of the six zones.Baltimore’s EZ recorded employmentgrowth of 18.1 percent between 1996and 2004 while the comparison cen-sus tracts and the city overallexperienced substantial employmentdeclines. In addition, from 1990 to2000, unemployment in the zonedeclined by 18.1 percent and medianfamily income increased by 67.5 per-cent.45

1 1AUGUST 2006 • THE BROOKINGS INSTITUTION • SURVEY SERIES

A comparison of Atlanta and Balti-more, cities that occupy the oppositeends of the performance continuumfor program effectiveness, providesinsights into the ways in which Balti-more combined tax incentives andgood governance to make its EZ pro-gram more effective. Baltimoresucceeded and Atlanta did not becauseof differences in the process of cross-sector collaboration and the capacityand performance of the institutionseach city had to draw upon in under-taking the task of revitalizingdistressed inner-city neighborhoods.

Baltimore’s zone leaders placedemphasis on local governance andcapacity building. The zone enjoyed astable, experienced leadership thatwas armed with a clear vision—to cre-ate job opportunities within the zoneand to prepare zone residents forthose opportunities. Empower Balti-more Management Corporation(EBMC), the zone-wide, quasi-public,nonprofit organization that coordi-nated Baltimore’s EZ initiative,integrated the efforts of Baltimore’sbusiness, civic, philanthropic, non-profit, and government leaders insupport of that vision. EBMC had aculture of accountability that empha-sized financial integrity andeffectiveness: EZ programs were care-fully developed and evaluated andresources were shifted away fromineffective programs to increase thefunds available for effective programs.In addition, EBMC devoted consider-able time and resources to thecreation of organizational capacity inthe community-based nonprofits theysponsored, called Village Centers, andgave significant planning and programimplementation responsibilities tothem in order to integrate them intothe policymaking process.

By contrast, Atlanta had frequentchanges in leadership. Local elites andzone residents never reached consen-sus on what the EZ was supposed toaccomplish nor the means by whichthose goals would be obtained. As aresult, the implementation of the EZ

initiative in Atlanta was mired in dead-lock and delay.

Lesson 6: Effective local gover-nance can ensure that existingresidents in the zone can benefitfrom the tax incentives and revi-talization efforts. Peters and Fisher contend that com-muters often occupy the majority ofthe jobs that are created in enterprisezones. On the basis of preliminary evi-dence, they conclude: “creating localgrowth may not, in and of itself, begood enough” to extend the benefits ofenterprise zones to disadvantaged zoneresidents.46

Effective governance can enhancethe benefits zone residents receive in anumber of different ways. For exam-ple, in his speech outlining hisredevelopment proposal for the GulfCoast, President Bush proposed$5,000 grants to individuals for jobtraining and work supports. The Presi-dent’s proposal appeals to symbolicvalues such as flexibility and choicebecause it empowers individuals asconsumers to use the grants in themanner they choose. However, con-sumers may make poor choices abouthow to spend their grants. In this case,effective local governance could helpconnect residents or workers to betterinformation about the job training pro-grams and connect them to suchprograms or job opportunities. In Bal-timore, venders for such employmenttraining services in the EZ were pre-screened by EBMC staff in order toassure that funds were spent on rep-utable, high quality programs.

Although the idea of empoweringindividuals to select the type of jobtraining they prefer has appeal, thetraining program that was deemedmost effective by leaders in Balti-more’s EZ was “customized training,” aprogram that trained workers for spe-cific job opportunities in the zone.Thus, rather than providing blankettraining funds to workers, a “cus-tomized” approach would ensure thatfunds go directly to programs that are


tied to emerging employment opportu-nities in the zone. This is differentfrom President Bush’s proposal intwo important ways. First, traineeswere assured that the skills developedthrough training would lead to a localjob opportunity. Second, it was possi-ble to offer customized training as onepart of a larger package of economicincentives to attract business invest-ment for employment growth.Empower Baltimore could offer low-

interest loans to businesses inexchange for employment guaranteesthat were conditioned on the abilityEBMC enjoyed to recruit and trainzone residents. The Village Centerswere vital partners in this initiativebecause they conducted outreach pro-grams and pre-screened applicants toassure that they were viable trainees.

Lesson 7: The combination ofcross-sector, collaborative gover-nance and tax incentives alsowork to create jobs and encour-age economic growth in larger,more diffuse rural settings. Federal initiatives have promotedregional business development and jobcreation in distressed rural areas formore than forty years.47 Regionaldevelopment initiatives have increasedaccess to capital to attract and retain


Table 2. Anti-Poverty Effectiveness of Empowerment Zone Programs

Anti-poverty indicator by city Empowerment Comparison Non-EZ high(1990-2000 percent change, except as noted) Zone tracts tracts poverty tracts City-wide

Atlanta

-Total employment* -13.8 -73.4 -41.5 -19.8

-People unemployed 41.5 -9.4 226.0 69.1

-Median family income 84.8 99.6 87.6 47.9

-People in poverty -24.2 -27.3 -20.7 -6.5

Baltimore

-Total employment* 18.1 -27.4 -37.0 6.0

-People unemployed -18.1 -10.5 -13.4 -3.6



Chicago

-Total employment* -2.4 3.9 -8.3 -0.2




Detroit

-Total employment* 1.2 -18.8 -27.5 -9.2




New York

-Total employment* -9.3 -8.3 0.9 0.4

-People unemployed 21.5 14.7 10.7 7.6


-People in poverty -2.2 1.5 -2.3 20.5

Philadelphia

-Total employment* 3.4 -59.0 -25.5 -0.2

-People unemployed -34.8 -12.4 0.1 2.3


-People in poverty -30.8 -11.9 -18.5 7.3

*Percent change from 1996 to 2004

Sources: for total employment, Claritas Inc., Business Facts, 1996 and 2004; all other data are from the U.S. Census Bureau, 1990 and 2000 Census.

investment, provided infrastructurefunding, and more recently, engaged instrategic planning to encourage collab-orative, cross-sector approaches torural economic development.

The rural component of the EZ/ECinitiative illustrates the significance ofcollaborative governance in a settingthat more accurately represents thechallenge of governance facing manyrural Gulf Coast communities in thewake of Hurricane Katrina. Whereasurban EZs and ECs were confined toselected neighborhoods in an individ-ual city, rural zones were oftencomposed of multi-county consortia.In their report on rural EZs and ECs,Norman Reid and Karen Savoie Mur-ray acknowledged that governancefeaturing cross-sector collaboration isa critical element of successful com-munity revitalization programs. Theiranalysis of fifty-seven rural EZs andECs found that comprehensive com-munity revitalization: “calls for specialapproaches and methods…especiallycritical is a strong base of on-the-ground support by communitydevelopment specialists who are ableto provide technical assistance in com-munity processes, leadership andproject management skills, and thetransfer of best practices from othercommunities to meet individual, localneeds.”48 Reid and Murray concludethat “a simple drop of money or taxcredits that are outside of local com-munity management andaccountability quickly become awasteful use of public funds…Theamazing accomplishments of theChampion Communities, which areimplementing their strategic planswithout EZ/EC grants, prove the pointthat clear focus, community support,and effective leadership are worththeir weight in gold.”49 However, theyalso observe that collaborative, cross-sector community building does notcome naturally to most communities;to the contrary, collaboration requiressignificant training, technical assis-tance, and capacity building.

Additional evidence suggesting that

collaborative approaches to regionaland rural economic development areeffective is found in a recent evalua-tion of the Appalachian RegionalCommission (ARC). The ARC, createdin 1965 to foster a comprehensive eco-nomic development strategy for theAppalachian region, serves an areathat includes about four hundredcounties in thirteen states with a pop-ulation of 22.9 million people(according to the 2000 Census).According to Andrew Isserman andTerance Rephann, “the ARC bringstogether federal stature and dollars,state governors, and local developmentdistricts. It supplies federal funds incoordination with state priorities; ithelps to build local capacity; and itprovides a forum for articulating stateand local preferences at the nationallevel.”50 Using a matched controlgroup design to compare Appalachiancounties to counties with similar eco-nomic structures and growth patternsoutside of Appalachia, they found thatbetween 1965 and 1991, “theAppalachian counties grew signifi-cantly faster than their twins did.”Moreover, these positive findings heldwhen a variety of demographic andincome indicators were included inmultivariate analysis. Although Isser-man and Rephann were not able toattribute these results to specific ARCprograms, their findings do suggestthat the region has benefited from theinitiative.


“First and fore-

most, federal

policymakers

must recognize

that the con-

straints and

opportunities

that exist for

economic rede-

velopment vary

from one Gulf

Coast commu-

nity to another.”

Policy Implications

The lessons from state, fed-eral, and even rural-oriented,economic development pro-grams show that there are

limitations to relying on tax incentivesalone to revitalize economically dis-tressed areas. The vast, interconnectedsocial and economic challenges facedby businesses, workers, and families indistressed areas make placing highhopes on market incentives alone animprudent policy. The literaturereviewed in this paper serves as a criti-cal reminder that a combination ofgrants and tax incentives, matched bya working partnership between thepublic, private, and nonprofit sectors,is a more effective strategy to revitalizedistressed areas.

There are several things the federalgovernment can do to encourageeffective, collaborative governancethat can complement the tax incen-tives that have already been providedto stimulate Gulf Coast redevelop-ment. First and foremost, federalpolicymakers must recognize that theconstraints and opportunities thatexist for economic redevelopment varyfrom one Gulf Coast community toanother. Effective policymakingrequires the creation of governanceentities that reflect that variation.

1. Designate Gulf EnhancedOpportunity Zones (GEO Zones)within the Katrina GO Zone topromote local planning andeffective program implementa-tion. In order promote better coordination,planning, and governance in Gulfcommunities, the federal governmentshould establish GEO Zones, smaller,coherent areas within existing GOZones. In cooperation with state gov-ernments, GEO Zones would receivefederal block grant funding to enhancethe capacity of local governance sys-tems and broaden the array of policytools that are available to promotecommunity revitalization and eco-

nomic growth.State and local governments would

nominate areas for GEO Zone desig-nation because they are best qualifiedto identify those communities thatrequire additional assistance in therecovery effort. Following proceduressimilar to those developed for the orig-inal EZ/EC initiative, local nomineeswould be required to engage variouskey local constituencies in the devel-opment of a strategic plan. The federalgovernment would then review theapplications and select GEO Zonedesignees. The competition for desig-nation would spur localities to developthoughtful plans that comply with fed-eral guidelines.

A financing mechanism already is inplace for GEO Zones. The Depart-ment of Defense Appropriations Act(DODAA, enacted on December 30,2005) appropriated $11.5 billion inCDBG funds for disaster relief, long-term recovery, and infrastructureimprovements related to the damagecaused by hurricanes Katrina, Rita,and Wilma (including more than $6.2billion for Louisiana and more than$5.0 billion for Mississippi).51 TheHUD Secretary is authorized to spec-ify alternate uses for these funds andcould use this authority to create GEOZones. If HUD Secretary Jackson isnot inclined to specify this use ofCDBG funds, Governors in theaffected states could initiate the cre-ation of GEO Zones through waiverrequests.

Regulations HUD developed toimplement the DODAA recommendthat states consider the creation of agovernance entity similar to the LowerManhattan Development Corporation(LDMC), a joint state-city corporationthat was created in the aftermath ofthe September 11 terrorist attacks toassist in the planning, coordination,and revitalization of the neighbor-hoods most directly affected by thedestruction of the World Trade Center.According to the LMDC’s web site,the LMDC directed a collaborative,cross-sector, strategic planning process

that defined a vision for revitalizingLower Manhattan, created specific ini-tiatives to improve the quality of life inLower Manhattan, and leveraged theresources and investments needed toachieve that vision.52

Despite HUD’s recommendation,the LMDC may be a poor model ofcollaborative governance. Severalentries in a recent volume edited byJohn Mollenkopf that chronicles thepolitics of recovery in New York fol-lowing the September 11 attacksconclude that public involvement andinfluence in the rebuilding effort wasfar more symbolic than real.53 On thepositive side, the Mollenkopf volumenotes that while the LMDC was signif-icantly constrained in directing theredevelopment of the World TradeCenter site, it was able to influencepublic opinion and participation in theplanning process to achieve a numberof concessions that were more in linewith what the public desired (e.g., lesscommercial space, more cultural andrecreational amenities) than what thePort Authority (who controlled thesite) and its lease holder sought.Nonetheless, several contributors tothe volume note that the LMDC andthe public were relatively powerless toalter the fundamental elements ofwhat the principal decision makerssought to achieve in the rebuildingeffort (i.e., to maximize the amount ofcommercial space that would berebuilt on the site).

The major lesson from the New YorkCity case is that rebuilding efforts thatblend market and government arelikely to yield outcomes that are moreclosely aligned with public intereststhan rebuilding efforts that rely solelyon market forces. But it also clearlyillustrates that the crafting and controlof governance entities are critical concerns that influence public partici-pation in such efforts and how thepublic interest is articulated and incor-porated into the decision makingprocess.

Unlike the strategic planning andcitizen participation requirements that


were part of the EZ/EC initiative, nei-ther the GO Zones legislation nor theprovisions accompanying HUD’s sup-plemental CDBG funds providesignificant requirements for local gov-ernance, planning, and communityparticipation. Although the CDBG dis-aster recovery regulations provide aGEO Zone funding mechanism andseem to acknowledge the importanceof local planning and targetingresources to “the most impacted anddistressed areas,” many other regula-tory provisions seem to be pushing inthe opposite direction. First, the regu-lations waive the standing provisionthat 70 percent of CDBG funds mustbe used to benefit low- and moderate-income persons. Second, citizenparticipation requirements are waivedto “permit a more streamlined publicprocess.”54 Finally, the regulationsendorse and encourage “direct” grantadministration by states (e.g., statesmay use grants “to carry out state-administered activities”) because ofconcerns about waste, fraud, andabuse. Rather than encouraging localplanning and program developmentthat will enhance the opportunities fordisplaced, low-income citizens to havea voice in disaster relief and economicrecovery programs, these provisionsencourage state administration thatinevitably will reflect a more distantperspective on the recovery andrebuilding effort. By taking this path,states are likely to miss importantopportunities for coordinating avail-able recovery resources for a moreholistic community building effort,and may end up targeting less-dis-tressed communities as well asdiluting citizen participation require-ments.

Without federal guidance and lead-ership the creation of effective localgovernance structures is likely to beuneven. For example, examination ofthe Action Plans filed by the threestates affected by Hurricane Katrinadetailing their proposed uses of thesupplemental CDBG funds providedfor disaster recovery and rebuilding

show wide variation in the extent ofcommunity-based strategic planningand the engagement of local commu-nities. Among the three states,Louisiana has taken the most compre-hensive and coordinated approach torecovery and rebuilding. TheLouisiana Recovery Authority (LRA),created by the Governor and theLouisiana legislature to oversee therebuilding effort, is charged withdeveloping policy and priorities for theuse of CDBG disaster assistance fundsand other federal and state resourcesavailable for the recovery effort. A cor-nerstone of that effort was the launchof “Louisiana Speaks,” a multifaceted,multilevel planning process designedto “develop a sustainable, long-termvision for the Southern region in thewake of the destruction caused byHurricanes Katrina and Rita.”55

According to the LRA, the plans devel-oped locally (Parish Recovery Plans,neighborhood improvement plans) willbe eligible for CDBG disaster funds tosupport their implementation. In addi-tion to support for homeowners, theLouisiana Action Plan earmarks fund-ing for workforce and affordable rentalhousing programs, homeless housingprograms, developer incentives andcode enforcement, economic develop-ment, and infrastructure.

The action plans submitted byAlabama and Mississippi, by contrast,take a less comprehensive approach.In Alabama, supplemental CDBGfunds have been targeted primarily torestore basic infrastructure (repair orreplacement of water and sewer sys-tems, repair of damaged roads anddrainage systems). In Mississippi, allof the state’s phase I supplementalCDBG funds ($3 billion) have beenallocated for a homeowner grant assis-tance program, with one-time grantpayments of up to $150,000 to eligiblehomeowners who suffered flood dam-age to their primary residence as aresult of Hurricane Katrina.

GEO Zones could use block grantfunding to establish the same sort ofgovernance system that worked so


effectively in Baltimore’s empower-ment zone. Such funding wouldprovide several benefits. First, it couldbe used to help bring government,non-profits, business and communityrepresentatives, and displaced resi-dents into a process in which theiractions can be coordinated, while pro-viding a vital communications link tohelp national representatives under-stand problems on the ground.Second, the block grants could financea variety of different economic devel-opment tools to compose acomprehensive program to coordinatejob training and placement with strate-gic investment, infrastructureimprovements, and business and com-munity development initiatives. TheGEO Zone governance structure couldalso coordinate the uses of other fed-eral assistance that is flowing into theGO Zone to assure that it is targetedstrategically and spent wisely. Third,grants would provide GEO Zone repre-sentatives the resources needed toconduct outreach efforts to informlocal business people about GO Zonetax incentives. Finally, by providingmulti-year funding, Congress canassure that the extensive planning thatis currently taking place will not belost in the implementation process. Itis vitally important that a governancestructure is put in place to build andsustain momentum for the many yearsthat rebuilding the Gulf Coast willrequire.

The states would also be key part-ners in the development and operationof GEO Zones. States should targetGEO Zones for tax breaks and otherforms of assistance such as businessand housing loans and workforcedevelopment initiatives. In addition,state governments should participatein local governance and provide tech-nical assistance to help assureprogram integrity.

2. To encourage rural economicvitality, the National RuralDevelopment Partnership shouldbe extended to more Gulf Coastcommunities within the KatrinaGO Zone. One model of cross-sector collabora-tion for rural Gulf Coast communitiesis the National Rural DevelopmentPartnership. The foundation of thispartnership is President George H.W.Bush’s Rural Development Initiative,an initiative that eventually led to thecreation of forty State Rural Develop-ment Councils. However, of the threestates with GO Zones, only Mississippihas created a Rural DevelopmentCouncil. The 2002 Farm Bill provided$10 million for each of fiscal years2003 through 2007 to support theCouncils. A portion of those fundscould be combined with other federalfunds (e.g., supplemental CDBGfunds) to establish and support coun-cils in Alabama and Louisiana and tobolster support for the existing Coun-cil in Mississippi as a means forfostering greater federal/state/localcoordination for the re-building effort.

The primary functions of the StateRural Development Councils are tofacilitate coordination and collabora-tion among the various ruraldevelopment stakeholders (federal,state, local, and tribal governments, aswell as for-profit and nonprofit organi-zations), to promote the disseminationand exchange of information on pub-licly and privately funded programs,both horizontally (on a state level) andvertically (federal-state-local), and tomonitor, report, and comment on poli-cies that address (or fail to address)the needs of rural communities.56

These councils bring together adiverse set of rural development stake-holders to address importantcommunity concerns and to craftstrategies to respond to new opportu-nities.

An analysis of the National RuralDevelopment Partnership noted thatwhile it is too early to draw definitiveconclusions about the effects of the


“As previous programs

have demonstrated,

tax incentives work

best when paired with

grants that finance

other economic devel-

opment tools, support

infrastructure, and

enhance community

development and

other social needs

within a system of

cross-sector, collabo-

rative governance.”

initiative on rural communities, “oneof the most surprising aspects of thePartnership was its ability to deal withthe extraordinary diversity foundwithin rural America…The eclecticapproach to rural development,embracing both economic and com-munity development aspects of thearea, gave states enough discretionand autonomy to shape the program intheir own image. Yet at the same time,the initiative was clearly a nationaleffort with an identity that tran-scended the individual activities withinthe states.” However, despite the earlypromise of the National Rural Devel-opment Partnership, the partnership’s2004 annual report to Congress pointsout that “the NRDP structure hasnever been fully implemented and onlylimited funds have been provided tosupport its work. Today, more than twoyears after the enactment of the 2002Farm Bill, the question arises: do Con-gress and the Executive Branch havethe will and determination to act onthis great vision?”57 Rural redevelop-ment within GO Zones affords anideal opportunity to realize this visionin response to an important nationalpriority.

Conclusion

In sum, this paper provides a cau-tionary tale for state and federalleaders about the limitations ofrelying primarily on tax incen-

tives for revitalizing economicallydistressed areas. As previous programshave demonstrated, tax incentiveswork best when paired with grants thatfinance other economic developmenttools, support infrastructure, andenhance community development andother social needs within a system ofcross-sector, collaborative governance.

The economic recovery of commu-nities like New Orleans and St.Bernard Parish in Louisiana and Gulf-port and Biloxi in Mississippi, will takemany years. Building strong institu-tions to complement existing taxincentives provided by the GulfOpportunity Zone and other invest-ments in the region will be difficult.However, experience from past federalefforts to promote economic develop-ment in distressed communitiesdemonstrates that the rewards will bewell worth the effort.


Appendix. Selected Characteristics of GO Zone Communities by State.

Alabama Louisiana Mississippi Total

Square Miles 11,620 20,272 29,974 61,866

Jurisdictions

Counties 11 31 47 89

Cities 29 42 70 141

Greater than 100,000 1 3 1 5

50,000–99,999 1 2 2 5

25,000–49,999 1 3 5 9

10,000–24,999 4 14 16 34

Less than 10,000 22 20 46 88

Population, 2003 estimate

Total 863,941 2,958,271 1,954,252 5,776,464

Metropolitan 718,024 2,463,906 938,570 4,120,500

Percent 83.1 83.3 48.0 71.3

Nonmetropolitan 145,917 494,365 1,015,682 1,655,964

Percent 16.9 16.7 52.0 28.7

Poverty, 2003 estimate

Number 144,012 508,406 351,718 1,004,136

Mean percent (counties) 19.2 17.2 20.1 19.0

Median Household Income, 2003 estimate

Mean (counties) 29,113 35,183 29,039 31,141

Unemployment, 2004 annual average

Number 23,715 74,395 53,428 151,538

Rate 6.0 5.4 5.9 5.6

Mean rate (counties) 7.4 6.2 6.9 6.7

Employment, 2003

Total 295,094 1,080,763 630,384 2,006,241

Percent manufacturing 13.9 9.0 15.4 11.9

Percent retail trade 15.3 14.0 15.4 14.8

Percent services 52.5 55.3 55.4 55.7

Percent total employment change, 1998-2003 -1.3 0.6 -1.2 -0.3

Sources: U.S. Bureau of the Census, Population Estimates Program, Vintage 2003; U.S. Bureau of the Census, Small Area Income and Poverty Estimates,

2003; Bureau of Labor Statistics, Local Area Unemployment Statistics, 2004; and U.S. Bureau of the Census, County Business Patterns 2003.


Endnotes1. Robert Stoker is Associate Professor of Political

Science and a member of the faculty of the

School of Public Policy and Public Administra-

tion at George Washington University. He

recently published a book with the Brookings

Institution Press, co-authored with Laura Wil-

son, entitled When Work is Not Enough: State

and Federal Policies to Support Needy Workers.

Michael J. Rich is Associate Professor of Political

Science and Director of the Office of University-

Community Partnerships at Emory University. He

is the author of several publications on federal

urban policy, including Federal Policymaking and

the Poor. His current research focuses on the

effects of comprehensive revitalization strategies

on urban neighborhoods.

2. John R. Logan, “The Impact of Katrina: Race and

Class in Storm-Damaged Neighborhoods”

(Brown University, 2006), available at

www.s4.brown.edu/Katrina/report.pdf Logan

found that “the population of damaged areas was

nearly half black (45.8 percent compared to 26.4

percent black in the rest of the region), living in

rental housing (45.7 percent compared to 30.9

percent), and disproportionately below the

poverty line (20.9 percent compared to 15.3 per-

cent) and unemployed (7.6 percent compared to

6.0 percent),” p. 7.

3. Logan’s analysis suggests that New Orleans may

lose as much as 80 percent of its black popula-

tion if residents cannot return to flooded

neighborhoods.

4. See, for example, “New Orleans After the Storm:

Lessons from the Past, a Plan for the Future”

(Washington: Brookings Institution, 2005).

5. Figures for New Orleans and the Biloxi-Gulfport-

Pascagoula MSA are from the U.S. Census

Bureau, American FactFinder, 2004 American

Community Survey. For comparison: 34.1 percent

of all U.S residents over 16 are not in the labor

force; unemployment among the U.S. civilian

labor force is 7.2 percent; 16.1 percent of the U.S.

population over 25 has not completed high school;

8.8 percent of U.S. households don’t have a vehi-

cle for transportation; the U.S. median household

income is $44,684; the U.S. poverty rate is 13.1

percent; the U.S. percent of female-headed house-

holds living in poverty is 37.6 percent; and 68

percent of Americans own their own home.

6. The text of President Bush’s speech can be

found on the White House website, www.white-

house.gov/news/releases/2005/09/20050915-8.

html

7. For a description and explanation of these provi-

sions, see the report prepared by the Joint

Committee on Taxation, Technical Explanation of

H.R. 3768, the “Katrina Emergency Tax Relief

Act of 2005,” as Passed by the House and the

Senate on September 21, 2005, (JCX-69-05),

September 22, 2005.

8. A conversion is the disposition of property as a

sale for cash or for other consideration (such as a

cash settlement from insurance or an exchange

for another property). This provision permits

someone who realizes a capital gain as a conse-

quence of the involuntary conversion of property

in the Katrina disaster area to wait five years

before recognizing (or declaring) the gain and

paying the tax. An involuntary disposition occurs

when a property is condemned. For example, if

George owned a rental property that was

destroyed by wind damage from Katrina, the

insurance settlement he receives may create a

capital gain if the amount of the settlement

exceeds his basis in the property (normally the

basis is the purchase price plus the value of

improvements less depreciation). If the property

suffered such severe damage that it was con-

demned, the conversion would be “involuntary.”

In that case, George would not have to acknowl-

edge his tax liability for the capital gain for a

five-year period.

9. The significance of designating private activity

uses for GO Zone bonds is that under normal

rules, income earned from the bonds would be

taxable. The exception granted by the legislation

makes this income tax-exempt, providing a sub-

sidy to bond holders by foregoing federal tax

revenue. The advance refund provisions allow the

states to take advantage of opportunities to refi-

nance their existing debt on more favorable

terms. For more information on tax-exempt

bonds, see Dennis Zimmerman, “Tax-exempt

Bonds.” In Joseph Cordes, Robert Ebel, and Jane

Granvelle, ed., The Encyclopedia of Taxation &

Tax Policy (Washington: The Urban Institute

Press, 2005).


10. For a description and explanation of the legisla-

tion, see the report by the Joint Committee on

Taxation, Technical Explanation of the Revenue

Provisions of H.R. 4440, the “Gulf Opportunity

Zone Act of 2005,” as Passed by the House of Rep-

resentatives and the Senate, (JCX-88-05),

December 16, 2005. This act extends many of

the benefits conferred on victims of Katrina to

victims of Hurricanes Rita and Wilma.

11. See Stuart M. Butler, “The Conceptual Evolution

of Enterprise Zones.” In Roy Green, ed., Enter-

prise Zones: New Directions in Economic

Development (Newbury Park, CA: Sage Publica-

tions, 1991).

12. Stuart M. Butler, “Enterprise Zones: Pioneering

in the Inner City” (Washington: The Heritage

Foundation, 1980).

13. Michael Wolf, “Enterprise Zones: A Decade of

Diversity,” Economic Development Quarterly 4

(1990). (Emphasis in original quote.)

14. A recent survey of state financial incentives in

the United States found that 40 percent of the

940 state economic development programs active

in 1997—including Enterprise Zones—provided

some type of tax incentive and the average value

of tax incentives was about $13 million. See Ken-

neth E. Poole, George A. Erickcek, Donald T.

Iannone, Nancy McCrea, and Pofen Salem, Eval-

uating Business Development Incentives, prepared

for U.S. Department of Commerce, Economic

Development Administration, August 1999.

15. See U.S. Department of Housing and Urban

Development, “Enterprise Zones Update” (Wash-

ington: Office of Policy Development and

Research, 1997).

16. Roy Green and Michael Brintnall, “Conclusions

and Lessons Learned.” In Roy Green, ed., Enter-

prise Zones: New Directions in Economic

Development (Newbury Park, CA: Sage Publica-

tions, 1991).

17. Ibid.

18. Enid Beaumont, “Enterprise Zones and Federal-

ism” In Roy Green, ed., Enterprise Zones: New

Directions in Economic Development (Newbury

Park, CA: Sage Publications, 1991).

19. See Michael J. Rich, “Riot and Reason: Crafting

an Urban Policy Response,” Publius: The Journal

of Federalism, 23 (Summer 1993): 115–134.

20. For a review of the legislative history of the

EZ/EC initiative see Sarah F. Liebschutz,

“Empowerment Zones and Enterprise Communi-

ties: Reinventing Federalism for Distressed

Communities,” Publius: The Journal of Federalism

25: 3 (Summer 1995): 117–132.

21. The President’s Community Enterprise Board,

“Building Communities Together: Empowerment

Zones and Enterprise Communities Application

Guide” (Washington: U.S. Department of Hous-

ing and Urban Development, 1994).

22. John Burton, “The GO Zone Won’t Go: Lessons

for Gulf Opportunity Zones” (Washington: Cen-

ter for American Progress, 2005).

23. U.S. General Accounting Office, “Community

Development: Federal Revitalization Programs

are Being Implemented, but Data on the Use of

Tax Benefits Are Limited,” Report GAO-04-306,

March 2004.

24. The capital gains tax benefits available to all

three rounds of empowerment zone designees—

which included the partial exclusion of capital

gains on stocks and restricted non-recognition of

capital gains on assets—were replaced in RCs

with a broad exclusion from the capital gains tax.

25. Renewal Communities are eligible to receive

Qualified Zone Academy Bonds to fund educa-

tional improvements. However, this is not

included as a benefit in this discussion because

this benefit is not exclusive to Empowerment

Zones, Renewal Communities, or GO Zones.

26. See, for example, Peter Eisinger, The Rise of the

Entrepreneurial State (Madison: University of

Wisconsin Press, 1988); Robert J. Newman and

Dennis H. Sullivan, “Econometric Analysis of

Business Tax Impacts on Industrial Location:

What Do We Know and How Do We Know It?”

Journal of Urban Economics 23 (2) (1988): 215-

234; Timothy Bartik, Who Benefits from State

and Local Economic Development Policies? (Kala-

mazoo: W.E. Upjohn Institute for Employment

Research, 1991); Timothy J. Bartik, “The Effects

of State and Local Taxes on Economic Develop-

ment: A Review of Recent Research, Economic

Development Quarterly 6 (1) (1992): 102-110;

and Michael J. Wasylenko, “Taxation and Eco-

nomic Development: The State of the Economic

Literature,” New England Economic Review, 5 (2)

(1997): 37-52.

27. Alan Peters and Peter Fisher, “The Failures of

Economic Development Incentives,” Journal of

the American Planning Association, 70, (1)

(2004): 27-37.

28. Scott Hebert, Avis Vidal, Greg Mills, Franklin

James, and Debbie Gruenstein, “Interim Assess-

ment of the Empowerment Zones and Enterprise

Communities (EZ/EC) Program: A Progress

Report,” Report prepared for U.S. Department of

Housing and Urban Development, 2001.

29. Ibid.


Development: Businesses’ Use of Empowerment

Zone Tax Incentives” (1999).


Development: Federal Revitalization Programs

Are Being Implemented, but Data on the Use of

Tax Benefits Are Limited” (2004).

32. Peter Hall, “The British Enterprise Zones.” In

Roy Green, ed., Enterprise Zones: New Directions

in Economic Development (Newbury Park, CA:

Sage Publications, 1991).

33. Marilyn Marks Rubin, “Can Reorchestration of

Historical Themes Reinvent Government? A Case

Study of the Empowerment Zones and Enterprise

Communities Act of 1993,” Public Administration

Review 54 (1994): 161-169.

34. See, for example, Marilyn Marks Rubin; “Urban

Enterprise Zones in New Jersey: Have They

Made a Difference? In Roy Green, ed., Enterprise

Zones: New Directions in Economic Development

(Newbury Park, CA: Sage Publications, 1991);

Barry Rubin and Margaret Wilder, “Urban Enter-

prise Zones: Employment Impacts and Fiscal

Incentives,” Journal of the American Planning

Association 55 (1989): 418-431; and Rodney

Erickson and Susan Friedman, “Enterprise Zones

2: A Comparative Analysis of Zone Performance

and State Government Policies,” Environment

and Planning C: Government and Policy 8 (4):

363-378.


35. Alan H. Peters and Peter S. Fisher, State Enter-

prise Zone Programs: Have They Worked?

(Kalamazoo: W.E. Upjohn Institute for Employ-

ment Research, 2002).

36. Ibid.

37. Robert Greenbaum and John Engberg, “The

Impact of State Enterprise Zones on Urban Man-

ufacturing Establishments,” Journal of Policy

Analysis and Management 23 (2) (2004): 315-

339.

38. Marilyn Rubin, 1990. “Urban Enterprise Zones:

Do They Work? Evidence from New Jersey,” Pub-

lic Budgeting and Finance 10 (4) (1990): 3-17.

39. Kala Sridhar, “Tax Costs and Employment Bene-

fits of Enterprise Zones,” Economic Development

Quarterly 10 (1) (1996): 69-90.

40. Peters and Fisher, State Enterprise Zone Pro-

grams: Have They Worked?

41. Robert J. Chaskin and Sunil Garg, “The Issue of

Governance in Neighborhood-Based Initiatives,”

Urban Affairs Review 32 (1997).

42. Initiative for a Competitive Inner City, “Inner-

City Business Development: Benchmarking

Federal Spending and Guidelines for Action,”

(1999).

43. Ibid.

44. Research conducted by the authors, using data

originally gathered by Abt Associates for the

HUD-sponsored “Interim Outcome Assessment”

of the empowerment zone initiative, suggests that

knowledge and use of tax incentives are related to

employment outcomes. See Michael Rich and

Robert Stoker, “Urban Regimes and Community

Empowerment: Lessons from the Empowerment

Zones in Atlanta and Baltimore” (2004). Contact

the authors to access this paper.

45. Although unemployment declines in Detroit and

Philadelphia outpaced what was achieved in Bal-

timore, the income gains in Detroit and

Philadelphia lagged behind Baltimore and in

Detroit the gains lagged behind its comparison

Census tracts. In addition, the number of poor

people residing in Baltimore’s EZ declined by

36.7 percent between 1990 and 2000, a decline

that exceeded what was achieved in Detroit and

Philadelphia.

46. Peters and Fisher, State Enterprise Zone Pro-

grams: Have They Worked?

47. Examples include the Area Redevelopment

Agency and its successor, the Economic Develop-

ment Administration, the Appalachian Regional

Commission, and the Tennessee Valley Authority.

48. J. Norman Reid and Karen Savoie Murray,

“Empowering Rural Communities: A Perspective

at the Five-Year Point,” Paper presented at the

annual meeting of the Rural Sociological Society,

2000.

49. In 1994 more than 220 rural communities sub-

mitted applications for designation as a Round I

Empowerment Zone or Enterprise Community.

To encourage implementation of the strategic

plans in communities that were not selected, the

U.S. Department of Agriculture (USDA) desig-

nated all applicant communities as “Champion

Communities” and provided assistance to them.

Several of these communities were designated as

EZ or EC communities in subsequent rounds.

Since 1995, the USDA has provided more than

$450 million in community development funding

to nearly 100 Champion Communities.

50. Andrew Isserman and Terance Rephann, “The

Economic Effects of the Appalachian Regional

Commission,” Journal of the American Planning

Association 61 (1995): 347.

51. See the Federal Register, Vol. 71, No. 29, Part IV,

Department of Housing and Urban Develop-

ment, Monday, February 13, 2006, 7666:7672.

52. Lower Manhattan Development Corporation,

“Progress Report, 2001-2004.” Available at

www.RenewNYC.com.

53. Contentious City: The Politics of Recovery in New

York City, John Mollenkopf, ed., (New York: Rus-

sell Sage Foundation, 2005).

54. “The streamlined requirements do not mandate

public hearings at either the state or local gov-

ernment level, but do require providing a

reasonable opportunity for citizen comment and

ongoing citizen access to information about the

use of grant funds.” U.S. Department of Housing


and Urban Development, “Allocations and Com-

mon Application and Reporting Waivers Granted

to and Alternative Requirements for CDBG Dis-

aster Recovery Grantees Under the Department

of Defense Appropriations Act, 2006; Notice,”

Federal Register 13 February 2006, Part IV, p.

7668.

55. Louisiana Recovery Authority, “The Road Home

Housing Programs: Action Plan for the Use of

Disaster Recovery Funds” (2006).

56. Farm Security and Rural Investment Act of 2002,

Public Law 107–171.

57. National Rural Development Partnership,

“Report to Congress” (2004).


For More Information:Robert Stoker: [email protected]

Michael Rich: [email protected].

For General InformationBrookings Institution Metropolitan Policy Program

(202) 797.6139www.brookings.edu/metro

AcknowledgmentsThe Brookings Institution Metropolitan Policy Program thanks Living Citiesfor its generous support of our work related to Gulf Coast recovery. LivingCities is a partnership of leading foundations, financial institutions, non-profit organizations, and the federal government that is committed toimproving the vitality of our nation’s cities and urban communities.

The authors wish to thank Jennifer Vey of the Brookings Institution and John Mollenkopf, of the CUNY Graduate Center, for their helpful commentson the paper. They’d also like to thank Manny Rossman for his review of Figure 1.

The Brookings Institution

1775 Massachusetts Avenue, NW • Washington D.C. 20036-2188Tel: 202-797-6000 • Fax: 202-797-6004

www.brookings.edu

Direct: 202-797-6139 • Fax/direct: 202-797-2965

www.brookings.edu/metro

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