Tax costs and employment benefits of enterprise zones

Economic Development Quarterly

Volumn 10, Issue 1, 1996, Pages 69-90

  Sridhar, Kala Seetharam ^a  

^a NONE

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EID: 0040456850     PISSN: 08912424     EISSN: None     Source Type: Journal    
DOI: 10.1177/089124249601000109     Document Type: Article

References (40)

1. The argument is elaborated in the next section.
2. Timothy J. Bartik, Who Benefits from State and Local Economic Development Policies? (Kalamazoo, MI: Upjohn Institute for Employment Research, 1991).
3. From a summary of Bartik's econometric studies, the long-run elasticity of business activity with respect to state and local taxes appears to be in the range of-1.0 to-3.0 for intrametropolitan location decisions (see Bartik, Who Benefits, p. 43). That is, if a small suburban jurisdiction within a metropolitan area raises its taxes by 10%, it can expect in the long run a reduction in its business activity by 10% to 30%.
4. Net benefit from a job is defined as the wages paid minus the reservation wage when the job is "new." However, when the job is relocated to the enterprise zone from some other location, the benefit from that job would not be wages paid minus the reservation wage but the reservation wage paid at the alternative location minus the reservation wage paid at the enterprise zone location. For a more complete discussion of this, see the section on research methodology.
5. Bartik's results showed that a shock that permanently raises a metropolitan area's employment by 1% was estimated to reduce the area's long-run unemployment rate by 7/100ths of 1% (based on his micro data results) or 6/100ths of 1% (based on aggregate data results; see Bartik, Who Benefits, p. 95). His estimates also suggested that long-run labor force participation rates (which, in turn, would have hysteresis effects) would increase by 14/100ths of 1%, as a result of job growth. Although these effects may appear small, their persistence makes them important.
6. According to Bartik, traditional policies, as opposed to new-wave policies, consist of financial incentives such as industrial revenue bonds (IRBs), property tax abatements, direct state loans, and nonfinancial incentives (such as customized industrial training), which are primarily targeted at branch plant recruitment. Since enterprise zones offer incentives targeted at plant recruitment, they may be considered as representing traditional policy.
7. Laura Reese, "Municipal Fiscal Health and Tax Abatement Policy," Economic Development Quarterly 5 (1991): 23-32.
8. Only in 1993 did the long-awaited federal enterprise zone legislation pass as Title XIII of the Omnibus Budge Reconciliation Act of 1993 (26 U.S.C. Section 1391), empowering the designation of 65 urban and 30 rural communities throughout the nation as enterprise communities.
9. U.S. Department of Housing and Urban Development (HUD), State-Designated Enterprise Zones: Ten Case Studies (Washington, DC: U.S. Government Printing Office, 1986).
10. HUD, State Enterprise Zone Update 1992 (Washington, DC: U.S. Government Printing Office, 1992).
11. Ibid., p. 27.
12. Illinois Department of Commerce and Community Affairs (DCCA), Enterprise Zone Descriptions and Accomplishments (Springfield: Illinois DCCA, 1990).
13. Bartik, Who Benefits, Table 7.7.
14. Richard Elling and Ann Sheldon, "Determinants of Enterprise Zone Success: A Four State Perspective," in Enterprise Zones: New Directions in Economic Development, ed. Roy E. Green (Newbury Park, CA: Sage, 1991).
15. The only study that throws some light on other tax costs in the state of Illinois is by Fisher, showing that investment tax credits (ITC) and job creation tax credits (JCTC) in the state of Illinois in 1990 would amount to $9,792 statewide and to a maximum of $22,203 in a depressed area, for an average manufacturing firm making an investment of $1 million in a new facility (see Peter Fisher, "State Economic Development Incentives, Unemployment, and the Redistribution of Jobs" [Paper presented at the 34th Annual Association of the Collegiate Schools of Planning Conference, October, 1992]; see also Peter Fisher, "What's Really New About the Economic Role of the American States in the 1980s?" [Paper presented at the Association of the Collegiate Schools of Planning - Association of European Schools of Planning (AESOP) Joint International Congress, July, 1991]) However, the Illinois Department of Revenue had been preparing a detailed report on the enterprise zone program costs in the state, which was to be completed in December 1993.
16. The only study that throws some light on other tax costs in the state of Illinois is by Fisher, showing that investment tax credits (ITC) and job creation tax credits (JCTC) in the state of Illinois in 1990 would amount to $9,792 statewide and to a maximum of $22,203 in a depressed area, for an average manufacturing firm making an investment of $1 million in a new facility (see Peter Fisher, "State Economic Development Incentives, Unemployment, and the Redistribution of Jobs" [Paper presented at the 34th Annual Association of the Collegiate Schools of Planning Conference, October, 1992]; see also Peter Fisher, "What's Really New About the Economic Role of the American States in the 1980s?" [Paper presented at the Association of the Collegiate Schools of Planning - Association of European Schools of Planning (AESOP) Joint International Congress, July, 1991]) However, the Illinois Department of Revenue had been preparing a detailed report on the enterprise zone program costs in the state, which was to be completed in December 1993.
17. The source of data on property tax abatements by enterprise zone in the state of Illinois was Illinois Department of Revenue, Illinois Property Tax Statistics 1990 (Chicago: Illinois Department of Revenue, 1992).
18. HUD, State-Designated Enterprise Zones.
19. The source of data on jobs created by industry was Illinois DCCA, Enterprise Zone Annual Report (Springfield: Illinois DCCA, 1990); see also Illinois DCCA, Enterprise Zone Descriptions. There was, however, no information on the proportion of jobs in the zones created by new or expanding firms as against those created by relocating firms.
20. The source of data on jobs created by industry was Illinois DCCA, Enterprise Zone Annual Report (Springfield: Illinois DCCA, 1990); see also Illinois DCCA, Enterprise Zone Descriptions. There was, however, no information on the proportion of jobs in the zones created by new or expanding firms as against those created by relocating firms.
21. The data on earnings by industry were obtained partly from U.S. Bureau of the Census, Census of Population and Housing (Washington, DC: U.S. Government Printing Office, 1980) and U.S. Bureau of Labor Statistics, Employment and Earnings (Washington, DC: U.S. Government Printing Office, 1991). Reservation wage, the lowest amount (wage) necessary to encourage the individual to work, was estimated as a function of the unemployment rate, by using a data set called the Panel Study of Income Dynamics (PSID).
22. The data on earnings by industry were obtained partly from U.S. Bureau of the Census, Census of Population and Housing (Washington, DC: U.S. Government Printing Office, 1980) and U.S. Bureau of Labor Statistics, Employment and Earnings (Washington, DC: U.S. Government Printing Office, 1991). Reservation wage, the lowest amount (wage) necessary to encourage the individual to work, was estimated as a function of the unemployment rate, by using a data set called the Panel Study of Income Dynamics (PSID).
23. Average earnings were used for jobs assigned to industry, and median earnings for jobs assigned to occupations.
24. j were used to convert the estimated hourly reservation wages to weekly and annual terms, respectively. Only then could annual earnings be made net of annual reservation wages.
25. The 1979 earnings by industry and occupation for the state of Illinois was used from the 1980 census, since the 1990 census (see U.S. Bureau of the Census, Census of Population and Housing: Summary of Social and Economic Characteristics [Washington, DC: U.S. Government Printing Office, 1990]) had not yet published the corresponding data for the state of Illinois. However, adjustment was made for the period 1979-1990, using national data in U.S. Bureau of Labor Statistics, Employment and Earnings.
26. The 1979 earnings by industry and occupation for the state of Illinois was used from the 1980 census, since the 1990 census (see U.S. Bureau of the Census, Census of Population and Housing: Summary of Social and Economic Characteristics [Washington, DC: U.S. Government Printing Office, 1990]) had not yet published the corresponding data for the state of Illinois. However, adjustment was made for the period 1979-1990, using national data in U.S. Bureau of Labor Statistics, Employment and Earnings.
27. This survey is conducted by the Institute for Social Research, Survey Research Center, at the University of Michigan, Ann Arbor (see Institute for Social Research, A Panel Study of Income Dynamics [Ann Arbor: University of Michigan Survey Research Center, 1987). This analysis is based on the 1987 interviewing sample.
28. The independent variables have been adopted from Stephen R. G. Jones, "Reservation Wages and the Cost of Unemployment," Economica 56 (1989): 225-46. This is the only study that examines how reservation wages vary with local unemployment rate, using a data set from Great Britain.
29. Sex was recoded as a 0-1 variable, from a 1 (male)-2 (female) variable in the original data set. For purposes of this analysis, 0 represents female, and 1 represents male. Since numbers between 0 and 1 can be viewed as representing the probability of being male or female, a negative relationship between sex and reservation wages means that the greater the number tends toward 1, the lower the reservation wages.
30. The original variable for marital status in the data set contained five categories: married, never married, widowed, divorced, and separated. However, for purposes of this analysis, this variable was recoded and reduced to two categories: married (1) and other (0).
31. This, a variable not in the original data set, was computed as the sum of Aid to Families with Dependent Children (AFDC) payments, Social Security payments, Supplemental Security Income, and other welfare payments.
32. Particularly, variables such as the intensity of job search (which WKLWORK and PLLWORK represent), UNCOMP, and NMI income affect the economic conditions of the unemployed person and reflect the cost of unemployment. In particular, UNCOMP and NMI decrease costs of remaining unemployed for the individual, because they ensure a continuing source of income, whereas the intensity of job search increases the costs of remaining unemployed. See Harry J. Holzer, "Job Search by Employed and Unemployed Youth," Industrial and Labor Relations Review 40 (July 1987): 601-11.
33. The variables HS and COLL were recoded from the original variable in the data set for education. The original variable consisted of eight categories: 0-5 grades, 6-8 grades, and so forth. The variable was recoded to two dummy variables - the two dummies being high school diploma (HS) and college degree (COLL). In the recoded form, a code of 0 on the variable HS meant a high school dropout, and a code of 1 meant a high school diploma. Similarly, a code of 0 on the variable COLL indicated no college degree, and a code of 1 implied a college degree. The recoding of the original variable enabled to test the significance of high school education and college education separately. This distinction proved important, as seen in the results.
34. This applies only to persons employed before and does not apply to graduates fresh from school.
35. The estimated reservation wages were expressed in terms of dollars and cents per hour (for 1987) Since the abatements and earnings from jobs were expressed as dollar amounts for the year 1990, the hourly reservation wages were converted to weekly wages by using the weekly hours worked by industry, from U.S. Bureau of Labor Statistics, Employment and Earnings. To convert the 1987 weekly reservation wages to annual reservation wages for 1987, the Current Population Survey (CPS; see U.S. Bureau of the Census, Current Population Survey [Washington, DC: U.S. Government Printing Office, 1990]) was used. Since the CPS does not provide data on number of weeks worked by industry, cross-tabulations were made between the relevant variables-number of weeks worked and the detailed industry codes Then, a weighted average was calculated for average weeks worked by industry for 1987. These average weeks were used to convert the weekly reservation wages to annual reservation wages. The annual reservation wages (same for all jobs in a zone) for all jobs are subtracted from the annual earnings (the earnings are obtained by industry for all jobs) in those jobs to obtain total net benefits for each zone. The resulting figun represents net benefits from jobs in a zone, assuming that the jobs are new and not merely relocated from somewhere else.
36. The estimated reservation wages were expressed in terms of dollars and cents per hour (for 1987) Since the abatements and earnings from jobs were expressed as dollar amounts for the year 1990, the hourly reservation wages were converted to weekly wages by using the weekly hours worked by industry, from U.S. Bureau of Labor Statistics, Employment and Earnings. To convert the 1987 weekly reservation wages to annual reservation wages for 1987, the Current Population Survey (CPS; see U.S. Bureau of the Census, Current Population Survey [Washington, DC: U.S. Government Printing Office, 1990]) was used. Since the CPS does not provide data on number of weeks worked by industry, cross-tabulations were made between the relevant variables-number of weeks worked and the detailed industry codes Then, a weighted average was calculated for average weeks worked by industry for 1987. These average weeks were used to convert the weekly reservation wages to annual reservation wages. The annual reservation wages (same for all jobs in a zone) for all jobs are subtracted from the annual earnings (the earnings are obtained by industry for all jobs) in those jobs to obtain total net benefits for each zone. The resulting figun represents net benefits from jobs in a zone, assuming that the jobs are new and not merely relocated from somewhere else.
37. See, for example, Larry Ledebur and Douglas Woodward, "Adding a Stick to the Carrot: Location Incentives with Clawbacks, Recisions and Recalibrations," Economic Development Quarterly 4 (1990): 221-37; Alan H. Peters, "Clawbacks and the Administration of Economic Development Policy in the Midwest," Economic Development Quarterly 1 (1993): 328-40; Peter Eisinger, The Rise of the Entrepreneurial State (Madison: University of Wisconsin Press, 1988).
38. See, for example, Larry Ledebur and Douglas Woodward, "Adding a Stick to the Carrot: Location Incentives with Clawbacks, Recisions and Recalibrations," Economic Development Quarterly 4 (1990): 221-37; Alan H. Peters, "Clawbacks and the Administration of Economic Development Policy in the Midwest," Economic Development Quarterly 1 (1993): 328-40; Peter Eisinger, The Rise of the Entrepreneurial State (Madison: University of Wisconsin Press, 1988).
39. See, for example, Larry Ledebur and Douglas Woodward, "Adding a Stick to the Carrot: Location Incentives with Clawbacks, Recisions and Recalibrations," Economic Development Quarterly 4 (1990): 221-37; Alan H. Peters, "Clawbacks and the Administration of Economic Development Policy in the Midwest," Economic Development Quarterly 1 (1993): 328-40; Peter Eisinger, The Rise of the Entrepreneurial State (Madison: University of Wisconsin Press, 1988).
40. Robert Perrucci, Japanese Auto Transplants in the Heartland: Corporatism and Community (New York: Aldine de Gruyter, 1994).