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Enterprise Zone Program Too Costly To Keep As Is

By Jed Kolko, associate director of research, Public Policy Institute of California and David Neumark, PPIC Bren Fellow and professor of economics, UC Irvine

This commentary appeared in the
San Francisco Chronicle on February 6, 2011

The state's budget gap requires painful cuts. The tough choices ahead require us to take a hard look at which programs achieve their goals and which do not before making decisions that will affect the lives of all Californians.

One area targeted for outright elimination in Gov. Jerry Brown's budget proposal is the enterprise zone program, which offers tax credits and other incentives to businesses in 42 designated zones throughout the state. His budget proposal cites our 2009 Public Policy Institute of California research report as a justification for doing so. (He also proposes eliminating redevelopment areas, another local economic development program with very different rules and goals; our report analyzed enterprise zones only.)

Here's what we found: Employment growth in enterprise zones was no greater than employment growth in very similar areas. California's enterprise zones are diverse. Some are in urban downtowns and others are rural, and each has a different mix of manufacturing, office space and retail. There is some evidence that enterprise zones with particular characteristics were more effective at creating jobs. These include zones where more effort was placed on marketing and outreach and those where there is less manufacturing.

But on average, enterprise zones are ineffective. We concluded that the enterprise zone program - which costs half a billion dollars annually - is too costly to simply continue as it is without clearer evidence of the program's benefits or a well-defined plan to make it more effective.

To reach this conclusion, we looked at almost every business in California from 1992 to 2004 and identified whether each one was inside or outside an enterprise zone. Unlike many other enterprise zone studies, ours used exact zone boundaries to decide whether a business was eligible for the program's tax credits and compared businesses inside enterprise zones to businesses just outside enterprise zones to hold constant other factors associated with employment growth in different parts of cities.

We focused on employment growth because the primary benefit to businesses is a tax credit for new hires, and we confirmed in a survey of local administrators of enterprise zones that job growth is the program's primary goal. Other studies have considered the program's effect on unemployment, poverty rates and other measures, but it's hard to see how these measures could be improved without an increase in jobs.

Elements of the program's design suggest some reasons for the failure of enterprise zones to raise employment relative to comparison areas. One possibility: The program offers incentives to invest in machinery and property so firms might opt to spend more on capital and less on labor. Another possibility:

The program subsidizes firms that hire "disadvantaged workers," but disadvantaged status is often based on where people live. For example, a company in a San Francisco enterprise zone area can receive this subsidy if it hires an engineer who has a job and owns a home but happens to live in a low-income area.

Political realities could mean that the enterprise zone program is not entirely eliminated. If it survives, the program should be retooled to focus more narrowly on zones most likely to raise employment. Zones unlikely to yield job growth - based on past evidence from the program - or zones that fail to achieve job growth also should be ended.

If the state decides that outcomes other than job growth are the primary goal of this program or any like it, selection and evaluation criteria should be reformed to ensure that the goals are achieved. This would be a marked change from the way the program works now. In 2006, when more new zones were awarded than at any time since the program's inception, every applicant was a winner. Zones were chosen regardless of how they stacked up against the selection criteria.

The governor's proposal to eliminate enterprise zones has already begun to stir fierce debate. Supporters will offer testimonials of businesses helped by the credits; opponents will point to examples of businesses that received credits for workers they would have hired anyway. Useful as these anecdotes are for understanding how businesses use the program, they cannot tell us anything about its effectiveness.

At a time when the state is struggling with double-digit unemployment, it is important for policymakers to support job creation. It is equally important that they ask hard questions about whether the money we are spending on particular policies is helping us reach that goal. The state's future economic health depends on the answer.


Do California's Enterprise Zones Create Jobs?

Policy Areas

Economic Development
Employment and Income
Public Finance