At a time when California is still trying to pass its budget, enterprise zone programs
may be on the chopping block as lawmakers’ debate whether these programs are
working. The state's budget crisis has spurred debate over the effectiveness of the
enterprise zone program, which began in 1986 as an effort to boost business investment
in economically depressed areas and create jobs for disadvantaged workers. Last year,
the state Legislative Analyst's Office recommended scaling it back, citing uncertain
economic benefits.

This week, the Public Policy Institute of California, PPIC released a report on California’s
enterprise zone program.  The report illustrates that enterprise zones have failed to achieve
the key goal of increasing jobs. The PPIC report contrasts employment growth in enterprise
zones with comparison areas and concludes that the program, on average, has no effect on
job or business creation.

The report recommends a re-examination of the program, which offers tax credits and incentives
to businesses in 42 designated zones throughout the state. The program's cost in the next fiscal
year is estimated at nearly $500 million.

"The state can ill afford to continue the enterprise zone program without clearer evidence of its
benefits or a well-defined plan to make it more effective," says Jed Kolko, PPIC associate director
of research, who co-authored the report with David Neumark, PPIC senior fellow and professor of
economics at the University of California, Irvine.

The PPIC researchers reached their conclusions after building street-by-street maps of the enterprise
zones and surrounding areas, which they matched to data on nearly every business in the state. They
compared employment growth inside the zones to growth in control areas, and then did a similar
analysis of changes in the number of businesses. They supplemented this effort with a survey of local
enterprise zone administrators.

While the report's main conclusion found that the enterprise zone program has been ineffective overall
in creating jobs or businesses, the authors found that some zones have been more successful than
others.

The PPIC study recommends further critical evaluation of the program's effectiveness in individual
zones to determine which ones should expire and which should be extended, if the program continues.

Conversely, a study completed in early 2009 by USC professors John Ham, Ayse Imrohoroglu and
Charles Swenson reveals that California’s State Enterprise Zone programs are indeed bright spots in
areas lagging in economic development and employment in California and the rest of the nation.

“If you’re going to eradicate a program, you need to evaluate it on the number of outcomes and we
found these programs had a positive impact,” said Swenson, a professor at the USC Marshall School
of Business and Leventhal research fellow, who is an expert on state taxation. “It’s the only program we
have that gives tax breaks and in a time of economic downturn. The last thing you’d want to do is cut
a program that increases jobs and decreases poverty.”

The study points to evidence  that shows enterprise zone programs foster growth by creating jobs and
increasing incomes, as well as reducing poverty and unemployment rates.

The study includes complete data on both state and federal enterprise zone programs from 1980 to 1990
and 1990 to 2000. The precise data, taken from census reports and correlated to show the differences
between enterprise zones and adjacent non-enterprise zones, looked at jobs, family income, unemployment
rates, percent of households with wage income and poverty rates.

The study also accounts for county and national effects, and for the effects of some overlapping federal tax
zones. In both studies, the professors found that for all criteria, enterprise zone programs had a statistically
significant impact.

“For California, we found that enterprise zones increased employment by 2.2 percent and increased the
fraction of houses with wage and salary income by 2.1 percent,” said Swenson, adding that the programs
have had a positive effect for all categories in all states that have them.

Swenson noted that a recent study that claimed California’s enterprise zones aren’t working examined
only jobs and was not able to detect growth as had the USC study.

The professors’ previous study, published in 2006 and commissioned by the California Department of
Housing and Community Development, found that when compared to the rest of the state, enterprise
zones had a 7.35 percent drop in poverty rates; a 7.1 percent increase in household incomes; and a
3.5 percent increase in salaries. Their work was cited by Gov. Arnold Schwarzenegger shortly after it
appeared.

Ham is an economics professor at USC College. Imrohoroglu is chair of the Department of Finance and
Business Economics at the USC Marshall School. Next, Swenson and his colleagues would like to look
at the effects of enterprise zones on business retention in California as well as firm profitability and capital
expenditures. “The wage credit of the program should affect all of these; looking at say, just employment
rates, is only a part of the picture,” he said.

Tim Johnson
www.CaliforniaBusinessMinute.com