The Case Against Enterprise Zones

TRB

May 07, 1992|By TRB

WASHINGTON — Washington. -- "Now where did I put that urban policy? I know I've got one around here somewhere.''

George Bush isn't the only one in Washington desperately searching for something practical to suggest in response to the Los Angeles riots. Thus the sudden interest in ''enterprise zones.''

Jack Kemp, now Secretary of Housing and Urban Development, has been pushing enterprise zones since he was a pup of a congressman. He is rightly praised as the one member of the Bush administration who has shown he really cares about the tragedy of the underclass.

But enterprise zones are a gimmick that has more to do with Republican theology about taxes and regulations than with practical help for the poor.

The idea is to designate 25 or 50 (or 75 or 100) districts across the country as ''enterprise zones.'' These would be areas of especially high poverty and unemployment. Owners, investors and employees of businesses that set up in enterprise zones would get a banquet of tax credits and deductions and regulatory exemptions.

If you make the bribes rich enough, they undoubtedly will produce new businesses and jobs in the designated zones. But where will these businesses and jobs come from? There are three possibilities.

Some will be businesses that wouldn't exist at all without these incentives. Some will be businesses that move from or would otherwise set up in prosperous, crime-free areas that can spare a few jobs in a worthy cause. And some will be businesses enticed or deflected from areas almost as poor and grim, but not quite grim enough to qualify as a ''zone.''

The businesses most easily tempted into enterprise zones by any given package of incentives will be those from areas almost as bad. Businesses from prosperous areas will be second and truly new businesses will be third.

What will Jack Kemp say to a white working-class area that loses a factory to an ''enterprise zone''? This begins to look a bit like wholesale reverse discrimination. (And we know what George Bush thinks about that!)

What will Mr. Kemp say to a dry cleaner in competition with another dry cleaner a couple blocks away who is exempt from all sorts of business taxes?

What will he say to the ghetto resident who works for an already-established company and therefore pays more income tax than his next-door neighbor who works for a new one?

Inevitably, once a program like this gets going, the list of beneficiaries will be expanded. The number of zones will increase, the rules defining a ''new'' business will be loosened, time limits on various benefits will be extended. That prospect doesn't bother the Republican theologians, who see lower taxes and looser regulations as good in all circumstances. But each expansion will simultaneously increase the cost of the program in lost revenue and lower its effectiveness by reducing the relative advantage of being in a ''zone.''

The image ''zone'' enthusiasts like to promote is of the ghetto resident, relieved of his burden of taxes, suddenly discovering the inner entrepreneur.

But that is not how enterprise zones work even in theory. After all, is it likely that someone with the brains and gumption to overcome the poverty, the crime, the squalor, the broken families, the drugs, the lousy education, the racism and go on to found his own business is currently thinking, ''Heck, I really can't be bothered, because if I succeed and sell my company some day I'll have to pay a 28 percent capital-gains tax?''

The real point of most of the tax breaks is to entice outside investors to put their money into these troubled areas.

Bribing rich people to help poor people, rather than helping poor people directly, is a popular approach because the cost of the tax breaks doesn't show up on the government books. But the middleman will have to take his cut. And this approach enlarges the deficit just like a traditional spending program. Of course if you wish to believe, in 1992, that this time the tax cut really will -- honest injun -- bring in more revenue than it loses, well, I guess I can't stop you.

Last month the Congressional Budget Office produced a study of the low-income-housing tax credit, a similar effort to help the poor by bribing the rich which the Bush administration is currently trying to get extended.

The CBO concludes that it's very bad value for money: reducing unsubsidized housing by three units for every two units produced under subsidy; benefiting investors more than tenants; siphoning off vast sums to lawyers, accountants and bankers. Enterprise zones would work the same way.

As for regulatory exemptions, no one can object to cutting red tape. But regulations are either sensible or they are not. If they are not sensible, they should be abolished everywhere, not just in some ''zone.'' If they are sensible, why should residents of a ''zone'' be denied their benefit? There is actually a serious argument that protections for health, safety and the environment are luxury goods that poor people should have less of. But I dare Jack Kemp to make it.

Enterprise zones, in short, are just another government boondoggle, albeit a boondoggle of a characteristically Republican kind.

TRB is a column of The New Republic magazine, written by Michael Kinsley.

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