Lost Opportunities: The Perplexing Persistence of Enterprise Zones.

Date01 September 2023

"Opportunity zones, hottest thing going," President Donald Trump touted his major antipoverty program, which he signed into law as part of the Tax Cuts and Jobs Act in December 2017. However, the legislation, designed to revitalize impoverished urban and rural communities through tax and regulatory relief to the private sector, was hardly new. It was merely the most recent version of "enterprise zones," the remedy prescribed by British Prime Minister Margaret Thatcher and American President Ronald Reagan in the 1980s. (1)

Enterprise zones, which would become "empowerment zones" under Bill Clinton, "opportunity zones" under George W. Bush, and "promise zones" under Barack Obama, had hardly been successful. With a few exceptions, they failed to make significant inroads against poverty. Republicans nevertheless have set aside their distrust of government, while Democrats have overcome their wariness of business, and each succeeding president has assured low-income Americans that this time, he would get it right.

Why do presidents from both parties keep resurrecting an idea whose time has never come? The need to act against poverty, the appearance of caring about poverty, the potential for patronage and perquisites, the legacy of public-private partnerships, the limits of the research on enterprise zones, the inertia of the antipoverty infrastructure, and the facade of frugality have combined to prolong the lives of the zones. After examining the record of, the research on, and the rationale behind federal and state enterprise zones, this study concludes that these presidents have been better politicians than businessmen, and the political advantages of enterprise zones continue to outweigh their economic benefits.

The Record

The American notion of enterprise zones (EZ) originated with Republican William F. Buckley, Jr., founder of the conservative magazine National Review. In his unsuccessful 1965 run for mayor of New York City, Buckley advocated tax incentives to encourage businesses to locate in underprivileged urban areas and to hire local residents. New York Democratic Senator Robert Kennedy incorporated Buckley's proposal as part of his 1968 plan to revamp Bedford-Stuyvesant, the predominantly African American neighborhood in Brooklyn. Buckley revisited the idea in his 1973 book Four Reforms, which he invited California Republican Governor Ronald Reagan to read. (2)

British enterprise zones were the brainchild of Peter Hall, a professor of urban planning, who sought to replicate in the United Kingdom the economic success of its loosely regulated, low-tax colony, Hong Kong. Although Hall was a socialist, conservative Prime Minister Margaret Thatcher adopted his idea, with her approval of a 1980 law that would establish seven enterprise zones across Great Britain. (3)

At the same time, Stuart Butler, a policy analyst at the conservative Heritage Foundation, was promoting the concept in the United States. "Creating new businesses" in distressed inner cities through tax and regulatory incentives, Butler argued, "means adding to the economy" instead of the traditional governmental approach of "redistributing it." (4)

Reagan espoused enterprise zones during his successful 1980 presidential campaign, and he called for their implementation in his 1982 State of the Union address. An enterprise zone proposal cosponsored by a pair of New York congressmen, Republican Jack Kemp and Democrat Robert Garcia, failed in committee in the House of Representatives in 1981. Another measure passed the Republican-controlled Senate in 1984, only to die in committee in the Democratic-controlled House during a presidential election year. "One of the problems we have encountered in advancing the President's enterprise zone initiative," Reagan aide Elizabeth Dole complained in June 1982, "is the perception that the president is really not committed to the proposal." (5)

Although enterprise zone legislation was floundering at the national level, it was flourishing in the states. In 1981, Connecticut became the first state to implement enterprise zones. Within a decade, thirty-eight states and Washington, D.C. would enact enterprise zone provisions. The legislative success of these state experiments encouraged federal officials to keep trying. (6)

Representative Kemp became Secretary Kemp in 1989, when newly elected Republican President George H.W. Bush chose him to head the Department of Housing and Urban Development. Kemp used his new platform to promote legislation creating seventy enterprise zones around the country. However, Bush's Office of Management and Budget pared the number to fifty before the Democratic Congress reduced it even further in 1989 to what Kemp called purely "symbolic" legislation. The next year the administration's Low-Income Opportunity Board coined the term "Opportunity Zone (OZ)" in calling for innovative methods of combating poverty, only to have the Domestic Council deride the acronym and discard the idea. (7)

At the end of April 1992, the trial of four Los Angeles police officers who had beaten an unarmed black man, Rodney King, resulted in no convictions. The verdicts unleashed five days of violence in the predominantly African American South Central neighborhood, claiming over $500 million of property damage and more than fifty lives. President Bush's response to the Los Angeles riots included an appeal to the Democratic Congress to pass a bill that would eliminate capital gains taxes on income obtained from the sale of property in enterprise zones. "That idea... is on the table right this minute in the Congress," the president pleaded, "and the Congress ought to pass it and pass it fast!" Congress would pass enterprise-zone legislation, but not the kind that the president envisioned. Congressional Democrats shrank Bush's 200 urban enterprise zones to twenty-five, while adding incentives for businesses to hire workers as well as a few new taxes. The day after he lost reelection in part because he had broken his promise not to raise taxes, Bush vetoed the bill. (8)

The candidate who defeated Bush, Democrat Bill Clinton, believed in his own version of enterprise zones. Unlike Reagan and Bush, Clinton entered the presidency with a legislature controlled by his party. When Congress passed and Clinton signed the Omnibus Budget Reconciliation Act of 1993, it contained the first substantial federal enterprise zone program. The measure provided $2.5 billion in tax incentives over five years in the form of a block grant. Clinton's approach differed from that of his Republican predecessors in four principal areas: 1) it substituted tax breaks connected to hiring targets for Bush's capital gains tax cuts; 2) it added public social service grants to tax incentives for private businesses; 3) it required local community planning; and 4) it created a federal supervisory board, chaired by Vice President Al Gore, to oversee the selection and administration of the zones. (9)

In other words, this Democratic model of public-private partnership relied more heavily on the public sector than did the Republican templates. As if to highlight this difference, Clinton employed the term "empowerment zones" to describe the six urban (Atlanta, Baltimore, Chicago, Detroit, New York City, and Philadelphia) and three rural (Mid-Delta, Mississippi; Rio Grande Valley, Texas; and Kentucky Highlands) areas that would be receiving up to $100 million, while applying the moniker "enterprise communities" to ninety-five regions that would obtain less than $3 million. Two years later, the Republicans took over both houses of Congress for the first time in four decades. So to achieve the expansion of the number of empowerment zones to forty in 2000, Clinton had to agree to a return to capital gains tax reductions instead of social service grants for jobs programs and construction of low-income housing. (10)

Republican President George W. Bush not only inherited Clinton's "empowerment zones," but he expanded their scope to include rural and urban "communities in transition." He revived the label "opportunity zones," acronym and all. The most prominent beneficiary of such assistance was New Orleans, which received considerable help under the Gulf Coast Opportunity Zone Act of 2005, which Congress passed and the president signed in the aftermath of Hurricane Katrina. (11)

Following the Bush presidency, Democrat Barack Obama took his turn at reviving--and renaming--enterprise zones. In 2013, he announced that San Antonio, Los Angeles, Philadelphia, the Choctaw Nation of Oklahoma, and the Appalachian region of southeastern Kentucky would be the first of twenty-two "promise zones." Restoring the Clinton hybrid of social service grants and tax relief for companies to invest and employ, but without going through Congress, Obama likened his approach to philanthropist Geoffrey Canada's acclaimed Children's Zone, which had "flooded" Harlem with educational, medical, and social safety nets. At his announcement, Obama surrounded himself with children from the Harlem Children's Zone Promise Academy. (12)

The next president, Republican Donald Trump, would build on Obama's "promise zones," even as he adopted George W. Bush's terminology and devotion to capital gains tax cuts. Trump's program, estimated to cost $1.6 billion over ten years, also reflected his party's preference for local governance. Before the Democrats reclaimed the House of Representatives in the 2018 midterm elections, the Republican congressional majority ensured that the governors of each state and territory, as well as the mayor of the District of Columbia, could designate up to one-quarter of the low-income community census tracts in their jurisdictions as opportunity zones, with the approval of the Secretary of Treasury. By May 2018, five months after passage of the enabling legislation, Treasury Secretary Steven Mnuchin had certified over 8,700 low-income and contiguous...

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