COLUMN LEFT / ELLEN APRILL : Enterprise Zones Aren’t All They Seem : Income-tax benefits help big business, not local stores.
America needs to encourage small, locally owned businesses in the inner cities. Small businesses create the majority of our new jobs, serve local needs and have a bigger stake in community stability.
In the wake of our troubles in Los Angeles, a bipartisan chorus clamors for the establishment of federal enterprise zones in our inner cities. Federal enterprise zones, unlike state enterprise zones, operate to stimulate growth in designated areas primarily by offering breaks on income taxes. Their boosters suggest that these zones will immediately and without cost encourage the creation of small, locally owned businesses along with the jobs, innovation and commitment to community that these businesses generate.
Federal enterprise zones, however, will not have these effects. They will benefit the owners of medium to large businesses, not members of the inner-city community. With very limited exceptions, the proposed tax breaks will help a business only if it owes federal income tax. They do not reduce the cost of starting or operating a business that has no income-tax liability. Because most small businesses experience tax losses rather than taxable income in their first few years, such breaks provide them no immediate good.
Consider one suggestion that President Bush is making--elimination of the capital-gains tax on assets in the enterprise zone. Such a tax break produces a benefit only when the property is sold at a profit. Even then, the capital-gains preference does not benefit the business itself--only the owner who is selling out. It will also likely raise the price of the assets. The preference thus rewards the seller who is ending ties to the community and burdens the buyer who would establish such ties.
If income-tax breaks are available, those who can use them--here, owners of larger businesses--will figure out a way to use them. Tax breaks are not free. They reduce tax revenues, and the lost revenues must come from somewhere. We need to view enterprise zones as a transfer of funds from the federal government to businesses.
Is the benefit gained worth the cost? Our past experience with tax incentives indicates that their cost can be heavy, often much heavier than expected.
One study reports that a British enterprise zone plan has created approximately 8,000 jobs at an estimated cost to taxpayers of more than $500 million--more than $60,000 per job. A 1989 Treasury Department report concluded that a tax credit designed to stimulate the Puerto Rican economy cost U.S. taxpayers $18,523 per employee, or 125% of average annual compensation. One person’s tax incentive represents another’s tax loophole. Remember the tax shelters of the 1980s, which resulted from tax incentives gone awry.
We may decide that we want and need to encourage larger businesses to locate in the inner city, whether or not the owners have ties to the neighborhood, whether or not the relocation creates new jobs. We may decide that we are willing to bear the cost of tax breaks designed to achieve that end. But we may also decide that we would better devote federal resources to other problems of our cities, such as health, education and job training.
In our eagerness to do whatever we can to improve the situation, we must not lose sight of the purposes, costs, and limits of the programs we propose.
