Rethinking enterprise zones

Three reports by three respected organizations in three consecutive years, all finding that California’s enterprise zones do not live up to their promise, ought to be enough. At an annual cost of close to half a billion dollars, the zones should be cut severely to help close the state’s budget gap. Gov. Jerry Brown wants to eliminate them altogether, a scenario that also deserves consideration.

Enterprise zones were one of a number of programs — along with redevelopment agencies — created as a way to revitalize downtrodden areas. But whereas redevelopment agencies — also targeted by Brown for elimination — use bond sales to finance construction projects, enterprise zones were intended to stimulate job growth by providing tax credits to companies that hired workers within the 42 designated zones.

Even with a budget gap that looks as wide and deep as the Pacific Ocean, it would be hard to argue for cutting a program that actually created jobs. Too many people are hurting for work, and employment is the backbone of meaningful economic recovery. But on Monday, the California Budget Project released a report saying that enterprise zones don’t create jobs. That’s in large part because they’re not even structured properly to do so. Employers get the tax credit for hiring, not for increasing employment. In other words, an employee leaves, a new one is hired for a position that might well have been filled anyway, and the company gets the tax benefit. The program, which includes zones in Los Angeles, Long Beach and Compton, has expanded greatly, with the cost to the state rising from $15.6 million in 1993 to $299 million in 2003, then to $465 million in 2008.

The Legislative Analyst’s Office had the same criticisms of enterprise zones last year. The Public Policy Institute of California, a think tank, published similar findings the year before that, reporting that the employment picture within most enterprise zones was no different from that in neighboring areas that lacked the designation.

But the 2009 report also found that not all enterprise zones were alike. Some were more effective at job creation than others, especially those with outreach programs to bring in new employers. Zones heavy in manufacturing jobs were less effective at stimulating job growth.

With the state’s budget in crisis, this is the right moment to press the reset button on enterprise zones. If the state can afford them at all, it should rebuild from scratch, with a far smaller program in a few areas where the obstacles to job creation are great but where the zones have a good chance of succeeding in stimulating hiring. Stricter accountability is needed to make sure that state residents are getting jobs in return for the largesse granted to employers in the zones.