Obama's 'Promise Zones' Are About Votes, Not Growth

As part of the White House's 2015 budget proposal, President Obama is proposing 40 "Promise Zones" sprinkled strategically around the country. On their face, promise zones, previously generally called enterprise zones and sometimes now called opportunity zones or empowerment zones, would seem to be an economic development initiative designed to increase investment and jobs in urban or rural areas that are lagging in terms of tax base and job creation. However, research on past similar policies has confirmed little if any gains from such policies. The obvious question is: why do politicians keep creating them?

Enterprise zones are specially designated regions that receive various economic and governmental advantages in order to attract capital investments and jobs to these areas. The advantages often include increased government assistance (if that is not an oxymoron), faster regulatory and permit approvals, and, most importantly, tax breaks. The tax breaks offered have included lower sales taxes, property tax reductions, investment tax credits, and job creation tax credits. The most important of these is often the job creation tax credits which can offer thousands of dollars in tax saving to a company per job created.

Research shows limited success at best. A review of 75 enterprise zones by two planning professors found that while the new jobs created did bring in more new tax revenue than the value of the tax breaks used to attract them, most of the jobs used to collect the tax breaks would have been created somewhere in the state anyway. When these unnecessary tax breaks are subtracted from the gains on the jobs that would truly not have existed without the enterprise zone, the result is that state and local governments lose money on the programs.

Interestingly, some criticism of this study has focused on the neglected cost of those tax giveaways and the cost of the additional government support provided to these designated areas. If a cost is assigned to those costs, the result is even more pessimistic about these policies.

If economists and planners are not excited about the return on investment from enterprise zones, why do politicians still like them? The answer is that that show a commitment to creating jobs and that they can appear successful without careful thought. In fact, if you google "enterprise zone success stories" you get almost two million results. Yet, all the results are from state or local governments or consulting firms who make money in ways related to enterprise zones.

Politicians do not really create jobs. They can scare them away if they choose. Other than that, the most power that politicians have is to relocate a job by convincing a business person to place the job in their jurisdiction instead of someplace else or by attracting capital into one industry at the expense of another. They do this with economic incentives, usually tax breaks.

Creating jobs in a designated area by giving the business a special deal is only a successful economic development strategy at a small scale. It may be a large benefit to a long-suffering locale that needs jobs, but when you look at the big picture the losses become visible. Some community did not get that job because it was not able to offer such an attractive tax break. Some taxpayers will face higher taxes to make up for the revenue given away inside the enterprise zone.

President Obama already has fifteen of these Promise Zones in process and now is proposing to add forty more. The president has advisors who know the research on such projects is negative, so the people putting this proposal together know it does not really work when examined from the national level. But it looks good to voters and allows the President to show he cares about jobs. He is not alone in this. Governor Cuomo (D-NY) is running television ads offering businesses that move to New York ten years of tax breaks.

Politicians will always support policies with visible, concentrated winners and diffuse hard-to-find losers because the winners present an easy press conference or photo opportunity. Politicians are counting on people to see the jobs created and think the policy succeeded without understanding that the same jobs would likely have been created regardless, perhaps just a bit down the road or across town.

The fact that the President is renaming enterprise zones as Promise Zones is a hint that he knows the policy is a bad one; the new name is a marketing gimmick. The President is not proposing Promise Zones because they work, but because he thinks they can attract votes.