EMPOWERMENT ZONES

An empowerment zone is an economically distressed American community that receives tax incentives and grants from the federal government under the Empowerment Zones and Enterprise Communities Act of 1993. The act provided for the designation of nine empowerment zones nationwide—six urban and three rural—as well as 95 enterprise communities, which receive similar benefits on a smaller scale. A second round of designations was proposed in 1996 that would create 20 new empowerment zones and 80 new enterprise communities. The term "empowerment zone" comes from the program's goal of providing resources and opportunities that will empower poor persons to become self-sufficient.

In order to be designated as an empowerment zone, a community had to meet a series of eligibility criteria based on its economic distress and its development potential. It then had to apply for consideration by submitting a detailed strategic plan outlining the coordinated public and private efforts that would contribute to its renewal and growth. The nine empowerment zones receive a number of tax incentives designed to stimulate employment and business investment in the region. In addition, each zone receives a block grant of $100 million over two years toward social service and economic development programs. Under the 1996 proposal to create 20 new empowerment zones, each zone would receive $75 million in grants over three years.

About 500 communities applied for a coveted spot in the $3.8 billion empowerment zone program by the June 1994 deadline. The six urban U.S. empowerment zones, which were announced in December 1994, are Atlanta, Baltimore, Chicago, Detroit, New York City, and a joint effort between Philadelphia and Camden, New Jersey. The three rural empowerment zones are in the Kentucky highlands, the mid-delta region of Mississippi, and the Rio Grande valley in Texas. The designation lasts for ten years.

IDEA EVOLVED OVER 15 YEARS

The main ideas behind empowerment zones—using tax incentives to encourage business investment, improve employment opportunities, and stimulate economic growth in certain geographical areas—originated in the late 1970s. Geoffrey Howe, a member of the British Parliament, announced the first "enterprise zones" in 1978 to help improve economic conditions in the dock districts of London. The system implemented in England reduced government restrictions in order to encourage the formation of new businesses in impoverished areas. It met with limited success, however, because it did not include provisions for improving the infrastructure of the urban areas, which was found to be necessary for the new businesses to succeed.

In the United States, the zone concept gained its first supporters among leaders of the Republican Party, which advocated an overall reduction of government influence. In the early 1980s, Ronald Reagan included enterprise zones in the urban policy platform for his presidential campaign, and Senator Jack Kemp introduced the first bill featuring enterprise zones in Congress. The idea gradually expanded its base of supporters to include more liberal members of Congress, such as Democrats Robert Garcia and Charles Rangel of New York, as well as the leaders of prominent minority organizations, such as the National Urban League and the National Association for the Advancement of Colored People (NAACP).

The first enterprise zone legislation enacted in the United States came in 1987, with the passage of Title VII of the Housing and Community Development Act. Rather than providing tax incentives, the act was intended to relax federal regulations and coordinate the efforts of existing programs in the designated zones. Although the Department of Housing and Urban Development (HUD) received applications from 270 distressed communities for assistance under the program, it never designated any enterprise zones. When George Bush became president, he also voiced his support for the idea of creating enterprise zones to revitalize urban areas. Several bills were introduced during his administration, but Bush vetoed the two that passed because they included tax increases. This development meant that no federal enterprise or empowerment zones were created in the United States during the 1980s, despite widespread support for the idea.

In the meantime, many states adopted the enterprise zone idea and started their own programs. According to Marilyn Marks Rubin in Public Administration Review, 37 states had enacted some variation of the enterprise zone concept by July 1993, and 25 of these states claimed that their programs had created jobs. The state programs all differed in their eligibility criteria, types of incentives, and methods for measuring success or failure. Consequently, evaluating and comparing the state programs was problematic.

President Bill Clinton supported the idea of empowerment zones during his 1992 campaign, but he proposed several changes to the plans put forth by previous administrations. Most significantly, the Clinton plan combined tax incentives, to lure new businesses to the zones, with grants—or "targeted government investment"—to help improve the zones' social and economic infrastructure. The Clinton plan also differed in that it provided for two tiers of assistance by designating nine empowerment zones and 95 enterprise communities. The Democrat-controlled Congress passed the Empowerment Zones and Enterprise Communities Act in May 1993.

SPECIFICS OF THE CLINTON PLAN

For a community to be considered for designation as an empowerment zone under the act, it had to demonstrate economic distress. Some of the measures of economic distress include high levels of unemployment, a poverty rate of at least 20 percent, a declining population, and a pattern of disinvestment by businesses. In addition, an empowerment zone community had to show the potential for economic development. Communities could meet this requirement by having public and private resources available to aid in the renewal process, and by involving various community groups and other interested parties in developing and implementing the strategic plan.

Once a community met the economic distress and development potential criteria, it had to apply for the program with the help of its local and state governments. The application for the empowerment zone designation required communities to submit a strategic development plan—incorporating the input of all affected members of the community, from business and government to church groups and community organizations—and identify sources of private funds and support for the renewal effort. Finally, the community had to develop baseline measurements and benchmark goals to evaluate the success of the program.

The nine communities that were designated as empowerment zones receive a number of tax incentives to help stimulate business activity. In order to create jobs for area residents, employers receive a 20 percent wage credit for the first $15,000 paid to a resident of the empowerment zone, in addition to tax breaks for any expenses incurred to train these workers. The credits can be applied to full- or part-time workers, but not to workers who are closely related to the business owner, who own part of the business themselves, or who work for golf courses, massage parlors, liquor stores, gambling facilities, or a number of other types of businesses.

In order to encourage investment in the zones, the act allows businesses to exclude from taxation 50 percent of any capital gains from such investments. It also provides tax-exempt bond financing for the purchase of certain properties within the zones, and increases the allowance for depreciating such properties by $10,000 to $20,000 in the first year (which has the effect of reducing taxes). In contrast to empowerment zones, which receive all of these benefits, enterprise communities are eligible only for tax-exempt bond financing.

Each empowerment zone also receives a block grant of $100 million over two years toward the economic development programs included in its strategic plan. Such programs might focus on reducing drug abuse and crime or providing affordable housing.

Each enterprise community receives a block grant of $2.8 million. Another provision of the act was to establish a Specialized Small Business Investment Company (SSBIC) in each empowerment zone. An SSBIC is a private lender that receives matching funds from the Small Business Administration for its investments in empowerment zone businesses. The SSBICs are intended to become "one stop capital shops" and distribute $300 to $400 million in loans and equity investments to zone businesses over a five-year period.

RESULTS OF THE EMPOWERMENT ZONE
PROGRAM

Several years after it was instituted, the Empowerment Zones and Enterprise Communities Act of 1993 has yet to show strong results in the designated cities. In a 1998 assessment of federal empowerment zones for Planning, Renee Berger cited two main problems with the program: the slow timetable for implementation, and infighting amongst politicians and various interest groups. The coordinating committees in some cities spent the first year or more after designation creating organizational structures for their zone programs and formulating the performance benchmarks required to obtain federal grants. This process was complicated by conflicts between mayors, city councils, government agencies, and community groups that all wanted to have a say in the implementation process.

In Detroit, for example, a coordinating council consisting of community activists, religious leaders, business representatives, and government officials was formed to create the empowerment zone application. The strategic plan they developed sought to establish an independent nonprofit corporation to oversee zone programs and funds. After the city was designated as an empowerment zone, however, the Detroit City Council worried that an autonomous corporation would undermine their oversight responsibility. This impasse was finally resolved through a compromise in which the city council reviews all contracts signed by the corporation, but only after a six-month delay. Other cities experienced problems in creating the performance benchmarks required for the empowerment zone program. For instance, delays of six to nine months occurred when HUD changed the forms that were required to report the benchmarks. Furthermore, some zone cities came into conflict with their state governments, which administered the grant funds, so that the money did not arrive in timely manner.

Some experts claim that the positive results reported by empowerment zone cities have often been overstated. For example, statistics on the number of jobs created sometimes includes transfers from one region to another. In addition, many of the businesses that locate in the zones are very small, so if they create jobs at all, the jobs tend to pay less and offer less security than positions with larger firms. Finally, some of the new private sector investments reported—such as a $750 million Chrysler engine plant in Detroit—were in the works well before the empowerment zone designations were announced. Still, the program has shown some successes, and other experts argue that it is too soon to evaluate the results. "There is no doubt that the initial planning phase of the zone program was extremely valuable," Berger wrote. "The plans themselves provided clear directions, minimizing post designation debates over program initiatives and priorities. As to whether the toolbox of waivers, preferences, and financing incentives—including [grant] funds—will make a real difference in empowerment zones, the jury is still out."