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Enterprise zones as an instrument of urban policy: a review of the zones in South Central Los Angeles.

Are tax incentives offered by enterprise zones effective in encouraging participation of commercial establishments? Research on tax credits taken by firms in the five zones/incentive areas of South Central Los Angeles documents participation rates of firms there.

Enterprise zones are depressed areas, specifically designated as such by the state, and involve the application of tax incentives and regulatory relief to encourage private investment, redevelopment and economic well-being in these specific, geographic areas. The purpose of enterprise zones is to revitalize economically distressed areas and to increase employment opportunities, particularly for zone residents. The enterprise zone concept requires less government intervention by removing regulatory barriers which restrict market entry. Ideally, the private sector would be encouraged to locate in the zones, thereby generating income which would be used to revive the existing neighborhoods and create new jobs.

Currently, 35 states and the District of Columbia have enacted enterprise zone legislation and have established 3,172 enterprise zones. Within these zones, 11,658 firms are participating in the various state programs, have invested more than $40 billion and produced 663,885 new jobs.

The eligibility requirements for a geographic area to be selected as an enterprise zone vary from state to state, but an overwhelming number of states require high unemployment, low income levels, pervasive poverty and population decline as major eligibility criteria. Similarly, the states offer a variety of tax incentives to firms that are located in enterprise zones. The most frequently offered incentives include employer tax credit, sales or use tax credit, and property tax credit.

This research presents an analysis of the enterprise zone progam in South Central Los Angeles and a determination as to whether enterprise zones, when used as an instrument of urban policy, represent viable incentives to encourage participation from the firms in the South Central Los Angeles area.

California Enterprise Zones

The California enterprise zone program was established in 1984 and amended in 1989. It established two concurrent programs: the Enterprise Zone Act, which was introduced by Assemblyman Pat Nolan, and the Employment and Economic Incentive Act, which was introduced by Assemblywoman Maxine Waters. Of the 34 areas of the California enterprise zone program, 25 are enterprise zones (Nolan) and 9 are incentive areas (Waters). California zones had created 7,041 jobs and $382 million in business investment by the end of 1990.

Both the Nolan and Waters programs offer incentives for companies that locate or expand in the enterprise zones or incentive areas. Some of the incentives included in the Nolan or Waters programs are as follows:

* tax credit for hiring unemployed individuals for at least three months or for hiring individuals enrolled in a job training program,

* tax credit equal to the amount of sales tax on purchases of manufacturing machinery,

* employee tax credit of 5 percent of wages earned up to $10,500,

* lender income tax deduction of interest income for loans to enterprise zone businesses,

* income tax deduction of 40 percent of real and personal property in the year purchased of up to $100,000 per year (Waters) or $10,000 per year (Nolan),

* a 15-year carryover of net operating losses applied against taxable income, and

* local fee waivers and other development incentives.

In addition to state tax credits and state assistant services, the City of Los Angeles also offers business assistance when applying for loans, additional support with building permits, job training linkages and management assistance.

Eligibility for enterprise zone or incentive area designation differs between the Nolan and Waters programs. To be eligible as a Nolan enterprise zone, an area must have a population of at least 1,000 and generally must meet the criteria for Urban Development Action Grant program for each census tract in the area. For the Waters incentive area program, the area's population must be at least 4,000 if within a metropolitan statistical area (MSA) or 2,500 if non-MSA and it must TABULAR DATA OMITTED have unemployment and poverty rates of at least 150 percent of the national average.

Registration in Incentive Areas. Firms located in the incentive areas (Waters) must register to participate in the state enterprise zone program, and a determination must be made by the California Department of Commerce as to whether the firm meets the prerequisites for participation. To qualify for certification, a business must meet one of the following criteria:

* at least 50 percent of its employees are residents of high-density unemployment areas; or

* at least 30 percent of its employees are residents of high-density unemployment areas, and the business contributes to an approved community service program; or

* at least 30 percent of its owners are residents of high-density unemployment areas.

Only certified firms in the incentive areas can take advantage of the tax benefits offered by the state enterprise zone program. Another advantage of registering with the program is that a familiarity is developed with the zone managers which often facilitates problem solving aspects of the program.

Studying South Central L.A.

There are five zones in South Central Los Angeles, consisting of two enterprise zones--Central City and Pacioma--and three incentive areas--Eastside, Greater Watts and Wilmington/San Pedro.

The purpose of this study was to identify the factors related to business activity and employment in these zones, as well as the socioeconomic characteristics of businesses located in the enterprise zones.

Zone administrators provided data pertaining to the economic, social and demographic factors of the enterprise zone they administer. This information included the number of firms, designation date of the zone, new business investment, number of new jobs, new business licenses and zone population. Data received from the zone administrators for Central City and Pacioma included all firms located in the enterprise zones; while data received from the three incentive areas--Eastside, Greater Watts and Wilmington/San Pedro--are available only for those firms which have formally enrolled as participants in the incentive area program. Participation from firms in these three zones generally is higher than from the enterprise zones, which do not require registration.

Another set of data was obtained from the business firms. A list of firms within each of the five zones in South Central Los Angeles was obtained from the five zone administrators. A sample of 447 firms was then selected from the population of 4,015. During the months of November and December 1992, each firm was telephoned and questioned regarding the number of employees, revenue of the firm, investment in capital assets, and the types and amounts of credits taken by the firms. Of the firms contacted, 373 supplied data used in this analysis. Of the sample, 31 percent of the responses were from Central City, 10 percent were from Pacioma, 19 percent from Eastside, 22 percent from Greater Watts and 18 percent from Wilmington/San Pedro. Based on the information from the zone administrators and the survey of businesses, profiles of the enterprise zones and incentive areas were compiled; these profiles are presented in Exhibit 1.

Businesses in the Zones

Exhibit 2 breaks down the data on the 373 firms of the sample by zone, type of firm, number of employees and sales volume. Exhibit 3 shows how the firms of the five zones took advantage in 1991 of the incentives offered through the Nolan and Waters programs. Thirty-seven percent of the firms surveyed in all five areas were actively participating in the enterprise zone or incentive area programs. It is important to note that, in the incentive areas of Eastside, Greater Watts and Wilmington/San Pedro, all of the firms surveyed are certified and registered with the incentive area program.

Enterprise Zones. Both Central City and Pacioma were designated as enterprise zones in 1986. Most of the firms in the two zones are involved in retail trade, have 10 or fewer employees, and earn between $500,000 and $2 million. Most of these firms were started between 1981 and 1990--59 percent in Central City and 50 percent in Pacioma. More than 85 percent of the firms surveyed in these zones do not take advantage of the credits offered by the enterprise zone program.

Incentive Areas. As in the enterprise zones of Central City and Pacioma, most of the firms in the incentive areas of Eastside, Greater Watts and Wilmington/San Pedro are retail with 10 or less employees. Most of the businesses in all three areas have sales between $100,000 and $500,000; however, while at least one-fifth of the firms in Eastside and Wilmington/San Pedro earn between $500,000 and $2 million, only 8 percent of the Greater Watts businesses have sales in that range. The majority of the businesses were started between 1981 and 1990.

It is clear that, while some differences exist between the enterprise zones and the incentive areas, businesses in the two programs are fairly homogeneous in terms of type, size and sales. Significant differences, however, occur in terms of utilization of incentives. While barely 10 percent of the firms in the enterprise zones use the tax incentives available to them, between 38 and 54 percent of the firms in the three incentive areas take advantage of the credits.

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Conclusion

This study focused on firms operating in designated enterprise zones and incentive areas of South Central Los Angeles and the extent to which they are taking advantage of the incentives available to them through the enterprise zone and incentive area programs. The firms in the three incentive areas showed higher participation rates than those in the areas classified as enterprise zones. This is attributed to the fact that, in the three incentive areas, firms must register before they can participate; therefore, zone administrators work with a smaller number of firms and usually can have more successful marketing efforts. In the two enterprise zone areas, no registration is required. Zone administrators keep track of all firms located in the zone and must extend greater efforts to record the activities of the various firms.

Thirty-seven percent of 373 enterprise zone and incentive area firms responding to the author's survey were participating in the enterprise zone program. Participation rates ranged from 9 percent for Pacioma firms to 54 percent in Wilmington/San Pedro. In 1991, 42 percent of the firms took advantage of the employer hiring credit, 36 percent used the sales/use tax deduction and 12 percent used the enterprise zone property tax deduction. These data represent only about 9.3 percent of the 4,015 firms located in the zones.

The authors conclude that enterprise zones and incentive areas have contributed to business development and have created new jobs in South Central Los Angeles; but the areas designated as enterprise zones need continuous attention, increased funding and a complementary federal enterprise zone bill to achieve the level of revitalization needed in South Central Los Angeles.

Author GLENDA GLOVER, Ph.D., CPA, is an assistant professor in the Department of Accounting of the School of Business at Howard University in Washington, D.C., and president of the National Center for Enterprise Zone Research, Washington, D.C. J. PAUL BROWNRIDGE is the city treasurer for the City of Los Angeles, California, and a former member of GFOA's Executive Board.
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Author:Glover, Glenda; Brownridge, J. Paul
Publication:Government Finance Review
Date:Jun 1, 1993
Words:1858
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