Tax Breaks Aimed At Boosting Cities Yield Mixed Results

It's been 15 years since then Congressman Jack Kemp became a champion of "enterprise zones" - giving tax incentives to businesses to locate in run-down cities.

Mr. Kemp's sudden elevation to vice presidential candidate raises the profile of this popular Republican urban-revival strategy and is prompting a fresh look at whether it works.

Here in this down-and-out mill town, Andy Rod is an ardent supporter. "We get fantastic workers," says the vice president of American Distribution Resources (ADR).

In an old brick former Sears Roebuck building, ADR employs some 60 people, most of them local residents, to pack office products that are shipped around the region. ADR is so enthusiastic about the concept, it has decided that it will only operate in such zones.

Nationwide, there are hundreds of similar projects. But the results are mixed. Some cities, such as Louisville, Ky., Elizabeth, N.J., and Evansville, Ind., appear to have parlayed tax breaks into net job growth and investment. But other cities have yet to stem their job losses.

State-sponsored projects are called enterprise zones, while federal efforts are dubbed empowerment zones or empowerment communities.

Neither effort is exactly the supply-side approach Kemp had in mind when he and a Democrat, former New York Congressman Robert Garcia, teamed up in 1981 to introduce laws intended to help save urban areas. "Kemp's idea was tax incentives and regulatory relief," says Marilyn Rubin, a professor at John Jay College in New York. Now, in addition to tax relief, substantial amounts of federal - and sometimes state - dollars are handed out.

States picked up on the concept before Congress acted. Now, 37 states offer their own versions of the zones. Presidents also seem to love the concept. "There has not been a State of Union address since the 1980s when the president has not mentioned them," says Ms. Rubin. This year, the Clinton administration sought to expand the program, which two years ago gave six cities $100 million apiece. But Congress, looking for results from its first effort, balked at the $200 million budget request.

On Monday, the accounting firm Price Waterhouse and the Rockefeller Institute will release an assessment of the federal program.

Philadelphia Mayor Edward Rendell says it's too soon to tell how the program is doing in his city, which won one of the $100 million awards. Only last month, Philadelphia gave out its first loan to a business. Still, Mr. Rendell says he recently told President Clinton and Vice President Al Gore that the federal incentives alone won't reduce poverty. "The incentives will improve conditions in the zone, but they will not improve conditions enough in the zones in my judgment," he says.

Experts agree there is only so much the programs can actually do. "If you are looking for dramatic turnarounds from severe distress to a thriving community you will not see it," says Michael Allan Wolf at the University of Richmond, in Virginia. But, Mr. Wolf, editor of the EZ Gazette, adds, "If you define success as small steps towards becoming a business-friendly environment, you will see it."

Margaret Wilder, a professor of urban planning at the State University of New York in Albany, says the majority of zones do have increased business activity from either the expansion of existing firms or new companies.

She says one of the most cited examples is Louisville, Ky., which says it has attracted over $1 billion in new investment. "When it works, it's beautiful, but generally the implementation comes up short in certain ways," she says. For example, Wilder says states often don't tie tax benefits to hiring local workers. "Even when they are generating new zones, the jobs may not be going to low-income residents of the zone," she says.

James Johnson, an urban expert at the University of North Carolina at Chapel Hill, says the concept has critical faults. He says businesses are drawn not as much by tax breaks as by access to markets, the quality of the work force, and crime rates. "Most zones strike out on all three areas," he says.

At ADR in Passaic, N.J., Mr. Rod disagrees. He calls his work force "loyal" with a very low turnover. He says 70 percent of the employees walk to work. "You can make a lot less money if you can walk to work and not have to drive to some other place," says Rod. And, he discounts the problem of crime in the area. "It's no worse than anywhere else," he says, but adds, "the public doesn't have to come to our distribution centers." His company recently opened up a similar facility in Baltimore and hopes to expand to Boston as well.

Even when a zone appears to be working, the impact may be limited and therefore hard to gauge. Take Passaic, a mill town that has been struggling for the past decade. The enterprise zone started in 1994 and now the city boasts that it added about 570 full-time and part-time jobs last year. "It has been a great lift for the city," says Mayor Margie Semler.

But in June the unemployment rate for the entire city was 12.6 percent, well above the national rate of 5.4 percent. And, employment for the entire city, which is only 3.2 square miles, has not moved up much.

But, the mayor views the effort differently. The rebate on state sales taxes paid by companies in the zone has added $1.6 million to the city kitty over the last two years. Most of the money has gone toward road and sewer improvements. It has yet to start a marketing campaign.

Once Passaic does start to market itself, one of its challenges will be to differentiate itself from the 26 other zones in the state. If there are too many zones, says Ms. Semler, "we'll all be on the same playing field." That's not exactly what ex-quarterback Kemp had in mind.