An Urban Enterprise Zones Primer
Although locating in an enterprise zone won't work for every firm, those that do locate in such zones can achieve substantial cost savings while helping to spur a community's economic development.
Dan Calabrese (April 2012)
Urban enterprise zones are an idea that emerged in the 1980s and gained widespread popularity in the 1990s as a way of revitalizing particular areas within major cities. While the approach varies from state to state, basically, a particular district is designated as an "urban enterprise zone" for special tax breaks or exemptions for those who either start businesses or make investments in these areas.
The creation of urban enterprise zones was spurred in part by a desire to see re-use of existing urban buildings - an outcome that not only made use of existing assets but, in many cases, obviated the need for expensive environmental remediation that tends to come with demolition of old structures and the construction of new ones.
Similar Programs, Different Names
Enterprise zones are available in at least half of the states, although they sometimes go by different names. (In Michigan, for example, they are called Renaissance Zones.) And each state tends to adopt its own approach to how the program works.
In New Jersey, for example, enterprise zones offer sales tax reductions and credits against the state's corporation business tax. But the benefits are conditional, based on how many employees the company has and where they come from.
In Florida, benefits include a combination of tax credits on sales and corporate income taxes, as well as sales tax refunds for things like building materials, business machinery, and electrical energy if they are used in the enterprise zone.
In Illinois, businesses locating or expanding in an enterprise zone can receive an exemption on the retailers' occupation tax paid on building materials, an investment tax credit of 0.5 percent on qualified property, and a jobs tax credit for each job created within the zone if the business hires a "certified dislocated worker or economically disadvantaged individual."
In Utah, by contrast, the focus is on income tax credits. Most states designate zones on the basis of economic need. The number of zones can vary dramatically from state to state. New Jersey has only 12 enterprise zones, whereas Ohio officials report that they have 363 active enterprise zones, with more than 1,345 active exemptions.
Most states maintain data that illustrate the effectiveness of the zones. An annual report issued by the Florida Department of Revenue, for example, says that in 2009/2010, Florida saw 7,559 new businesses sited within enterprise zones at a cost of $67.6 million in state incentives and $19.9 million in local incentives.
But enterprise zones are not without their detractors. In New Jersey, which makes extensive use of enterprise zones and has had the program in place since 1984, Governor Chris Christie recently proposed eliminating the zones - based on his belief that they were not a cost-effective way of spurring economic development. Christie's proposal stemmed largely from a report that indicated reduced sales tax revenues, which were being recaptured and given to municipalities to fund economic development programs, were not being spent effectively for that purpose.
According to Kevin Roberts, a spokesman for Governor Christie, the Governor has backed off his desire to eliminate urban enterprise zones completely, but did make a change in the program.
"We decided that we would maintain the lowered sales tax rate, but rather than return the sales tax that's collected to the municipalities for these programs, the state would keep it," Roberts said.
Other states have changed their programs as the overall impact of tax policies has changed. In Ohio, the state's enterprise zone program put a heavy emphasis on exemptions for personal property taxes; however, the program's emphasis changed when the state phased out tangible personal property taxes altogether.
"That had been an important component to our enterprise zone program - that local governments could offer reductions and incentives and reduced levels of personal property tax - so that is no longer such a key part," said Chris Schmenk, director of the Ohio Department of Development.
Schmenk said Ohio recognized it wasn't enough just to offer personal property tax exemptions in certain zones - a belief that was supported by her own experience in industry: "I was with a company that did have intensive investments in machinery and equipment, and [personal property taxes] were a huge concern.I think they made Ohio less competitive."
Lauren Fink, a community development administrator at the Virginia, Department of Housing and Community Development, sees the state's enterprise zone program as one part of a larger package of efforts designed to create a positive environment for business and growth.
"Something that we are very cognizant of is the fact that (the Virginia Enterprise Zone) is not the silver bullet to singlehandedly fix economic conditions in Virginia," Fink said. "The program is meant to be used in conjunction with other available local, state, and federal programs, with the intention of improving the business climate in targeted areas throughout Virginia. Our goal is to improve the quality of life for Virginians by finding ways to leverage private-sector investment by offering incentives that promote job creation/retention and the investment in real property in economically depressed areas of the state."
In 2010, the last year for which numbers are available, Fink said Virginia spent more than $271 million on enterprise zone tax breaks on real property investments. The result was 950 new full-time jobs.
You'll Do Well, If.
For businesses interested in applying for benefits or exemptions within an urban enterprise zone, the best way to find out specifically what kinds of benefits are available is to check with the specific administering department in the state that offers the zones. (See the online chart at www.areadevelopment.com/urban-enterprise-zones for links and contact information.)
But as a general rule, businesses are most likely to do well if they:
- Hire a sizeable number of employees to work within the zone, particularly (in some states) if the new employees are people who have been out of work for some time;
- Will be making major capital investments in the form of equipment or fixtures;
- Will be spending money to improve the real property in which they'll be operating;
- Will be doing business in a depressed area; or
- Will be re-using an urban building that is vacant or partially vacant, especially if it is already connected to usable infrastructure.
In some states, businesses can also qualify for additional credits if they make contributions to the community, offer child care on-site, or offer incentives to employees to use mass transit or other environmentally friendly forms of transportation.
In most cases, local governments or economic development agencies administer the programs using tax incentives passed into law by the state, so a company's initial contact with a state economic development official may prompt a referral to a local agency that will actually lead the business through the process.
States also tend to have varying terms for the agreements - some extending exemptions for fixed periods of five, 10, or 15 years.
While the choice to locate in an urban area doesn't necessarily work for every business, enterprise zones do offer cost savings for those who want to be there, which is why the programs have survived for several decades in most states and are available on such a widespread basis today.
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