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The Attraction of Enterprise Zones: Tax Benefits and Incentives for Businesses

Locating a business in a designated enterprise zone can often provide incentives unavailable in other areas. But the incentives offered are beginning to change - and there may be tradeoffs that could devalue the financial advantages.

Nov 08
Nearly 3,000 enterprise zones operate across the United States. They go by various names depending on the location - Empire Zones, Pine Tree Development Zones, and Economic Target Areas, to name several. For more than two decades, enterprise zones have been key drivers of economic development in many states.

"Enterprise zones are designed to stimulate business growth and job creation in economically distressed communities, where market forces would not normally operate," says Jim Colson, president of site selection for Angelou Economics in Austin, Texas. Some states have only a few enterprise zones, while others have hundreds. Still other states, such as Kansas, have designated the entire state as an enterprise zone. Core benefits of enterprise zones are tax credits for capital investment, research and development, new jobs, and hiring local workers. The exact rules and details for these incentive packages, however, vary from state to state and often have additional county and municipal regulations to follow. Benefits may also be tiered, where the best credits go to companies that do business in communities or regions that are the most economically distressed.

Other incentives linked to enterprise zones are state loans, property tax credits, investment tax credits, tax increment financing, improvements to public infrastructure and services, venture capital funding, and income tax credits. When added together, tax credits from enterprise zones can total millions of dollars every year over a given time period. This aggregate tax break makes a huge difference to business startups and expansions, which often require large capitalization expenditures that would otherwise be difficult to afford.

Take, for example, Baltimore County's Southwest Enterprise Zone in Maryland. Established in 1996, this zone now has 62 thriving companies that have invested nearly $100 million and added 920 new jobs. In 2007 and 2008, according to state officials, new companies created 670 jobs in the Southwest Enterprise Zone. The 51-acre, $30 million Hollins End Corporate Park, a former grocery warehouse-distribution center, is being redeveloped to include multi-tenant, bulk, and service warehouse buildings. A total of 1.3 million square feet in eight buildings will be available when the project is completed. Service Express and Fed Ex Ground have recently signed leases there. Environmental Quality Resources (EQR) an environmental construction company, moved to the Southwest Enterprise Zone in August 2007. "We just received our first credit after being here one year - an 80 percent reduction in our property taxes," says Martin Varghese, the company's human resources director.

New Strategies
Enterprise zones are set up for various lengths of time, typically 10-15 years. As legislative authorization for many of these programs are beginning to expire, many states are starting to take a hard look at the economic paybacks: Are the lost taxes worth the economic development that results in the enterprise zones? Which ones aren't producing? Are there ways to streamline administration to make the enterprise zones more cost-effective?

The Portland Development Commission (PDC) in Oregon temporarily shut down its North/Northeast Portland Enterprise Zone in 2007 to study its performance and streamline its rules and regulations, which had become overly burdensome. "It is the biggest tool in our toolbox," says Erin Flynn, economic development manager for the PDC. The main goal was to make the tax incentives less complicated and to do a better job of customizing work force development for individual companies. To date, 35 companies have invested $437 million in new buildings and equipment and created or retained over 4,000 jobs, making it one of the most productive enterprise zones in the state. In return, businesses saved a collective $26 million in taxes. Notable companies in the zone include Oregon Steel Mills, Columbia Sportswear, YoCream International, and Widmer Brothers Brewing.

New Mexico has both region-specific and statewide incentives to maximize its appeal to new businesses. The state provides a tax credit for high-wage jobs in small communities - 10 percent of the combined value of salaries and benefits for each new job paying a minimum of $28,000 per year in areas with populations less than 40,000 persons. The credit cannot exceed $12,000 per year per job and can be taken for a maximum of four years. Manufacturers anywhere in the state are entitled to a tax credit of 5 percent of the value of qualified equipment and other property used in their operation. Businesses may also claim a credit on research expenditures of four percent (eight percent in rural areas). An additional 4 percent may be applied against state income tax if base payroll expenses are increased by at least $75,000 per $1,000,000 of expenditures claimed.

Pleasantville, New Jersey, near Atlantic City, has launched a new member recruiting campaign to promote its enterprise zone, which has been retooled to include more targeted, professional communication and streamlined processing for new members. City officials have have also branded the zone benefits into what they call a "tool kit" that clearly spells out benefits to member businesses.

Maine established its eight-zone Pine Tree Development Zone (PTDZ) program in 2004 to entice businesses with the opportunity to greatly reduce or virtually eliminate paying state taxes for up to 10 years. In September 2007, the state made the Pine Tree Development Zone incentives available to any qualifying manufacturer who sets up new operations anywhere in Maine - essentially making the state a single enterprise zone for manufacturers.

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