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Our Enterprising Council

In the past week, the City of Los Angeles, led by Councilmember Greig Smith, condemned and rejected Governor Jerry Brown's proposal to eliminate Enterprise Zones throughout the State.

I am fond of saying that politics often flip at the local level. There is no greater example of this than the example of Enterprise Zones. Most Democrats support these tax breaks. Some Republicans actually oppose them.

Enterprise Zones as they were originally formulated offered tax breaks to corporations willing to move into blighted commercial areas. The corporation gets a tax break, the neighborhood gets a business. It's an apparent win-win for a blighted community.

Apparent is the key word here. Some of the downside occurs elsewhere: the loss comes for the place that would have naturally hosted the business had the government not given it a tax break. But ironically, all too often, most of the downside comes to the very community that offered the tax break.

Like a pro sports team blackmailing a government into subsidizing its stadium, the corporation ends up the beneficiary of a community subsidy in the form of an enormous tax break. The community has been bullied, giving tax breaks to a business that wanted to move into the community anyway, and reaping none of the tax revenue that would have been rightfully theirs had they not made the deal in the first place.

Democrats often end up supporting enterprise zones--yes, here is a case in one's backyard where Democrats often favor tax breaks to corporations. And Republicans split on them: some are grateful for tax breaks anywhere, and others more doctrinaire conservatives say that a tax break for one but not another is an artificial deal.

The greatest problem with the formula is, in urban areas, enterprise zones often become the expectation for corporations, rather than the exception. When the average citizen moans about how corporations are able to skate on taxes but citizens are not, the answer is that there are no enterprise zones for citizens, only for corporations. And corporations end up using the Enterprise Zones as a way to nickel down their tax obligations into perpetuity.

In the past week, Governor Jerry Brown proposed eliminating Enterprise Zones as a way to close the taxation loopholes that exist. Municipalities were largely furious, including those at the inflated pueblo of Los Angeles.

Sure enough, that far from doctrinaire Republican of City Council, Greig Smith, immediately struck back. He authored a city resolution condemning and even rejecting Brown's proposal to eliminate the State Enterprise Zone Program.

In a letter to his constituents, Smith reminded them that in the past year he had actually worked to expand Enterprise Zones in his district. He claimed that Enterprise Zones lower unemployment rates--a ridiculous argument, because if a corporation doesn't build a site somewhere, it will build it somewhere else. If enterprise zones truly lowered unemployment, then unemployment in urban areas would be lower, not higher than in the 'burbs.

I cite from Smith's letter:
Just last year, we fought to secure two expansions of the Enterprise Zone, including in the Chatsworth/Northridge industrial zone. The expansions are expected to save 4,000 jobs and generate another 15,000 in the next five years. A 20-year study of 8,000 Enterprise Zones in 43 states showed that the zones lowered unemployment rates by 1.6%, poverty rates by 5.4% and increased household income. In California alone, the zones pushed down unemployment by 2.2%.
These statistics are such contemptible lies that it barely bothers addressing, but I will. Smith bases these figures on a very suspicious study, "Evaluating the Evidence on Enterprise Zones," conducted by three corporate-cuddling academics, including two at USC. The paper (which tellingly is not available on the Internet) is starkly opposed to the conclusions of much other research, including that of the esteemed Public Policy Institute of California, which concluded that "on average, enterprise zones have no effect on business creation or job growth." (You may find links to that study here).

Doctrinaire Republicans such as those at the Howard Jarvis Tax Association--people who are always calling for a level playing field--do not favor Enterprise Zones any more than Jerry Brown does. The voter only finds a muddle at the local level--their Council member always promises that the presence of an Enterprise Zone means more and better jobs locally, and even unions on occasion favor the presence of EZs. But the evidence in support of their efficacy certainly flies in the face of the promises.