the establishment of a foreign-trade zone in an Indian enterprise zone. Similarly, the Secretary of the Treasury would be required to consider on a priority basis the processing of any application that involves the establishment of a port of entry that is necessary to permit the establishment of a foreign-trade zone in an Indian enterprise zone. In evaluating applications for the establishment of foreign-trade zones and ports of entry in connection with Indian enterprise zones, the Foreign Trade Zone Board and the Secretary of the Treasury would be required to approve the applications, to the maximum extent practicable, consistent with their respective statutory responsibilities.

The bill would also require the Secretary of the Treasury and the Comptroller General to submit a report to the House Committee on Ways and Means and the Senate Committee on Finance not later than July 1, 1995, on the overall impact of the bill.

IV. ISSUES RELATING TO TAX INCENTIVES FOR
ENTERPRISE ZONES

A. Overview of Issues

As a geographic matter, economic growth and development have not occurred evenly across the United States. While differences in resources and climates may explain part of the geographic diversity, within States and cities the pattern of economic growth is uneven. Some areas have high unemployment and decaying structures, while nearby areas enjoy full employment and economic growth. Some analysts have argued that this uneven pattern of growth is evidence of a failure of the market and that government intervention may be appropriate to encourage a more geographically even pattern of growth. In addition, other analysts observe that areas of high unemployment and blight often are characterized by higher crime rates, poorer health of residents, and other social ills. They note these problems represent additional costs to society at large and that efforts to aid economic development in such areas would improve social welfare beyond that which would be measured by job creation, wages, or output.

Enterprise zone tax incentives are intended to encourage economic activity within a particular geographic location. Almost all enterprise zone proposals provide tax incentives for the location of certain activities within certain economically distressed areas. 43 The proposals differ with respect to economic activities that are provided tax incentives and the manner in which the incentives are provided. For example, enterprise zone proposals may provide incentives for certain types of employment through an employer or an employee wage credit, or for certain types of capital investment through accelerated capital recovery methods or capital gains tax relief. In addition, the proposals often target relief to small businesses. Therefore, not only do enterprise zone proposals target tax incentives to particular geographic locations, but also within each enterprise zone the proposals direct tax incentives to particular types of activities.

Possible goals of geographic tax incentives

Enterprise zone proposals intend to provide economic aid to distressed areas. However, the aid may be intended to achieve several distinct and perhaps disparate goals. One goal may be to rebuild a blighted urban area. Another goal may be to attract business activity to the area. Yet, another goal may be to increase the employment opportunity and incomes earned by those people who currently live in the designated area.

Policies designed to address one goal, if not carefully crafted, may work against the attainment of another goal. For example, gentrification 44 of a blighted urban neighborhood may rebuild the area, but it may provide no jobs or increase in income to those who were area residents prior to gentrification. The increase in property values which accompanies gentrification may further impoverish those who were area residents prior to the gentrification or force them to move to other areas. A policy that successfully attracts businesses to a particular geographic location may return some economic vitality to that area. However, if the businesses utilize labor skills not possessed by residents of the area, there may be few gains in income to those residents. Similarly, a business may be attracted to an area to utilize the base of low skilled, low wage labor. While such businesses provide employment opportunities, they may not promote significant income growth for area residents. Without income growth there may not be significant rebuilding of the area's physical structure. As a further example, siting a business within a specific geographic area may result in the displacement of current residents from that area. Alternatively, a policy which successfully promotes income growth of residents of an area may enable those residents to choose to leave the area which may result in further blight.

The effect of tax incentives on the location of investments

Enterprise zone proposals contemplate that economic incentives provided through Federal income tax relief can redirect investment toward economically disadvantaged areas. In theory, the provision of financial incentives should be able to induce economic activity to be located in designated areas. However, empirical research is inconclusive and, in any event, even if investment is redirected, cost benefit analysis might show that society does not benefit from the relocation of investment. As there are few Federal programs that provide economic incentives to redirect investment geographically, most existing studies are based on State and local initiatives and the British experience. The State and local initiatives may not be relevant to analysis of a Federal program, if it is contemplated that the Federal program will offer larger economic incentives than do existing State and local initiatives. Moreover the types of tax incentives offered may be fundamentally different. For example, sales and property tax exemptions have no direct Federal counterpart. Similarly, the British experience may not be relevant to proposals for the United States.

Research on the impact of State and local tax factors on the location decisions of firms is inconclusive. On the one hand, lower local property taxes or lower State or local income taxes act directly to lower the cost of doing business in a particular area. This could make low tax jurisdictions relatively attractive to businesses. On the other hand, relatively high tax jurisdictions may provide more and higher quality public services and are often associated with highly educated and/or highly skilled local labor forces. These factors could offset the higher tax cost of doing business in a high tax jurisdiction. Separating these conflicting forces is a difficult task and conclusive econometric evidence has not yet been provided on this issue.45

The General Accounting Office (GAO) has attempted to measure empirically the employment changes resulting from the tax benefits provided under one State's enterprise zone program. 46 The GAO measured monthly employment changes in three enterprise zones over a four-year period and concluded that while increases in employment did occur, "factors other than the [enterprise zone] program seemed to account for these increases." 47 The empirical analysis of the GAO study has been criticized. 48 For example, it is difficult to specify a correct counter-factual hypothesis of what employment levels would have been in the absence of the enterprise zone program. This makes it difficult to determine which, if any, changes in employment result from enterprise zone benefits. Also, four years may be too short a time period to assess the economic effect of an enterprise zone program. 49

Another study has taken a broader approach by attempting to empirically account for the sources of employment growth in 37 disaggregated sectors across United States metropolitan areas over the period 1977 to 1984.50 The authors found that the presence of enterprise zones was positively related to employment growth in some sectors, specifically, total manufacturing, hospitals, legal services, and engineering and architectural services. However, their results explicitly reject any employment effects resulting from changes in taxes or subsidies. The authors suggest the presence of enterprise zones may represent government responsiveness to firms seeking to expand or relocate.

As an alternative to empirical studies, a number of surveys have been undertaken to address the effectiveness of tax incentives on location decisions. Many economists suggest caution in interpreting the findings of survey research since responses to survey questions may not accurately forecast the economic behavior of decision makers. Nor may survey results based on State and local programs be applicable to a Federal program if the Federal program offers larger financial incentives. Nevertheless, surveys may provide some insight into the motivation of business managers who make decisions concerning location of investment. Generally, these surveys explicitly ask managers of firms about the importance of financial factors on location decisions. For the most part, these surveys have found that governmentally provided financial incentives (e.g., low interest loans, property tax abatements, income tax credits) are of secondary importance to a firm's location decision. Primary factors for location decisions have included items such as proximity to markets, availability of suitable raw materials, an appropriately trained labor force, and access to transportation networks. For example, the GAO surveyed employers in two of the enterprise zones in its study. The GAO reported that 60 percent of respondents rated financial incentives, including grants, subsidized interest rates, and other subsidies as of little or no importance to their location decision, while market access, community characteristics (community service, crime rate, etc.), and site characteristics each were listed as important by more than half the respondents. 51 Researchers hypothesize that the primary factors, such as proximity to markets, attract a firm to a particular geographic region and that the secondary factors, such as financial incentives, may affect the particular choice of location within that region.52

A third research approach to determining the effect of tax incentives on the location of investments is the case study method. While case studies are, by nature, anecdotal they may reveal general trends. Several States and outside analysts have used case studies to analyze the effects of State enterprise zone programs. 53 One case study has argued that the economic benefits of enterprise zones are important to firm location decisions. A study of Maryland's enterprise zone program cites financial incentives as important to Tandy Corporation's decision to locate a distribution center in Hagerstown, Maryland. 54 On the other hand, a case study of the General Motors' Saturn plant location decision concluded that tax incentives were a minor consideration in General Motors' final de