Enterprise zones: Economic tools or unleashed monsters?

The most famous enterprise zone in Illinois is the one in the Bloomington-Normal area where Diamond-Star Motors Corporation's two-million square foot facility is nearing completion. An all-new sports specialty vehicle which will be distributed through Chrysler's Plymouth Division and Mitsubishi Motor Sales of America is scheduled to roll off the assembly line in the fall. Photo courtesy Diamond-Star Motors Corporation

When Illinois embraced enterprise zones in 1983, did the state create a useful economic development tool or did it unleash a monster it now can't control? That is a question many state policymakers want to see answered as the program enters its fifth year and pauses, slightly, for evaluation. The initial reading seems to be that the answer is a mixture of the two extremes if a recent symposium on the topic can be taken as an indication.

That seminar on enterprise zones, sponsored jointly by Sangamon State University, the Taxpayers' Federation of Illinois and the Exchange National Bank of Chicago, brought together national and state experts with Illinoisans who have had personal involvement with the zones. Taxpayers' Federation President Doug Whitley said the purpose of the gathering was to begin the evaluation of the program, to identify the types of information that will be needed to conduct a thorough review and to assess what the state has learned from operating the program for five years.

The responses to Whitley's call reflected a wide range of opinion. Ken Marks of CPC International told how an enterprise zone was instrumental in keeping his corn products manufacturing company in Illinois when it decided it could not be competitive in its 1906 factory at Argo, a near southwest suburb of Chicago. On the other hand, Edward Kotler of Kotler Industries told of how the designation of an enterprise zone in his factory's Chicago neighborhood has had no effect on his picture frame manufacturing business. Kotler expressed more concern about the city's inability to keep abandoned cars and garbage from piling up in the area.

Kotler's complaint is directly to the point of the enterprise zone debate. Cities like Chicago are giving up local tax dollars that fund such basic municipal services in hopes of attracting business to enterprise zones.

Enterprise zones were defined as a program to eliminate impediments to investment in economically distressed areas. The idea started in England as a neighorhood redevelopment program and became part of the American political consciousness when President Reagan proposed the idea in his 1980 national campaign. Initially, the zones were proposed for areas so blighted that only the elimination of many government regulations and the availability of special tax breaks would encourage new private investment.

The federal government has never adopted an enterprise zone program, but more than half the states have. As the concept was developed state by state, some states modified the original intention. The extreme British model, where regulations like building codes and minimum wage laws are eliminated in enterprise zones, has not been adopted here. But many states have used the zones to target areas for economic development by making tax breaks available. The Illinois program centers on a series of state and local tax breaks that are available to businesses that locate or expand in enterprise zones, and to financial institutions that lend money for zone investment.

A community is eligible to win designation as an enterprise zone in Illinois if it can meet any of four criteria. The most common is unemployment within the proposed zone that exceeds 120 percent of the statewide average. Other measures are based on poverty and population loss.

Overall, the 40 attendees seemed to express a positive assessment of the enterprise zone program in Illinois, but there were warnings that the state has little on which to base an evaluation of the program's benefits and costs. At one point, Department of Commerce and Community Affairs Director Jay Hedges, a staunch proponent of enterprise zones, seemed to be likening the program to a Frankenstein creation. Speaking of WCI/Schrock Industries in Arthur in central Illinois, Hedges said, "Schrock is a classic example of a company that is infatuated with enterprise zones. They told us that if they got an enterprise zone, they'd stay and expand in Illinois. But Arthur

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isn't eligible for enterprise zone designation, so we asked them to tell us how much they thought they would benefit from an enterprise zone. They told us a zone was worth $850,000 to the company, so we offered them a similar amount from other state development programs. They are 'considering.' There is no good reason for their reaction; they just want an enterprise zone. The marketing has made the program's benefits seem bigger than the incentives are themselves."

The zones were originally envisioned to help "even the playing field" for the economic development competition between blighted urban areas and raw land in the suburbs and rural areas. But, apparently, something else has happened. At least in Illinois, the zone designation has created a new super class of communities, and businesses want to locate in these communities' zones, forsaking all other areas.

The director said that companies contacting the state to express interest in locating a new plant are increasingly asking to see only those areas that have been designated enterprise zones, even though the state could often offer a package of incentives through other programs that would equal or exceed the benefits available in the 59 zones. As a result, Heldges said he will not ask the Illinois General Assembly to expand the number of authorized zones beyond the 64 already allowed. Any expansion, he said, would intensify competition among the zones for business prospects and further isolate the economic development programs of communities with no zone designation.

Hedges strongly defended the program as one of three "critical" components in the state's economic development package, the other two being the low interest loans available through Build Illinois and the state's job training programs. He noted that investment in the state's 59 zones has been more than $900 million between fiscal year 1984 and the middle of fiscal year 1988, and that does not count the major investments by Chrysler at Belvidere and Chrysler-Mitsubishi at Bloomington-Normal. Again excluding those two major plant investments, almost 2,000 jobs have been created in enterprise zones since 1983, and nearly 50,000 existing jobs retained, Hedges said.

Most critical of the program was Northwestern University professor Louis Masotti of the Kellogg Graduate School of Management, who said, "There is a lack of clear focus on this economic development tool and how it is being used. I am confused by the objective: Is it economic development, neighborhood development or job creation? We can't even begin to evaluate the program without an answer. We've heard there is a correlation between enterprise zones and economic activity. But is there a causal effect?"

Masotti reminded those attending that government economic development programs should offer only the minimum necessary to spur private investment. He said the problem with evaluating enterprise zones is that there is no way to measure the development that would have taken place without them. "We've made assumptions on the macro level about what businesses need. Do we have any information that tells us whether we're right? Do we know what needs were unmet for the businesses that left the state or closed or chose not to come?"

There are at least two legislative staff studies underway in Illinois on its enterprise zones, and Whitley hopes the February seminar will be the catalyst for an independent evaluation as well.

Michael Savage, deputy director for block grant assistance in the U.S. Department of Housing and Urban Development, said Illinois is not alone in its desire to evaluate an ongoing enterprise zone program. "There are now 27 states plus the District of Columbia that have designated at least one enterprise zone," Savage said. "In most cases, those states are trying to evaluate their program based on the original purpose. Enterprise zones have emerged as an important tool in economic development." Often, said Savage, the perception of whether a community is hospitable to business is as important as the hard numbers when a locational decision is made, and having an enterprise zone boosts that perception. "Private investment will follow if business feels that enterprise zone designation means there are good things going on in an area," he said.

Michael Alan Wolf, a nationally known researcher on enterprise zones based at the University of Richmond, noted that enterprise zones were the first real urban redevelopment program attempted on the state level without the lead of the federal government. He suggested that the variety that resulted may be the greatest value of the enterprise zone programs nationally, but added: "By no means is it all rosy and blissful in enterprise zones. There still exist designated zones that reflect no increase in economic activity, and there are areas where the same level of employment and investment would have occurred anyway. Despite many successes, there are several things wrong with enterprise zones and several disappointments." Wolfe said many zones are too unfocused, that the programs are too often the "creatures" of political compromise, that they are often too indulgent to the private sector, unwilling to innovate and impatient with slow progress.

It was a simple story told by an enterprise zone administrator from Streator that best put the zone dilemma in perspective. Larry Bianchi spoke of the time a local man came in to seek enterprise zone assistance for an auto repair business he wanted to start. Bianchi's advice helped get the business up and running, but the zone incentives played no part. The example showed that an enterprise zone can spur economic development it will never get credit for creating. But it also proved that enterprise zone incentives can be irrelevant to the needs of entrepreneurs. □

Jeff Brody is Statehouse bureau chief for The State Journal-Register in Springfield.

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