Do Local Economic Development Programs Work? Evidence from the Federal Empowerment Zone Program∗

This paper evaluates the impact of Round I of the federal urban Empowerment Zone (EZ) program on neighborhood level labor and housing market outcomes over the period 1994-2000. Using four decades of Census data in conjunction with information on the proposed boundaries of rejected EZs, we find that neighborhoods receiving EZ designation experienced substantial improvements in labor market conditions and moderate increases in rents relative to rejected and future zones. These effects were accompanied by small changes in the demographic composition of the neighborhoods, though evidence from disaggregate Census tabulations suggests that these changes account for little of the observed improvements. First version: April 18, 2006 This version: November 28, 2007 JEL Codes: H2, O1, R58, C21. ∗The authors would like to thank Soren Anderson, Timothy Bartik, John Bound, Charlie Brown, Kerwin Charles, John DiNardo, Taryn Dinkelman, Jesse Gregory, Jim Hines, Ben Keys, Justin McCrary, Gary Solon, Joel Slemrod, and Jeff Smith for encouragement and advice on this project. We would also like to thank participants of the University of Michigan Labor Seminar, the Michigan Public Finance Brownbag Lunch, and the Upjohn Institute Seminar for useful comments. This work has been supported (in part) by a grant from the National Poverty Center at the University of Michigan. Any opinions expressed are those of the authors. Local economic development programs are an important, yet understudied, feature of the U.S. tax and expenditure system. Timothy Bartik (2002) estimates that state and local governments spend $20-30 billion per year on economic development programs with an additional $6 billion per annum coming from the federal government. However, little academic work has been done examining the impact of these expenditures on local communities, largely because of the small scale and general diversity of most such programs. This paper evaluates the federal urban Empowerment Zone (EZ) program, which constitutes one of the largest standardized federal interventions in impoverished urban American neighborhoods since President Johnson’s Model Cities program. With a mandate to revitalize distressed urban communities, the EZ program represents a nexus between social welfare policy and economic development efforts. Unlike conventional anti-poverty programs, Empowerment Zones aim to help the poor by subsidizing demand for their services at local firms, which has made them one of the few social welfare programs popular on both sides of the congressional aisle. In an era where non-entitlement spending on social welfare programs has been scaled back dramatically, the federal Empowerment Zone program has enjoyed rapid growth. After the initial funding of six first round EZs and two “supplemental” EZs in 1994, fifteen more cities were awarded zones in 1999, followed by another eight in 2001. An additional forty-nine urban areas were concurrently granted smaller Enterprise Communities (ECs) which entailed a reduced package of benefits. The enthusiasm for spatially targeted tax credits has led to the birth of a variety of new zones, each modifying the original EZ concept in different ways. Most recently, the justification for tax abatement zones has been expanded to include disaster relief. For example, in the wake of the September 11th attacks, parts of New York city were designated “Liberty Zones” and granted a variety of localized tax credits; while, in 2006, Congress passed legislation authorizing a set of “Gulf Opportunity Zones” for areas stricken by Hurricane Katrina. These recent forays of the IRS into the business of local economic development should merit the attention of economists. The GAO (1999) estimates that the first round Empowerment Zones will cost $2.5 billion over the course of the ten year program. Given that EZ neighborhoods have a total population of under a million people, subsidies of this magnitude, when directed to such relatively small urban areas, might be expected to have important effects upon the behavior of firms and workers. Measuring the nature and magnitude of these See Bartik (1991) and the volume by Nolan and Wong (2004) for a review. In addition to urban EZs and ECs, there are a series of rural EZs and ECs, Enhanced Enterprise Communities (EECs), and 28 urban and 12 rural “Renewal Communities” entitled to benefits similar in magnitude to EZs.