Issue Bulletin #68
July 16, 1981
July 16, 1981TI-E URBAN JOBS AND EMERPRM ZONE ACT OF 1981 M 13109 H.R. 3824)
The Enterprise Zone concept has made solid progress on both sides of the Atlantic since it was unveiled in a 1978 speech by Sir Geoffrey Howe, MP, now the Chancellor of the Exchequer in Mrs. Thatcher's Conservative government. A means of stimulating economic development in depressed urban areas by encouraging local entrepreneurs through tax and regulatory relief, the approach marks a radical departure from the government expenditure programs of the 1960s and 1970s.
In Britain, leVislation to create eleven experimental zones was enacted by Parliament in November 1980, and a number of these sites will be operating by the end of this summer. The British zones are, however, a specialized version of the basic concept, designed primarily to reactivate deserted industrial areas, and they are not likely to be an accurate guide to the way in which American zones would affect neighborhoods.' In the United States, the Enterprise Zone has become a central issue -- if not the central issue -- in the national urban policy debate, and =egislation is being considered at both the state and federal levels to create versions of the concept. In the District of Columbia and several states, such as Illinois, bills have been passed or are pending which would reduce state and local taxes, and regulatory burdens, in distressed neighbor- hoods. Although these measures are designed to establish state Enterprise Zones, they are generally constructed in a manner thatFor an analysis of the British Enterprise Zones, see Stuart Butler, "Enterprise Zones in Britain: The Experiment Begins," International Briefing #8 (The Heritage Foundation, 1981).
2would allow the zones to fit within the criteria being discussed at the federal level. In some other cases, the measure establishes a commission or similar body to investigate possible sites and to examine state burdens which could be relieved in federally- designated zones.2 President Reagan.gave strong support to the Enterprise Zone idea during his campaign. In particularl in his speech to the National Urban League in August 1980, he argued that taxes and regulation should be relaxed in such inner city zones. He explained that the purpose of the Enterprise Zone, in his view, should be to encourage entrepreneurs to start new businesses, and to put local people to work. "Those who view poverty and unemployment as permanent afflictions of our cities," he concluded, fail to understand how rapidly the poor can move up the ladder of success in our economy. But to move up the ladder, they must first get on it. And this is the concept behind the Enterprise Zones. After the Reagan.Administration took office, the White House began a detailed examination of the idea, and a cabinet council was set up under Commerce Secretary Malcolm Baldrige to seek ways of turning the concept into reality. Although, as yet, no firm proposal has emerged from the Administration, Secretary Baldrige issued a statement in June, stating that The Administration supports the establishment of Enter- prise Zones to help create new jobs and enterprise in our nation's poorest communities. ...It is a top priority of the Reagan Administration that Enterprise Zone legislation be enacted in this Congress.
CONGRESSIONAL ACTION -- THE URBAN JOBS AND ENTERPRISE ZONE ACT (MARK I ) In June 1980, a bill to create Enterprise Zones was introduced in the House (H.R. 7563) by Representatives Jack Kemp (R-NY) and Bob Garcia (D-NY), and in the Senate (S. 2823) by Senators John Chafee (R-RI) and Rudy Boschwitz (R-Minn.).3 Known generally as the Kemp-Garcia bill, the measure laid down poverty and unemployment characteristics that would have to2 For information on state legislation dealing with Enterprise Zones, contact the American Legislative Exchange Council, 418 C Street, N.E., 3 Washington, D.C., 20002, tel. (202) 547-4646. For an analysis of the bill, see Butler, "The Urban Jobs and Enterprise Zone Act," Issue Bulletin #62, (The Heritage Foundation, 1980).
3exist for an area to be considered for Enterprise Zone status. in addition, the proposed zone would have to contaih at least 4,000tpeop@e,, and the local government would have to agree to a reduc Ion in property taxes in the zone amounting to at least 20 percent within four years. If these requirements were met, the Secretary of Commerce would accept the application from a local government and declare the area an Enterprise Zone. Once the designation had been made, the bill authorized the following incentives, in addition to the property tax reduction. They would apply for a minimum of ten years: 1) For individuals owning property in the zone: - An increase in the capital gain deduction from 60 percent to 80 percent on property used predominantly for business purpo.ses within the zone. 2) For employees who complete most of their work in the zone: - A 90 percent reduction in the employee's and employer's social security tax for employees under 21 years of age, and a 50 percent reduction for other workers. 3) For businesses who recruit 50 percent of their workforce from among the zone's residents ("qualified businesses"): - A 15 percent reduction in corporate income tax. - Three year straight-line depreciation for all property, other than land, used for business purposes in the zone, up to $500,000 in property per year. - Loss carryforward for up to ten years. - Cash method of computing taxable income available for businesses with gross annual income below $1.5 million. 4) For corporations in general: - A reduction in capital gains tax from 28 percent to 15 percent on property (other than land) used for trading purposes in the zone.
REACTIONS TO THE 1980 ACT
When the Urban Jobs and Enterprise Zone Act of 1980 was presented to the Congress, it was intended by its sponsors to be a discussion document rather than a bill intended for passage. The sponsors urged both supporters and critics of the Enterprise Zone idea to make their views known, so that a remodeled bill could be offered at a later date.4
The Kemp-Garcia bill did, indeed, provoke considerable national discussion. In the year following the introduction of the bill, there have been many conferences and meetings, and much media coverage devoted to discussions of the concept and the legislation. While the Enterprise Zone gained wide support as an approach, however, certain specific features of the 1980 bill did attract criticism. The principal objections may be summarized as follows.
1) Targeting The criteria for selection of areas were said to be imprecise and too coldly statistical. Some areas which might seem to be perfect candidates for a zone could not meet the requirements, while less deserving locations managed to fit the demands. Some critics also questioned the wisdom of what was, in effect, the automatic designation of eligible areas. They argued that there should be some discretion and a limit on the number of zones, at least until the performance of the initial zones could be analyzed and necessary modifications made.
The absence of any provisions serving to streamline federal or local regulation came under attack. Many small businessmen, and some neighborhood groups, argued that red tape -- particularly at the local level -- is a greater obstacle to enterprise and innovation than taxes and other tangible costs.
3) Small Business
Small business spokesmen maintained that although the Enter- prise Zone was supposed to stimulate the creation of new firms, and in particular small, local enterprises, the tax incentive package was heavily geared towards larger, established companies. While the loss carryforward, social security tax cuts, and proper- ty tax reduction might offer some help to struggling new businesses, they conceded, most new firms show little or no taxable profit in their early years, and so depreciation and other tax allowances would have very limited impact.
4) Social Security
The reduction in social security taxes proposed by the bill was to be reimbursed to the fund out of general revenues. This was viewed by some as a dangerous precedent in light of the controversy over the future of social securi@y. Also, it was pointed out, the incentive might well be designed to help low- income employees, but it would also benefit highly-paid executives in Enterprise Zone firms.
5) Depreciation A major criticism of the bill was that the rapid depreciation allowance appeared to be the most significant incentive in the5
package. This miqht lead to companies deciding to install a great deal of equipment, while employing very few local people. 6) Residency Requirement The requirement that at least 50 percent of a company's workforce be zone residents for it to enjoy the principal incen- tives was seen by the sponsors of the bill as a mechanism to ensure that local residents would be the chief beneficiaries of the Enterprise Zone. However, objections to this provision did emerge. The reguirment. did not specify any category of resident, such as CETA eligibles, and so skilled workers or highly-paid executives would fulfill the criterion if they moved to the zone -- or established convenience addresses. In addition, critics charged, the requirement was precisely the kind of red tape that the zones were supposed to reduce. If it remained as a feature of the zones, it was said, it would only.have the effect of dissuading new entrepreneurs from setting up in the Enterprise Zone. Some even predicted dawn raids on zone businesses by government agents checking for "illegal non-zoners," much as agents now search for illegal aliens.
7) Property Tax
Perhaps the most vociferous criticism voiced against the bill centered on the requirement that property taxes had to be reduced by at least 20 percent. In certain states, it was p9inted out, differing property tax rates are unconstitutional, meaning that no site could comply with the requirement. Even in states where there was no constitutional problem, mayors arvued that it would be impossible to adopt further reductions in city revenues already cut by tax referendums.
8) Thrust of the Bill
There was general concern that the goals of the Enterprise Zone would not be achieved by the package of incentives in the bill. Certain minority and neighborhood organizations, in parti- cular, feared that although the zones probably would lead to increased economic activity, local people would be passed over in the process. There was also some concern that residents, and even existing small businesses, would be displaced by newcomers. If the purpose of Enterprise Zones is to stimulate the creation of local entrepreneurs and to help poor inner city residents, it was argued, then the incentives must be aimed at small businesses. Similarly, the emphasis should be on reducing the disincentives that persuade unskilled inner city people to stay on the welfare rolls rather than taking entry level jobs. The Ente7rise Zone, in other words, should provide a "trickle up" mechanism in depressed neighborhoods.
A second reservation often expressed about the broad thrust of the bill concerned the question of relocation. While some advocates of the Enterprise Zone seemed unconcerned where new6
jobs might come from, providing they came to the inner cities, others maintained that the approach could only be justified if it led to new economic activity. It should not be a mechanism to realloc-a-fe-- economic activity, it was argued, but to expand it in the cities. Like those emphasizing the importance of local activi@y, people who took this position stressed the need to have incentives which would lead to new entrepreneurs entering into the market, rather than incentiTe--s which would cause businesses to move to the inner cities.ME URBAN JOBS AND ENTERPRISE ZONE ACT OF 1981 Many of the criticisms of the 1980 bill were accepted by its sponsors, and led them to refashion the measure. The modified bill was introduced in the House (H.R. 3824) and Senate (S. 1310) on June 3, 1981. The House bill was referred to the Committee on Ways and Means -- although elements touching'on other federal programs were also referred to the Committee on Banking, Finance and Urban Affairs. The Senate bill was referred to the Committee on Finance. The principle co-sponsors were once again Kemp and Garcia in the House, and Boschwitz and Chafee in the Senate. The bill has impressive support. National Urban League President Vernon Jordan joined the co-sponsors at their June press conference introducing the new legislation. In addition, the NAACP, the National Urban Coalition the National League of Cities, and many other organizations ha@e endorsed the Enterprise Zone concept. Congressional support for the new bill has been growing. The measure picked up sixty-one House co-sponsors within one month. The forty-five Republican co-sponsors include House leaders Bob Michel (R-Ill.) and Trent Lott (R-Miss.). The Demo- cratic support is particularly impressive. Garcia is joined by fellow Bronx member Mario Biaggi. Black Caucus members Gus Hawkins (D-Cal.) and Bill Gray (D-Pa.) are also co-sponsoring the measure. The Senate bill collected fifteen Republican co-sponsors in the first month, but only one Democrat, Quentin Burdick (D-ND).
PROVISIONS OF THE BILL
a) Method of Designation The initiating body must be a state government (or possession) or a local government. If the state applies on behalf of a local government, the latter must consent to the application. The governor of a state may block a local application within twenty- one days.7
The Secretary of HUD, after consultation with the Secretaries of Commerce, Labor, and the Treasury and the Administrator of the Small Business Administration, may approve applications for zones in eligible areas. The designation would last until the year 2001. Designations may be made by the HUD Secretary until 1996, but in the first three years of the program, no more than twenty- five zones, and no fewer than ten, may be made in any one year. The bill requires the Secretary @o give priority to areas with the highest levels of economic distress, areas in which state and local government is making the "greatest effort to remove impediments to job creation" (see Local Commitment), and areas which have the widest support from the government seeking designation, the community, residents, local businesses, and private organizations, especially in meeting local commitment....
To be eligible for designation as an Enterprise Zone, an area must be characterized by "pervasive poverty, unemployment and general distress." Sites must meet the eligibility require- ments of the Urban Development Action Grant Program (including Pockets of Poverty -- designed for poor neighborhoods within generally prosperous neigh@orhoods). The areas must also meet at least one of the following criteria of distress: Unemployment for the most recent eighteen-month period is at least one and a half times the national average. At least 20 percent of the population is living in poverty, as defined by the Bureau of Census. At least 70 percent of area residents have incomes below 80 percent of the median income for the area as a whole.
All census tracts within the area suffered at least a 10 percent decrease in population between 1970 and 1980 and are characterized by chronic abandonment or substantial property tax arrearages. To be eligible, the area must contain at least 4,000 people (at the time of the most recent'census) if it is within a metropol- itan area of 50,000 or more; or 2,500 in any other case; or be an Indian reservation.
2) Local Commitment The government seeking the Enterprise Zone designation must also agree, in writing, to follow a course of action "designed to reduce the various burdens borne by employers and employees" in the area. This local commitment may involve the participation of private and/or public entities, and may include the use of federal programs. The bill suggests the following:8
Reductions in tax rates or fees.
Improvements in local services. Streamlining of business and employment regulations. Commitments from private entities to provide training and other assistance for zone residents.
The HUD Secretary may revoke the Enterprise Zone designation if he determines that the applicant government has not substantial- ly complied with the local commitment. This is the only circum- stances in which the designation may be terminated prior to the date specified in the bill.
3) Federal Commitment
The HUD Secretary is directed to expedite and coordinate all federal housing, deyelopmentl financial assistance, and employee training programs within the zone. The federal government must also disregard any reduction in taxes, resulting from the local commitment, in determining the eligibility of the state or local government for federal assistance programs.
4) Sense of Congress Provisions The bill states that it is the sense of Congress that local governments should attempt to facilitate "to the greatest extent possible" the employment of poor and unemployed zone residents. But in choosing the sites for consideration, the impact of an Enterprise Zone on neighboring areas should be examined. The IRS is urged to simplify the administration and enforce- ment of the tax incentives contained in the bill. The Foreign Trade Zone Board is also urged to expedite applications for foreign trade zones within Enterprise Zones, and to take into account future development likely to result from Enterprise Zone incentives in determining the economic viability of the site under consideration for foreign trade zone status.
5) Tax Incentives a) Refundable Credits for Employers and Em2loyees An employer may take a tax credit equal to 5 percent of the wages paid to a "qualified employee." A qualified employee is defined as a CETA eligible person who performs at least 50 percent of his service within an Enterprise Zone. The credit is refundable if the total credit exceeds the employer's tax liability.
Any employee of a "qualified business" may also take a credit against his or her personal federal income tax equal to 5 percent of the income received from services performed for the9
business within an Enterprise Zone.' The credit is limited to $1,500 in any taxable year and only covers the first 36 months of employment. Like the employer's credit, it is refundable. b) Capital Gains -- Corporations and Non-Corporate Taxpayers Taxpayers are not required to pay any capital gains tax on tangible property installed after an Enterprise Zone is designated, providing the property has been used for business purposes. Such property would include an interest in a qualified business, and both new and substantially rehabilitated low-income rental housing. The exemption from capital gains tax extends to the first sale or exchange made after the zone designation ends. Capital gains on such p@email@example.com not be taken into account as a preference for assessing minimum tax.
c) Taxation of Business Income
A 50 percent tax allowance is available to any qualified business for income received within a zone. The same allowance is available for any income rece3 ved by any taxp@yer from loans, mortgag@s and other financing provided to a qualified business for business purposes within the zone. The full 50 percent allowance will operate only until the year 1997, after which date it is to be reduced in increments of 10 percent until it is phased out by 2001. 6) Other Financial Incentives A q@ialified business may use the cash method of computing taxable income, providing its total receipts do not exceed $2 million in the tax year. The bill also specifies that new and rehabilitated low-income rental housing in an Enterprise Zone is eligible for investment credits.
7) Regulatory Flexibility
A qualified business is to be considered as a "small entity" for the purposes of the Regulatory Flexibility Act. A not-for- profit enterprise operating within an Enterprise Zone would be treated in the same manner. Rules affecting the administration4 A qualified business is defined as a business in which at least 50 percent of gross receipts come from trade within an Enterprise Zone and at least 40 percent of new hirings are qualified employees. In the case of a firm already in existence, the business will be considered as a qualified business only if the average number of full-time employees for the taxable year is at least 10 percent greater than for the year immediately before the area's designation as an Enterprise Zone.
10of an Enterprise Zone will also be subject to the Regulatory Flexibility Act.
The 1981 Urban Jobs and Enterprise Zone Act is a substantial modification, and improvement, of the 1980 bill. It does much to meet the criticisms raised against the earlier measure. The new bill lays much greater stress on smal.1 business development within the Enterprise Zones, and breaks entirely new ground in providing a means for streamlining both federal and local regulation. A much greater emphasis on the provision of low-income housing can also be seen in the new bill.
The 1981 bill differs in important ways from its predecessor concerning the selection of sites. The designating authority has been moved from Commerce to HUD, and the Secretary of HUD has been given the task of coordinating other federal programs within the zones. These changes reflect the fear expressed by some that the Enterprise Zone might become a replacement for other programs, rather than a supplement to them. The 1981 bill also seeks to extend the Enterprise Zone mechanism to small towns, rather than restricting it, in practice, to large urban areas. States and local governments are also brought more into the picture than was true.,in the 1980 version. This indicates a greater emphasis on the idua of Ente@prise Zones as a local program, and conforms with the Administration's strategy of devolving development planning as far as possible to the states through such means as the block grant system. The limit on the number of zones which can be designated in any one year is an extremely important change. Even some of the most enthusiastic supporters of the Enterprise Zone concept have become concerned that what is still a very experimental approach to inner city revitalization has gradually acquired the status of the urban policy of the 1980s, and the panacea for all urban ills TH might be added that the reason for this situation stems largely from the lack of alternative urban initiatives). A limit on the number of designations has the advantage that the incentives may be examined very closely in the first set of cities before they are applied more extensively. This limit and priority s@stem should also ensure that the cities acquiring the zones will be those prepared to do most at the local level to help the Enterprise Zone idea to succeed.
There is a negative aspect to the limitation on numbers, however, when compared with the automatic designation process inthe earlier version. Critics will no doubt charge that HUD discretion only opens the door to political pressures and favori- tism. While this problem cannot be eliminated, it obviously must be addressed. The Local Commitment The property tax reduction required by the 1980 bill has given way to a new provision requiring state and local governments to put together a package of changes within the zone, designed to encourage enterprise and development. This is another very important feature of the 1981 measure, and removes a major criti- cism of the previous bill. It allows local flexibility and should stimulate innovative mechanisms by local g9vernments. It also further emphasizes that the Enterprise Zone is very much a local device for revitalization, not a blueprint from Washington. The bill awards priority in selection to areas where the local government can demonstrate strong neighborhood support for a zone. Community support is crucial to the success of an Enter- prise Zone. One cannot achieve development based on grassroots organizations and entrepreneurs if there is no enthusiam for the approach in the neighborhood. The bill correctly stresses this. Only by motivating and mobilizing a community will the "trickle up" process embodied in the concept be achieved. An Enterprise Zone Contract? Although the local commitment must be in writing, there is no provision in the bill for it to be modified in the light of experience. An improvement might be to require the federal government, and the state and local governments involved in.any 2one, to draw up a formal E.,-.terprise Zone contract, specifying-, the agreed local commitment and the federal programs and projects which would be provided in the zone. The contract could be modified during the lifetime of the zone, but only by the agreement of all parties. Such a contract could lead to additional incen- tives being offered by both "sides." The federal government, for example, might offer to test a new housing or development program in the zone if the local government agreed to a greater' relaxation in its housing regulations or if it would contract out city services to neighborhood groups. In short, the Enterprise Zone contract could become a vehicle for innovative ideas to be tried out with the agreement of all concerned. The Business Tax Incentives The tax incentives in the bill represent a significant shift from devices that would encourage branching by larger firms to incentives which are more likely to meet the needs of new, indepen- dent businesses. Small firms of this kind generally pay very little tax, and find access to capital a bigger obstacle than their tax burden. The bill seeks to improve the flow of finance to these new companies by the elimination of capital gains on
12investments made in such firms, and by the 50 percent allowance on income from loans made to the businesses. It remains to be seen whether this will be sufficient to overcome the risk and other disincentives.accompanying investment in small, inner city firms; but the provision is based upon the valid assumption that the best method of encouraging @he growth of new firms in depressed areas, as elsewhere, is to provide incentives for investors, rather than tax breaks for the firms themselves. No limit is placed on the tax saving that can be obtained under the capital gains tax or the 50 percent allowance. This is a shortcoming. Enormous tax savings would be possible under the provision. If it remains in the final legislation, it is likely that "paper" companies will form, sharing large profits channeled from corporations outside the zone. Without some limit on the total investment that would be eligible for these generous conces- sions, the Enterprise Zones could offer considerable opportunities for corporate accountants and yet have little impact on the poor. The tax incentives in the bill might be improved considerably by incorporating a measure suggested by Senators Heinz (R-Pa.) and Riegle (D-Mich.) in their Urban and Rural Revitalization Act of 1981 (S. 1240), introduced in May. The Heinz-Riegle bill would change the rules covering Subchapter S corporations by expanding the number of persons who could be shareholders of such corporations, in depressed areas, from 15 to 100. Subchapter S corporations can "pass through" tax benefits and operating losses to their investors, who may then utilize them for tax-saving , purposes. The investors are treated as shareholders, yet retain the advantages,of limited personal liability. Given the low tax burden common in new firms, Subchapter S treatment would make these firms moke attractive to investors who were seeking ways of reducing their tax burden,.rather than obtaini..g immediate income. The greater number of investors permissible unaer Heinz-Riegle mig#t also stimulate more investment in local firms by zone residents with modest savings, and could encourage employee stock ownership plans (ESOPs). The new Enterprise Zone bill drops the three-year straight- line depreciation allowance for capital equipment that was a feature of the 1980 bill. Although some critics argued,that the allowance was too strong, others now contend that removing it completely may go too far in the other direction. There are many, such as Ed Logue, Director of New York's South Bronx Develop- ment office, who fear that if the 10-5-3 depreciation system passes Congress, something will be necessary @o offset the even greater encouragement there will then be for inner city businesses to leave for new suburban sites. While there is merit to this argument, the emphasis on small, new firms in the Enterprise Zone concept does mean that the other tax mechanisms in the 1981 bill are likely to be more important than a depreciation allowance. In considering deprecia- tion as an element in an amended bill, it would be sensible to
13examine the idea of Congressman Henry Nowak (D-NY), contained in his Jobs Expansion and Urban Development Act (H.R. 390). Nowak's bill would increase the amount of used machinery and rehabilitated buildings eligible for an investment :Eax credit. Not only would this be particularly useful for small businesses with limited @apital, but it would also provide a greater inducement for new inner city entrepreneurs to acquire facilities abandoned or being sold by companies moving out of the city. Refundable Employer and Employee Tax Credits A refundable tax credit for employing CETA eligible workers is an improvement on the social security tax reduction in the earlier bill, although it is not without its shortcomings. The credit would offset at least part of the disincentive of the payroll tax and would target the kind of person the Enterprise Zone seeks to assist. The refundable nature of the credit would extend its effect to new companies with small tax burdens. Since the credit is merely a reduction in payroll tax payable, it does not constitute a new outlay by the government. Even when a firm receives a refund, it is only the reimbursement of tax already taken. The social security tax reduction in the 1980 bill was, however, simpler and easier to administer than the new provision. Furthermore, experience with the Targeted Jobs Tax Credit suggests that small companies are reluctant to deal with all the red tape needed to obtain employment tax credits. The credit available for employees is an important step towards reducing the effect of the "poverty trap." Because certain welfare benefits are withdrawn when a recipient obtains paid employment, the worker faces, in effect, a much higher rate of tax than the normal income tax -- in some cases the worker actually faces a net reduction in after-tax income by taking a low-p@id job! The credit will not eliminate this effect, but it will improve the situation, and so make paid employment a little more attractive for those on welfare. Qualified Businesses In order to obtain the most important tax incentives, a business must show that at least 40 percent of its new employees are CETA eligible workers. This is certainly an improvement on the 1980 bill, in that it targets the requirement more effective- ly, and will allow low-skilled people to benefit from the zone, even if they do not live there. The problem with the new requirement is that although the paperwork necessary may impose only a small burden for major corporations, it may be just the kind of restriction which would stifle a new firm in its early days. If a printer decided to start a business in an Enterprise Zone and hire three people, for
14instance, he would need to ensure that two of them were CETA eligibles to be treated as a qualified business -- irrespective of skills he needed to get the printing firm established. When a business is very small, a precise range of skills is often neces- sary. When it begins to grow it can build on this nucleus and hire less-skilled employees. In order to combine the goal of creating jobs for low-skilled people with that of reducing the obstacles to small business start-ups -- so that they can employ such people -- it would.be sensible to place a minimum workforce size for the CETA requirement. If a business had fewer than five employees, for example, it should be considered as a qualified business without a certain proportion having to be CETA eligibles: the 40 percent req@irement should only come into play for workers hired beyond the minimum. Foreign Trade Zones The foreign trade zone provision in the 1980 bill has been retained; it would encourage the Foreign Trade Zone Board to consider future development likely to result from an Enterprise Zone, as well as the current situation, when evaluating an applica- tion for a trade zone. The sponsors see foreigi@ trade zones as potential cores of economic activity in appropriate Enterprise Zones, around which a local economy could develop. Foreign trade zones around the world have been remarkably successful in stimulating growth in this way -- Hong Kong and Taiwan are examples of what can be achieved. Within a foreign trade zone imported goods are not liable for customs duties until they leave the zone for the domestic market, and they are totally exempt if they are re-exported. In addition, goods which are assembled or finished within the zone are relieved of duty on the added value. This makes the foreign trade zone very attractive to foreign suppliers of goods, who have an incentive to establish assembly plants, hiring local workers, in order to escape part of the customs duties. Since assembly plants tend to offer a high proportion of jobs for low-skilled workers, they are particularly suitable for depressed urban neighborhoods. Regulation A major criticism levelled against the 1980 bill was that it failed to include any mechanism to reduce the burden of regulation on businesses and organizations in an Enterprise Zone. Yet many people feared that the relaxation of regulation would mean an unacceptable reduction in safety and other protections for those working and living in the zones. Defining Enterprise Zones as "small entities" under the terms of the 1980 Regulatory Flexibility ACt (P.L. 96-354) would
15seem to be an effective method of relieving unreasonable regulation without in any way removing protections desired by Congress. The Act, which was passed with strong bi-partisan support, recognizes in its preamble that: Laws and regulation designed for application to large scale entities have been applied uniformly to small businesses, small organizations, and small governmental jurisdictions even though the problems that gave rise to goverment action may not have been caused by those small entities. The failure to recognize differences in scale and resources of regulated entities has in numerous instances adversely affected competition in the market place, discouraged innovation and restricted improvement in productivity. The law goes on to argue that in the case of such small entities, alternative regulatory approaches which do not conflict with the state objectives of applicable statutes may be available which minimize the significant economic impact of rules on small business, small organizations, and small governmental jurisdictions. If a proposed regulation is considered to have a "significant economic impact" on a number of small entities, the agency is required to seek an alternative regulation, or grant an exemption, for the small entities -- p@oviding Oe objective of the relevant statute is observed. Agencies are given ten years to carry out the same procedure for existing regulations. Treating Enterprise Zones, and the qualified businesses and non-profit organizations within them, as small entities means that if the economic development of an Enterprise Zone is adverse- ly affected by an existing or proposed regulation, the agency will have to make every effort to find some alternative rule which would accomplish the intent of Congress. The Regulatory Flexibility Act has not been on the statute book long enough for any judgment to be made regarding its effec- tiveness, but it appears to be the best mechanism available for relieving businesses and organizations in an Enterprise Zone from many of the regulatory burdens which stifle rather than protect. In conjunction with the required local commitment, it should help to remove the rules which are irrelevant to conditions in the blighted inner city.
The 1981 Urban Jobs and Enterprise Zone Act is a significant improvement on the 1980 version of the Enterprise Zone, and would16
seem to be an effective piece of legislation to establish Enter- prise Zones in the United States. The bill deals with most of the objections raised against its predecessor, and has helped to widen the coalition supporting the concept. The emphasis on small business and regulation should win support for the bill among the inner city entrepreneurs and neighborhood organizations whose talents the Enterprise Zone seek to encourage. The important role of state and local governments is appreci- ated in the bill, and the measure is compatible with the Admini- stration's view of federalism. With only minor amendments, the bill should dispel many of the fears of liberal and minority organizations that the Enterprise Zones may become a tax shelter for big business, where the benefits to the community would be confined to a trickle-down effect. While the 1981 Enterprise Zone bill may have its defects, it is nevertheless a bold attempt to set in motion a genuine "trickle up" process in the depressed inner cities.,Stuart M. Butler, Ph.D. Policy Analyst