David Hickey, Senior Director of H&A, was featured in the Q4 Issue of Area Development. “Enterprise Zones: Opportunity Requiring Due Diligence” provides a brief history of enterprise zones and key factors to evaluate before investing. The article emphasizes the importance of due diligence when faced with decisions involving enterprise zones.
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Enterprise Zones: Opportunity Requiring Due Diligence
By: David Hickey
History of Enterprise Zones
Enterprise zones were first developed in Great Britain and implemented by the Conservative Party government of Margaret Thatcher in the early 1980’s. The initial concept, credited by many to Peter Hall, an urban planning professor, believed permitting more free enterprise in economically-struggling areas through tax benefits and reduced governmental interference would lead to new economic activity. The initial sites were in Newcastle, Liverpool, Belfast, and east London.
Not long after, the ideology behind enterprise zone programs reached the United States. Beginning at the federal level, Representatives Jack Kemp (R-NY) and Robert Garcia (D-NY) introduced legislation to establish enterprise zones throughout the country. The Reagan Administration also supported the concept of zones with tax concessions and relaxed regulations. However, these efforts did not make it outside the capital beltway.
Connecticut was the first state to enact an enterprise zone program in 1981; four years later, at least forty states established legislation enacting the enterprise zone program idea. A decade on, the Clinton Administration worked with Congress to develop a community and empowerment zone program.
What to know when investing?
Going forward, enterprise zones can provide vast benefits for businesses through tax concessions and relaxed regulation, along with supplemental support dependent on the location. However, businesses need to conduct a thorough evaluation of these potential benefits when making location decisions to understand all of the dynamics facing the project. The key factors to identify and understand include the specific rules of the zone, the benefits, the commitments, and the potential economic challenges.
- Rules of the Road: Through legislation, and subsequent rule-making processes, state and local governments have developed their enterprise zone programs to best meet the unique elements of their communities. For any business seeking to invest in a zone, the company must understand the specific statutory and regulatory rules in place.
- The Benefits: As it comes to the benefits provided to investors in these zones, there are major variations across the country. Many of the enterprise zones have a key focus on the delivery of tax benefits to stimulate investment. How the tax relief is applied varies depending on the state. Several states focus on state corporate income tax liability, while others leverage sales and use tax exemptions/refunds, as well as, property tax abatements. It is vital to understand how these tax concessions benefit the company being in the particular zone, and if the relief is of true value. In addition to tax relief, state and local governments provide further support for businesses investing in enterprise zones. This supplemental aid may come in a number of different forms, including cash grants, subsidized unemployment insurance, waived permitting fees, training funds, and technical assistance.
- The Commitments: Along with the varying levels and forms of support available in enterprise zones, state and local governments also have vastly different project commitments to capture incentives. Investing in an enterprise zone often does not automatically trigger incentive support. Typically, the key eligibility drivers include industry, size of capital investment, job creation, employee wages, and employee residency.
- The Challenges: Enterprise zones are designated for a reason, which is characteristically a heightened level of economic disparity. With that under consideration, these areas are frequently faced with economic barriers, including labor availability, transportation access, social challenges, and environmental issues, among others.
With several decades in existence, enterprise zone programs have evolved greatly from their inception in the United Kingdom. Today, while not supported by all, enterprise zones are continuing to be utilized as a policy instrument to stimulate economic activity across the United States. Before investing in an enterprise zone, there are a number of key factors to evaluate, including the specific rules of the zone, the benefits, the commitments, and the potential economic challenges. The benefits can be substantial, but the requirements and challenges must be understood.