economy needs all the help it can get. It is barely growing. Its unemployment
rate, at 12.5%, is the second highest in the nation. Yet in his
budget-balancing proposal, Gov. Jerry Brown includes a money-saving idea that,
if adopted, would kill a program that keeps more than 1 million Californians
working and generates millions in tax revenues. He claims this program doesn’t
significantly contribute to the state economy. The governor is wrong.

Begun in
1986, the state’s Enterprise Zone Program offers tax breaks and other
incentives to more than 100,000 companies doing business in any of 42
designated areas with high unemployment and poverty rates. The zones range in
size from 1.7 square miles to 671 square miles. And they boost local economic

A recent
example. Last year, Baxter International, a major pharmaceutical company, was
weighing a plan to move its manufacturing facility in East Los Angeles out of
state.  Some 1,100 jobs were on the line.
But the company changed its mind when an adjacent enterprise zone was enlarged
to include its facility. Not only were jobs saved; Baxter also said it would
create more by expanding the plant.

The success
of enterprise zones rests on more than anecdotes. Two colleagues and I studied
the economic performance of enterprise zones across the country. A few studies
have shown that zones stimulate economic activity in some states, but the
findings were more suggestive than definitive because researchers relied on ZIP
codes, an imprecise tool, to define the boundaries of a zone. Using precise GIS
mapping software, we examined the 20-year economic records of 1,200 zones in
the 45 states where they exist.

findings were unequivocal. Unemployment in enterprise zones was, on average,
1.6 percentage points lower than in similar areas with high rates of
joblessness and poverty. Over 20 years, the poverty rate in enterprise zones
dropped, on average, by 6.1 points, while household income – wages and salaries
– grew by $700 annually.

economic performance of California’s enterprise zones was even better.  Joblessness, on average, was 3.4 percentage
points lower than in comparable depressed economic areas, while the poverty
rate in these zones declined, on average, by about 8.6 points over 20 years.
Incomes – wages and salaries – rose, on average, by about $3,000 annually.

finding directly contradicts the governor’s claim that enterprise zones do not
significantly boost employment. Brown is largely relying on a study done by the
Public Policy Institute of California. The study also used GIS software to map
the state’s enterprise zones. But it measured employment in a different way,
which made it more difficult to detect job gains, or losses, in enterprise

study defined companies’ workforces in terms of broad ranges — one to five
employees for a small company, 50 to 75 for a larger one, and so on. As you can
easily see, if a small company with three workers hires a fourth because of the
tax breaks it receives for being in an enterprise zone, it would not register
as a job gain. Only jobs that push a company into a new workforce range would
be counted. This problem is amplified as you move up the company-size ladder
and the associated range of workers broadens.

contrast, the study I worked on used Census data, which reported job gains, or
losses, in exact numbers. Employment changes could be more easily tabulated.

Put studies
aside, however, and think of the issue this way. If eliminating an enterprise
zone forces a business to downsize or move out of state — or if it keeps a
company from relocating to California – the state loses tax revenues. This is
not pocket change. Using data from The Tax Foundation, I estimate that
businesses in California, on average, collectively pay about 21% of their
profits annually in state and local taxes. Using the foundation’s data on
individuals, I estimate that each employed worker annually pays about $2,000 a
year in combined income and sales taxes.

It’s thus
possible to see the potential loss in tax revenues of, say, 10% of businesses
downsizing or closing once they lose their enterprise-zone tax breaks.

Or put it
another way. If a worker loses her job, she can collect up to $23,000 in
unemployment benefits in California. On average, a company operating in one of
the state’s 42 enterprise zones receives a tax break of about $15,000 per
qualified employee hired or retained. What possible economic sense is there in
risking the loss of her $2,000 in annual taxes while gaining the burden of
paying her $23,000 in jobless benefits for the sake of ending a $15,000 tax

deficit-plagued Illinois faced the option of cutting its enterprise zone
program, it decided instead to raise its income tax rates by 66%.

California’s chronic budget problems will be a formidable task. But jettisoning
a job-creating and -sustaining program to save less than an estimated $1
billion to help close a $25 billion gap is more likely to perpetuate the budget
mess than clean it up – and keep the state’s economy crawling.

Charles W. Swenson is professor and
Leventhal research fellow at the Marshall School of Business at the University
of Southern California. His study on enterprise zones will appear in the
forthcoming Journal of Public Economics.