The Bush administration has sent to Congress a qualitatively new proposal for enterprise zones. It is more faithful to the principles of empowerment preached by Housing Secretary Jack Kemp than any previous tax-break legislation designed to stimulate business in impoverished areas.
Past proposals invited cities and rural areas to compete for a limited number of enterprise-zone designations. The new approach would establish objective standards - levels of unemployment, poverty and business activity, for example - and entitle all neighborhoods meeting the standards to enterprise-zone status.This approach denies federal bureaucrats the power to pick winners and losers.
The tax breaks within zones would go to investors, creditors and employees of qualifying businesses, reinforcing every link in the economic chain. To qualify, a business would have to earn at least 80 percent of its annual gross income within the zone, and at least one-third of its employees would have to be residents of the zone.
Kemp summed up the proposed tax breaks as "complete elimination of the capital-gains tax on investing, working and living in enterprise zones." Even local homeowners whose property accrued in value because of enterprise zone activity over five years would escape taxation on their capital gain. And the Earned Income Tax Credit of $1,800 now available to low-income working families with children would be extended to childless low-income employees of enterprise-zone firms.
The Treasury estimates the cost of the program at $2.3 billion in forgone taxes over five years. To keep the revenue loss that low, the eligibility standards must target truly distressed areas. If the zones prove their worth, the standards can be broadened.
Critics warn that tax incentives alone will not cure the credit dearth in poor neighborhoods. They call for low-interest government loans to start-up businesses. That concern must be weighed against Kemp's justified desire to keep the assessment of risk and awarding of benefits free of political influence.
With or without such an amendment, Kemp's plan for removing tax barriers to enterprise in depressed neighborhoods deserves to be tried.