(Editor's note: This commentary was originally published July 15, 2002. Co-authored by Michael D. LaFaive and the late Dr. Martin Wing, its recommendations for wide-spread tax relief should be heeded by policymakers who continue to harm Michigan through piecemeal central planning.)
For two decades, governments around the country have been experimenting with an economic development device commonly known as "enterprise zones." The 24 zones in Michigan, usually drawn around economically "distressed" areas, are between 120 and 2,900 acres in size, and are designed to provide special tax relief to businesses and people who operate (and sometimes live) in the zone.
Michigan state and local units of government have access to all sorts of zones. For instance, there are "empowerment zones," "smart zones," and "hub zones" depending on location, needs, and political leadership. Each designation signifies characteristics that make it slightly different from the others.
In Michigan, enterprise zones are referred to as "renaissance zones," which can offer significant tax relief for 15 years. While privatization is typically understood as a private assumption of functions formerly performed by government, in the case of renaissance zones, privatization would mean ending public interference in the state's economy. It would mean abolishing the practice of offering special favors to some businesses at the expense of others.
The state should privatize the renaissance zone program and its offshoot, the Agricultural Processing Renaissance-Zone. Instead, it should provide greater tax relief for all Michigan businesses and citizens, not just those lucky enough to live in a tiny geographic box drawn by politically appointed central planners.
Every county in the state is allowed to apply for a zone designation for economically distressed areas. According to the Michigan Economic Development Corporation, the nine-member board of the Michigan Strategic Fund (MSF) recommends zone applicants to the State Administrative Board (SAB), which makes the final decision. The MSF was created in 1984 to help businesses "obtain additional sources of financing." The SAB provides general oversight of state department activities, including the approval of contracts. If an existing business is operating in an area designated as a renaissance zone, it is exempt from the Single Business Tax, state property tax, local personal property tax, utility tax, local property tax, and special millages. Individuals get the same basic package of relief, minus the break on the business tax, which doesn't apply to them.
Nationwide, research indicates that enterprise zones have had a negligible impact on economic growth and development. Professors Thomas Lambert and Paul Coomes of Spalding University and University of Louisville, respectively, studied one of the nation's oldest and biggest enterprise zones in Louisville, Ky., and used "many measures to try and give the program every chance of success." Yet the evidence, published last May, showed that after 14 years "it is difficult to document that this program has been effective."
Other studies concur. In their paper, "Enterprise Zones and Local Employment: Evidence from the States' Programs," published in Regional Science and Urban Economics, Daniele Bondonio and John Engberg found "zero impact" on local employment from enterprise zones and that "the level of the monetary value of the incentives awarded to zone businesses does not noticeably contribute toward enhancing the impact on local employment."
The newest type of renaissance zone in Michigan is known as "Agricultural Processing Renaissance Zones," of which there are three, two in Oceana County and one in Ionia. All underscore two basic problems with state favoritism in the name of "economic development": 1) It's unfair to businesses that do not receive the tax advantages offered; and 2) Officials can't prove that the development they claim as proof of the zone's success wouldn't have taken place without their interference.
Targeted tax relief places at a competitive disadvantage those businesses that do not get the state favors. This is why Michigan agricultural companies, in January 2001, actively opposed zones being granted around the properties of their competitors, Peterson Farms, near Shelby, and Gray & Company in Hart.
One of the zones' critics, who asked to remain anonymous for fear of state retribution, told Michigan Privatization Report, "The state has put me at a terrible disadvantage by giving my competition substantial tax relief. How can Lansing bureaucrats possibly believe that hurting me will help the economy?" This was generally the nature of other processing companies' opposition, though several firms' officers noted that they were not opposed to the idea of helping the agricultural industry. The state took testimony in person and by letter from businesses opposed to the way these zones were being used, but plowed ahead anyway.
Unfortunately, this is not the first time this northern Michigan entrepreneur has been stung by central planners. Just over a year ago, a local and publicly funded economic development agency helped one of his nearby competitors obtain a $350,000 loan to upgrade its facility. Shortly after the improvements were made, the competitor won a contract from an ice cream firm for cherries that had been with his firm for more than a decade. The contract represented 50 percent ($5 million) of the entrepreneur's business. To add insult to economic injury, once the contract was secure, his competitor hired away five employees from his business.
Perhaps the loan and subsequent loss of contract was just a coincidence, but that is beside the point. Whether it's through renaissance zones or special favors offered directly to individual companies, government simply has no business picking winners and losers in the marketplace.
Everything in the world has a cost, even if it is an "opportunity cost." An opportunity cost is the next best alternative forgone. By creating political programs that allow officials to pick projects or geographic areas that deserve tax relief, government makes it more difficult for everyone to have tax relief. Furthermore, it hurts people and businesses not lucky enough to have favor with Lansing's economic wizards.
All of this might be tolerable if state officials could prove that renaissance zones actually produce a positive net benefit to the economy. But the literature on the subject is very clear: Enterprise zones have no measurable impact on economic growth and employment-but they do have huge costs.
It's time to end such special treatment and make all of the Great Lakes State one big renaissance zone by making the same tax relief available to everyone.
Dr. Martin Wing is an assistant professor of economics at Kettering University in Flint. Michael LaFaive is an economist and senior managing editor of Michigan Privatization Report.