Assessing the Renaissance Zone Idea

Anyone passing through Detroit on I-75 first notices the cylindrical skyline of downtown's Renaissance towers built by Henry Ford II and his partners 20 years ago.  Midway through his five consecutive terms, Mayor Coleman Young had hoped that the mammoth office-hotel complex would reverse Michigan's largest city's economic and social lethargy.  Unfortunately, the past 20 years have fallen short of that renaissance, for the Motor City has continued losing population, wealth, and employment to the suburbs.  Now, the Engler administration, in what amounts to an ambitious program to stimulate growth in economically depressed areas, has introduced an idea it calls "renaissance zones."

Renaissance zones were born out of the belief that the disincentives to work or reside in the city were so great that only a massive cut in taxes would begin offsetting them.  The zones would abolish all state and local income and property taxes in eight regions singled out for economic development.  Five of the eight zones would be in Michigan cities (three more in rural areas).  Residents and businesses within these zones would, for up to 15 years, pay only federal taxes, sales taxes and tax-tied bond millage.  Lansing would compensate localities for lost revenue in any school financing.  Supported by the Governor, the bill has already passed Michigan's Senate and is under consideration in the House.

According to estimates by the Michigan Department of Treasury, under the Senate's plan, a Michigan family residing within one of the designated zones, with a home valued at $70,000 and annual income of $60,000 would see its taxes drop by $5,378.  A small business with annual revenue of $250,000 would see its annual tax bill drop to $410 from $8,625.  A larger company with annual revenue of $50 million with property worth $3 million could see its taxes fall from $680,000 to $15,000.

Renaissance zones do reflect a radical change in urban renewal policy.  Twenty years ago it was believed that higher taxes produced superior city services, which in turn, attracted both residents and businesses into the city.  Today, it is widely held that higher taxes discourage economic development for any region.  With Detroit's total personal income tax rate of 7.4 percent (4.4% state and 3.0% local) and a total tax burden seven times the level of adjacent suburbs, the renaissance zone idea takes a major step in recognizing that taxes destroy the incentive to work, save and invest.

Renaissance zones are another name for enterprise zones, which were utilized by most states to varying degrees during the 1980s.  Up to now, they have produced mixed results at best.  While some cities have seen a modest rise in business formation and employment within the zones, many companies have just used the zone as a tax shelter.

That is, they moved operations inside the zones to save money on taxes, but continued using workers from the more affluent neighborhoods.  Some studies found that as little as 15 percent of the workforce in some enterprise zones actually live there.  While renaissance zones are superior to empowerment zones (where federal aid is given to cities without really identifying their underlying problems, and tax reductions are never as generous), they still are not the best solution for revitalizing cities.

If reducing taxes in a depressed region really increases business activity, then why not do it for the entire city or state?  The fact that certain regions need state and federal tax relief should send a signal that taxes are too high in the area to begin with.  Decreasing taxes in one area without dropping them in an adjacent region may only redistribute business activity to the favored region.  This is analogous to rearranging the money inside a cash register.  Ostensibly, the goal of public policy should be to increase the overall net level of wealth, jobs, and business activity, particularly within a depressed region.  Whenever the federal or state government has been in the business of targeting a particular industry or geographical region for help, the end result is almost always failure.  The Model Cities project during the 1960s, followed later by Model Neighborhoods, didn't help the inner cities because the targeted region failed to reform itself.

In reality, these special zones often represent just another attempt by the federal or state governments to do for local communities what they are not doing for themselves.  Depressed regions, be they large or small cities, have nothing to lose by permanently phasing out large sections of their tax code.  How, then, would municipalities finance their services?  The same way many American cities have revitalized over the past decade.  By cutting bloated bureaucracies, privatizing city services, and selling government-owned assets.  Like a century ago, when Detroit sprouted a middle class seeking opportunity, we need to again provide business and residential incentives for locating in the city.

It is no coincidence that the areas likely to quality for renaissance zone status are also likely to be the very areas that are doing the least to cut bloated public spending, trim bureaucracies, reform burdensome regulations that stifle enterprise, and modernize services through privatization.  Should people in other parts of the state that have done these things subsidize people in those parts that will not?  Will renaissance zones have the perverse effect of insulating areas from the consequences of their own folly, thereby putting off the day when they will make the tough but necessary decisions themselves?  Will the state expenditures needed to reimburse local governments for lost revenue in the renaissance zones make it less likely to secure further tax relief at the state level for everybody?  These are important questions that legislators should not ignore.

The direction Michigan takes on renaissance zones will have national implications.  Given Michigan's new leadership status in public policy reform, other states are watching with anticipation.  Hopefully we will show them only the very best solution.

(William T. Wilson is Vice President and Economist with Comerica Bank in Detroit and an adjunct scholar with the Mackinac Center for Public Policy in Midland.)